KEY TO GROWTH

Panama 2018 | ECONOMY | FOCUS: SEM LAW

Multinational companies already had favorable conditions in Panama, and it seems the business environment will only get better, helping to ramp up the country's growth.

The law on sedes de empresas multinacionales (SEMs), or multinational company headquarters, first changed the landscape for multinational companies in Panama over 10 years ago. Today, SEMs remain a source of growth and development for the Central American country, and new updates to the law look to increase competitiveness. As of January 2017, 147 companies were registered, with an accumulated investment of USD1 billion, while generating approximately 6,000 jobs.

SEM companies can operate as a foreign company registered in Panama or as a Panamanian company owned by a transnational company. Regardless, in order to qualify for the benefits as an SEM company under Law 41 2007, the enterprise's headquarters must be in a foreign country with assets greater than USD200 million and operations in several countries. Panama is increasingly becoming a recipient of these companies. 2016 saw the most newly registered multinational companies under the SEM regime, and in 2017, 20 new companies joined. Some multinational companies registered include Procter and Gamble (P&G), Adidas, Halliburton, Dell, Bayer, Caterpillar, Phillips, and Nestlé.

Additionally, the country receives almost half (45%) of all FDI in Central America, and is the largest recipient in the region. More telling, 57% of this investment is re-investment. Costa Rica and Panama often compete with similar offerings and advantages for multinational companies, but Panama is objectively more favorable. Panama is a strategic point as a communications hub, which is much more connected than Costa Rica. Panama City is a modern city that is more international than its Costa Rican counterpart. Transactions in the US dollar give stability and confidence to investors and multinational companies that want to establish operations in Central America.

In Panama, there are special laws and economic zones that include tax incentives, such as the City of Knowledge, Panama Pacifico, and the SEM Law 41 of 2007. Later amended by Law 45 of August 10, 2012, the SEM Law establishes several tax incentives, both for the company with an SEM license and for its upper middle-level foreign personnel. Some of the incentives are the exemption from the payment of income tax, exemption from affiliation to social security, permanent personnel visas, and legal stability, among others.

Panama, as a service-based economy, must take advantage of globalization and global structures to create new alternatives that help the development of the country. According to Alberto Alesi, Caribbean and Central America Regional Manager of Manpower Group, Panama's cross-sector tax incentives for multinationals make it preferable to its neighbors. Yet the government is working together with SEM companies to adjust the regime to make it even more competitive.

In the case of the SEM companies, the Ministry of Commerce and Industries has led a project with the aim of proposing comprehensive reform. The idea is to copy the success of other countries, such as Singapore, with the intent to eliminate the elements that discriminate between local and international operations and introduce certain factors that SEM companies have requested to make the Panamanian regime more attractive.

The economy of Panama ended 2017 with a growth of 5.4% and GDP exceeding the threshold of USD60 billion for the first time. The country is one of the most dynamic in the region, but the feeling among people is that the economy is still slow. At the moment the SEM regime is one of the key factors to this growth, and forecasts estimate that in 2018 another 20 new companies will be established in Panama under this regime.