Tax relief & EMMA LAW in Panama incentivise business growth

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s a regional trade and transportation hub, Panama was hit hard by the global downturn last year. Shipping traffic through the Panama Canal dropped by about 10% according to the IMF, while health and social spending surged. Panama has suffered one of the highest Covid fatality rates in the world, which has affected economic activity.

In an effort to fight off the effects of the pandemic there have been significant regulatory developments in the areas of tax and labour, and for those companies that are listed on the stock exchange.

“The government has issued laws and decrees in order to relieve companies of regulation,” says Hector Luis Alvarez Medina, director of Kreston Alvarez & Carrasco. “This included a tax amnesty that expired on August 31 2021, but allows taxpayers to make payment arrangements with terms that don’t expire until December 31 2021, in order to comply with their tax obligations.”

There has also been a shake-up in labour laws to minimise unemployment caused by the pandemic, where companies could propose suspension of employment contracts, reduction of working hours and mutual agreements.

Specific industries have also been targeted with tailor-made laws. “The EMMA Law is a special fiscal regime for multinational companies that provide services related to the manufacturing sector,” explains Jose Lemos, managing partner at ECOVIS Panama. “It is very similar to the existing SEM Law (Sede de Empresa Multinacional), but is exclusively for manufacturing companies. The goal is to incentivise multinational companies to establish their assembly factories in Panama.”

The accounting profession could also benefit from law and policy reform over the coming months, according to Rafael Rivera, managing partner BDO Panama “There is an ongoing discussion of a bill of law containing a proposal to modernise the legal framework governing the accounting profession,” says Rivera.

“This will include things such a confirmation of the adoption of the international financial reporting standards (IFRS) as the applicable accounting principles in Panama and granting more powers to the accounting regulatory body (the Accounting Technical Board),” he adds.

Covid has hit the Panamanian accounting industry hard. Maycquel Mendoza, managing partner from PrimeGlobal member firm Mendoza & Asocios says he has seen many companies forced to reduce headcount and a lot of accounting staff have lost their jobs.

But of course, the books still need to be balanced and this could lead to a significant outsourcing opportunity for independent companies. It is also leading to a squeeze on fees.

“Due to the economic situation of many companies, many of the medium and large companies that maintain services with the Big 4 are forced to seek services in accounting and auditing firms at a more affordable cost,” says Mendoza. “Another niche that may have potential is financial and tax consultancy.”

Auditing, consulting, and accounting outsourcing services became virtual services, explains Medina. “At the same time, some companies requested discounts on all services while other clients requested the temporary suspension of some services because they could not cancel the fees.”

The unemployment rate in the Republic of Panama is around 20% and there is a big number of professionals unemployed, observes Osmar Echevers, audit manager at Moreno and Moreno CPA, a Crowe member firm. “However, the unemployment situation in the country has improved staff retention, which has been a historical problem in the industry.”

Labour relations have provided an unexpected growth area and José Eduardo Jované, director of Jovane and Jovane, a BKR International member firm, thinks that creditor negotiations will be another area where services will be required.

“The government developed policies to allow companies to temporarily suspend the payment of wages to their employees,” he says. “The application of these measures required the completion of certain processes with the labour authority , which allowed the accounting sector and also law firms to take advantage of the situation and offer these services during the pandemic.”

“We also feel that an issue that will be requiring our services is the negotiations that companies are having with credit institutions, mainly banks,” he continues. “Many credit facilities stopped being paid due to the paralysis of commercial and industrial activities. We have already carried out some consultancy aimed at gathering information that demonstrates the economic blow suffered by the client and future forecasts in order to reach agreements with the banks regarding interest rates and payment periods.”

The business climate is improving, however, and Jovane says the outlook is optimistic. “By mid-2021, the vast majority of companies in the accounting sector were already showing improvement in terms of a gradual increase in their income,” he says. “This includes resuming the rates that we used before the pandemic, which we consider quite positive. We have not yet reached the levels we had in 2019, for example, but we are definitely in much better condition than in 2020.”

Echevers agrees. “Our expectations for the next 12 months are that the economy in Panama will begin to improve substantially,” he says. “The government had presented a recovery plan post pandemic, the main points being economic help for the small entities and entrepreneurs that represent 90% of the companies in the country and generates more than 70% of employment, and huge investment in public infrastructure programmes and the agricultural industry.”

Based on the economic movement that began to be felt in the second and third quarters of 2021, industry observers are optimistic that Panama is already in a recovery. Tourism, construction and real estate are the key areas for a post-Covid boom, while developments in other countries in the region could also result in new revenue streams.

“The political situation in Peru, where general elections were recently held, could result in investment in Panama,” says Jovane. “However, we will have to wait to see how events unfold.”

Rivera sounded a note of caution, noting that Panama implemented one of – if not the strictest - lockdown policies in Latin America, which has had an inevitable drag on growth.

“The private sector has been showing some improvements, but we need to consider that certain government restrictions have been in place until mid-year,” says Rivera. “Our expectation is that the recovery signals will be stronger by the last quarter of the fiscal year. There is optimism related to certain public infrastructure projects which are scheduled for late 2021 and early 2022, such as a new subway line and the fourth bridge above the Panama Canal.”

One of the economic supports the Panamanian government has put in place is a precautionary liquidity line from the IMF. The liquidity line is an insurance policy against risks and can help boost investor confidence. A country must have sound fundamentals and policies to qualify for a precautionary credit line and according to the IMF, this sends an important signal to markets.

So has it worked?

“The banking entities in the Republic of Panama have been sending circulars to companies requesting the financial statements of the year ending 2020 and other financial information,” says Medina. “This is to evaluate the current situation of each entity and adapt their credit facilities. Notes are also being sent to them to maintain or reduce the amounts of their credit line. In other words, banks are being very cautious and conservative in relation to credit lines.”

But while banks are being cautious with credit, Jovane does feel being given access to the liquidity line has helped retain confidence in Panama in international markets and helped investors hold their nerve.

“This has enabled the country to react to the economic consequences the pandemic has caused and could continue to cause,” he says. “The facility granted by the IMF makes investors feel reassured about the government's ability to face possible future emergencies.”

According to Eduardo Montúfar Rojas, partner at MGI Montúfar and Asociados, bureaucracy in general is hampering all the government's initiative's to get the economy back on track.

"The Panamanian government has instituted several economic reactivation programmes but their success has been limited," he says. "This is due to demanding extremely cumbersome requirements and lengthy procedures that impede people from getting the money promptly. Few disbursements have been made that can change the current economic situation."

One sore point that is still hurting the Panamanian economy and will have repercussions far beyond Covid is its presence on the Financial Action Task Force (FATF) grey list. Countries on the grey list are those that represent a much higher risk of money laundering and terrorism financing but have formally committed to working with the FATF.

The process of getting off the FATF grey list is at a standstill in Panama, according to Mendoza. “The agency recently reiterated its decision to keep us on the list since of the 15 recommendations indicated, about 10 have not been fully complied with and in one there have been no changes,” he says. “One of the main objections is the lack of compliance and certainty of punishment - laws and regulations exist, but criminal sanctions are not imposed on companies or individuals involved in activities related to money laundering and/or terrorist financing.”

Jovane feels that Panama has worked hard to get itself off the list and that the FATF is not working in harmony with the Panamanian government, to the extent that compliance with FATF rules is hurting the economy.

“It is just a matter of time before Panama is removed from this list,” he says. “Unfortunately, the estimation of said time does not seem to depend entirely on Panamanian policies, but rather the FATF. The issue is not easy to deal with and many merchants and industrialists consider that the laws the country has been passing to ‘comply’ with the requirements of FATF have had a negative impact rather than a positive one.”

“An example of this is that the requirements for opening a bank account in Panama have become so complex that many law firms and accountants that previously provided this service to foreign investors have stopped doing so due to their low profitability versus the time invested,” he concludes.