Nearshoring opportunities in panama

Carolina Palma Trade & Customs Leader, Indirect Tax Director at Ernst & Young Central America, discusses the scale of nearshoring opportunities in Panama.

• Communique: EY

NEARSHORING IS NOT A NEW THEME, but rather global companies have been already exploring nearshoring possibilities as the world becomes more global and as consumers grow in numbers and demands. In a book called Nearshoring, Reshoring, and Insourcing, author Paul L. Hartman points out that even back in 2017 firms were rethinking their outsourcing and offshoring strategies. At the time, the options seemed to be the US, and some emerging interest in Latin America. Supply chain specialists recommended looking at the complexities and functionalities of the manufacturing processes on a case-by-case basis to take a decision on nearshoring.

However, this idea took strength with the global pandemic that the world encountered in 2020. Incipient ideas of relocation to different latitudes were no longer a luxury, but a necessity. As China encountered sudden supply chain disruptions and as customers demanded quick, fast, and healthy solutions across all businesses, companies were forced to rethink their supply chain routes and even their manufacturing activities. In a survey carried by EY at the start of the pandemic, 100% of Fortune 500 companies reported COVID-19 impacts on trade and their supply chain, a number that became staggering as the pandemic moved forward.

Moreover, protectionist policies were on the rise, and the ensuing tariffs and sanctions disrupted established business models and had a significant impact on a company’s balance sheet. Countries also started embracing digital taxation and accessing trade data in real time, creating compliance challenges that strain organizational resources. And unplanned-for crises created an urgent a need for companies to stabilize their business, preserve capital, and realize cost savings.

NEARSHORING OPTIONS

Research institutions like IDB and ECLAC determined that USbased companies have new opportunities to generate business value by outsourcing customer relationship services to Latin American destinations. It was also clear that both services and manufacturing needed to have a foot in Latin America for intra-regional consumers, but also for supplying products and services to the US, as a second option to their operations in Asia.

Moreover, Central American countries stood out in Latin America due to their strategic location and especially due to their openness in trade and investment. The table below contains the number of FTAs negotiated and signed with the region, where it is evident that the region has a particularly business-friendly environment.

In research carried out by EY, as an example, a company in the retail business with services and operations in Europe and Asia requested to have a mapping of potential savings and opportunities if it was to establish a hub in Latin America to supply mainly the Latin American market. Some manufacturing was to be performed in Panama, but mainly service-related activities. EY teams conducted taxes and customs modellings and found savings of 20% compared to previous supply chain model. Customs savings accounted for more than 20% savings in duties. Logistics and direct tax savings were also in the range of 20%.

Due to strategic positioning, economic stability, the Panama Canal, and incentive regimes, Panama, among other countries, surged as a perfect option for companies in need of faster, better

As an example, the Colon Free Trade Zone (CFZ) was restructured by Law 8 of April 4, 2016. Its operations began in a segregated area of 35 hectares originally in downtown Colon and with 10 companies. Now, this free trade zone is divided into nine different sectors totaling 1,064 hectares for exhibition with more than 2,000 companies. The main objective of CFZ is to promote international trade.

Logistics services, as well as the sale of merchandise, are part of the allowed activities. From a practical perspective, traded goods need to flow through the CFZ for sale.

The special area is located on the Atlantic side of Panama. The CFZ supposes several tax incentives such as:

• CIT: 0% on exports and sales within the CFZ;

• REPAT TAX (if subsidiary): 0% if only foreign source;

• REPAT TAX (if branch): 0% if only foreign source;

• Withholding Tax: 0% given no deduction of service or royalty payments;

• NOTICE OF OPERATION payment: 2% on capital with a solutions, with cost savings and efficiencies that they could benefit from given the COVID-19 uncertainty back then, and the slow recovery that it would entail.

PANAMA AS THE PERFECT NEARSHORING DESTINATION

As mentioned, due to Panama’s strategic location, skilled work force, the Panama Canal, infrastructure, and business friendly environment, it emerges as the perfect destination for nearshoring. In addition, incentives in Panama are attractive for multinational companies, where they enjoy a number of tax incentives.

Research shows that even years ago, investment increased in Panama, which stands out as the country with the most services exports in the region, as presented by the ECLAC in the below chart min. of USD100,000 and max. USD60,000,000;

• VAT: 0% on exports, 0% on sales within CFZ. Depending on the chosen regime, they provide for CIT, Dividend WHT, VAT, customs, labour, and immigration benefits.

As the CFZ, there are a number of other options, including Panama Pacifico and Multinational Headquarters, which also bring companies substantial benefits and cost savings. As such, Panama is one of the countries in Latin America with the best offering for nearshoring firms looking into exports into North America and supplying the Latin American market. Manufacturing, services, and logistics activities may be performed depending on the regime and complying with the rules and regulations of each option.

World crises have been more evident with the pandemic, but they made evident the fragility and the need for constant improvement. Moreover, experts have stated that this crisis will be the new constant, with new challenges for firms. So, supply chain resilience is crucial for companies around the world and this is the right moment to move forward with such nearshoring planning.