Panama s Minister of Economy and Finance proposes bill for calculating income subject to preferential tax treatment under an IP regime

Transcription

1 28 August 2018 Global Tax Alert News from Americas Tax Center Panama s Minister of Economy and Finance proposes bill for calculating income subject to preferential tax treatment under an IP regime NEW! EY Tax News Update: Global Edition EY s new Tax News Update: Global Edition is a free, personalized subscription service that allows you to receive EY Global Tax Alerts, newsletters, events, and thought leadership published across all areas of tax. Access information about the tool and registration here. EY Americas Tax Center The EY ATC brings together the experience and perspectives of over 10,000 tax professionals across the region to help clients address administrative, legislative and regulatory opportunities and challenges in the 33 countries that comprise the Americas region of the global EY organization. Access more information here. Panama s Minister of Economy and Finance (MEF) has proposed to the National Assembly a bill (Draft Bill No. 654) that would establish the method for calculating income that is derived from the transfer or exploitation of intangible assets (IP assets) and subject to a tax exemption or preferential tax treatment. Background On 11 July 2018, the Cabinet Council authorized the MEF, through Cabinet Resolution No. 48 of 2018, to present to the National Assembly of Panama a bill that would amend the COK regime. 1 Accordingly, on 16 July 2018, the MEF proposed to the National Assembly the bill with the new calculation method, which is based on the nexus approach established under Action 5 of the Organisation for Economic Co-operation and Development s (OECD) Base Erosion and Profit Shifting (BEPS) project. Draft Bill No The bill would establish that taxpayers operating under a preferential tax regime that grants tax benefits or exemptions to income derived from the transfer or exploitation of intangible assets would only be able to access those benefits when

2 2 Global Tax Alert Americas Tax Center the income originates from a qualifying intangible asset. In that case, the taxpayer would need to apply the formula established under this bill and comply with the rest of the bill s provisions (including tracking and documentation requirements), in order to access the tax benefit granted by the respective IP regime. Nexus approach formula Under the nexus approach, as established by the OECD in the BEPS Action 5 final report, the application of an IP regime would depend on the level of research and development (R&D) activities carried out by the taxpayer. To apply the nexus approach, the bill would establish a formula that calculates the amount of income that would benefit from the exemption or preferential tax treatment granted to a qualifying taxpayer under an IP regime as discussed later. Qualifying intangible asset Under the bill, the only IP assets that would benefit from a tax exemption or preferential tax treatment would be copyrighted software and intangibles protected by means of a patent or a registration. Marketing-related IP assets, such as trademarks, would be excluded from the scope of a qualifying intangible asset. The qualifying expenses related to the IP assets would be included in the determination of the ratio at the time they are incurred (i.e., qualifying expenses over overall expenses), regardless of the accounting or tax treatment. Qualifying expense The bill would consider as a qualifying expense any expenses or costs incurred by a qualifying taxpayer in the execution of R&D activities within Panama, when said activities lead to the creation or improvement of a qualifying intangible asset. Qualifying expenses also would include any expenses from outsourcing the R&D activities to an unrelated party or a related party that renders its services within Panama. Furthermore, the bill would allow qualifying taxpayers to increase their qualifying expenses. The percentage of this uplift would be established by the Executive Branch, and in no case would exceed 30%. Therefore, to calculate income subject to a tax exemption or preferential tax treatment, the formula would be as follows: Income subject to tax exemption or preferential tax treatment = Qualifying Expenses + Uplift established through regulation Overall Expenses x Net income derived from the transfer or exploitation of qualifying intangible asset Overall expense The overall expenditures would comprise, in addition to the qualifying expenditures, the acquisition costs of a qualifying intangible asset and any outsourcing payments made to a related party for R&D activities rendered abroad on behalf of the qualifying taxpayer and directly linked to the creation or improvement of a qualifying intangible asset. Those expenditures would be taken into account in the year in which they were incurred, regardless of their accounting or tax treatment. The bill would include in acquisition costs: Costs incurred in the acquisition of a qualifying intangible asset Costs incurred in the acquisition of a legal entity that owns a qualifying intangible asset Costs incurred in the acquisition of a license of a qualifying intangible asset Net income derived from the transfer or exploitation of qualifying intangible assets The bill would define net income derived from the transfer or exploitation of qualifying intangible assets as the positive difference between the income derived from the transfer or exploitation of qualifying intangible assets and the expenses, costs and losses that are attributable to that income, incurred during the same fiscal period. Net income would include income produced in Panama that is derived from the sale or transfer of a qualifying intangible asset, including royalties, capital gains and the portion of the sales price of a final product that is attributable to the embedded qualifying intangible asset.

3 Global Tax Alert Americas Tax Center 3 With regard to the losses associated with a qualifying intangible asset, the bill would establish that these losses must be kept separate from ordinary income and, therefore, may only offset income derived from the transfer or exploitation of qualifying intangible asset. Tracking and documentation The bill would require individual tracking and tracing (i.e., IP by IP basis) of qualifying expenditures, overall expenditures and income derived from the transfer or exploitation of qualifying intangible assets. The bill would, however, allow qualifying taxpayers to track the income and expenditures with the final product that has qualifying intangible assets embedded within it, if the taxpayer was unable to track each asset individually. The bill would authorize the Executive Branch to establish the documentation required to ensure adequate compliance with the tracking and documentation obligation. These documents would need to be held in Panama and at the disposal of the Panamanian tax administration when requested from the taxpayer. Transfer pricing requirement for preferential tax regimes The bill would include a new provision in the Fiscal Code that establishes transfer pricing obligations for taxpayers that perform activities within a preferential tax regime, including taxpayers that have operations with related parties that are within a preferential tax regime. A follow-up Tax Alert will be issued once the bill is enacted. Endnotes 1. Source: 2. Source:

4 4 Global Tax Alert Americas Tax Center For additional information with respect to this Alert, please contact the following:s Ernst & Young Limited Corp., Panama City Luis Eduardo Ocando Isabel Chiri Ernst & Young, S.A., San José Rafael Sayagues Ernst & Young, LLP, Latin America Business Center, New York Ana Mingramm Enrique Perez Grovas Pablo Wejcman Ernst & Young LLP (United Kingdom), Latin American Business Center, London Jose Padilla Ernst & Young Tax Co., Latin America Tax Desk, Japan & Asia Pacific Raul Moreno, Tokyo Luis Coronado, Singapore

5 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Americas Tax Center 2018 EYGM Limited. All Rights Reserved. EYG no Gbl NY ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com