Changes To Panama's Petroleum Free Zones

by Mike Godfrey, Tax-News.com, Washington

17 May 2005

Panama has recently amended its Petroleum Free Trade Zone legislation, including an increase in the period covered by a permit from one to firve years.

Other changes include:

• Abolition of the need to present evidence of 50% financing by a financial institution has been eliminated;
• Distributors for sales in the domestic market are now exempted from some prevention and security requirements;
• Permit holders are obliged to operate at their maximum capacity;
• A 45 day deadline is given for the Crude Oil and By-Products Office to grant permits to operate or extensions to these permits;
• Companies operating on a Petroleum Free Trade Zone will now have to maintain strategic reserves equivalent to 7-day sales, as opposed to the previous 10-day sales period;
• The “precio de paridad” or benchmark price for Gas and related items is now considered a “suggested price” as opposed to the previous text considering it a “maximum price”;
• The Crude Oil and By-Products Office can now determine the “precio de paridad”or benchmark price for Gas and Related Products on a weekly basis, as opposed to the previous biweekly basis;
• The executive branch can now, through the Crude Oil and By-Products Office, import all crude oil by-products to supply the local market in cases of national emergency, provided that the strategic reserve of the country is affected, or at risk.

No existing tax incentives are affected by the changes. Petroleum Free Zones were created under Decree No. 29 of July 14, 1992 for foreign or domestic companies and individuals involved in importing, refining, marketing or distributing petroleum or derivative products. Investors are required to contract with the Ministry of Commerce and deposit an amount equal to 1% of their investment up to a maximum of US$250,000. Investors also are expected to employ Panamanians except for skilled technicians and managers and maintain a minimum environmental liability insurance policy for US$1,000,000. Local products must be used if available at competitive prices.

Qualified investors can engage in the following activities: Lease or acquire property and construct port facilities, including docks for loading and unloading petroleum shipments; Build, install and operate refineries and pumping facilities, construct storage tanks, pipe lines and other equipment for processing petroleum or preventing fire or spillage; and Import, store or handle petroleum for export or marketing and distribution within Panama.

Petroleum imported into the Zone is exempt from import duty or taxes and is exempt from sales tax if sold within the Zone: Enterprises operating in a Zone are eligible for the incentives under Investment Promotion Law 3 of 1986.

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