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Panama Adopts Modified Nexus Approach To Counter BEPS

by Mike Godfrey,, Washington

17 June 2019

Panama has newly gazetted legislation to ensure that taxpayers can access preferential tax arrangements for intellectual property income only where they can demonstrate that such income came from activities with economic substance in Panama.

The legislation - law no. 69 of December 26, 2018 - was published in Official Gazette No. 28684-B on December 27, 2018.

The changes are in response to the international agreement that countries should adopt the OECD's modified nexus approach, formulated under Action 5 of the OECD's base erosion and profit shifting (BEPS) Action Plan. This stipulates that a taxpayer would only be allowed to benefit from an IP regime, and its beneficial tax rates, to the extent that it can show that it itself incurred expenditures, such as on research and development, that gave rise to IP income in that territory.

The Ministry said: "The purpose of the standard is to establish the rules applicable to the tax treatment of income generated by activities dedicated to the assignment or exploitation of intangible assets, [if there is a preferential tax regime that results in] payment of tax on income (ISR) [at] less than the general rate established in the Tax Code."

"The taxpayers subject to the rule must establish the relationship between the activities carried out and the benefits that will enjoy preferential treatment – thus, the regime will be conditioned on whether the benefit is being generated by the research and development activities carried out by the taxpayer in Panama, for the creation of the intangible asset. For these purposes, the legislation includes the corresponding formula and each one of the terms is defined for the calculation of the respective income."

TAGS: tax | law | intellectual property | legislation | transfer pricing | tax rates | Panama | research and development | Tax | BEPS

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