Introducing the 15% global minimum tax on multinationals in Panama marks a significant step in reshaping international taxation frameworks. Aimed at curbing tax avoidance by large multinational corporations, this measure applies to groups with annual consolidated revenues exceeding 750 million euros or the equivalent in U.S. dollars. While the policy reflects global efforts to create a fairer taxation system, its implementation in countries like Panama presents complex challenges, raising questions about its implications for foreign investment, local fiscal incentives, and economic competitiveness.
A Global Push for Tax Equity
The global minimum tax is part of the Organization for Economic Cooperation and Development’s (OECD) Inclusive Framework on Base Erosion and Profit Shifting (BEPS). The BEPS initiative seeks to address gaps in international tax rules that allow multinational corporations, including multinationals in Panama, to shift profits to low- or no-tax jurisdictions, often eroding countries’ tax bases where substantial economic activities occur.
The 15% minimum tax ensures that multinationals in Panama pay at least a baseline level of tax in the jurisdictions where they operate. This policy aims to dissuade companies from exploiting tax arbitrage opportunities and to create a level playing field among nations. However, implementing the tax has been fraught with challenges, especially in developing countries like Panama.
Panama’s Potential Revenue Gains
Álvaro Villegas, Vice President of the Latin American Regional Committee of the International Fiscal Association (IFA), highlighted the revenue potential of implementing the tax. Based on OECD data, Panama could collect between $209 million and $256 million annually, equivalent to up to 30% of its current income tax revenue. These additional funds could significantly bolster the country’s fiscal health, primarily as it seeks to fund public services and infrastructure projects.
“This tax represents an opportunity to improve the fiscal capacity of countries like Panama,” Villegas noted. “However, there is a delicate balance to maintain. While the tax promises increased revenue, it also risks the country’s ability to attract and retain multinationals in Panama.”
Operational Challenges in Implementation
One of Panama’s key hurdles is operationalizing the global minimum tax. Villegas emphasized that enforcing this measure requires significant technical and administrative capacity. Tax authorities must establish systems to calculate, collect, and monitor the tax effectively while ensuring multinationals’ compliance in Panama. Additionally, they need to coordinate with other jurisdictions to prevent double taxation and disputes.
Natalia Quiñones, Global Vice President of IFA, echoed these concerns, stating that implementing the tax requires overcoming various technical, operational, and political barriers. “Despite efforts to create a harmonized regime, implementation has been divergent and chaotic,” she said. Quiñones noted that the tax’s complexity and differences in national tax systems have led to uneven application worldwide.
The Role of the Qualified Domestic Minimum Tax
One potential tool to address implementation challenges is the Qualified Domestic Minimum Tax (QDMT), which allows countries to tax multinational profits domestically before other jurisdictions can claim them. Quiñones argued that this approach is crucial for Panama. “The QDMT ensures that revenues from multinational operations are captured locally, reducing the risk of losing tax revenue to other countries,” she explained.
This mechanism could help Panama retain a portion of the tax revenue generated by multinationals in Panama, even as other nations adopt similar measures. However, implementing the QDMT also requires significant legislative and administrative adjustments, which may take time to develop.
Implications for Panama’s Economic Regimes
Panama’s unique economic frameworks, such as the Multinational Headquarters (SEM) regime, free zones, and other special financial incentives, further complicate the implementation of the global minimum tax. These regimes have traditionally attracted multinationals in Panama by offering favorable tax rates and streamlined regulatory environments. Introducing a minimum tax rate could undermine these incentives, potentially deterring investment.
José Luis Galíndez, President of the Panamanian Chapter of IFA, noted that tax authorities still debate the implications of adopting the global minimum tax. “Panama must carefully evaluate how this measure will affect its ability to attract FDI. If the country does not implement the tax, it risks losing revenue to other jurisdictions. But if it does, it could jeopardize its economic regimes’ attractiveness to Panama multinationals,” he said.
Balancing Tax Equity and Economic Competitiveness
Panama’s challenge lies in promoting tax equity and maintaining its economic competitiveness. Villegas stressed that countries in the region must transition toward fiscal incentives that encourage substantial economic activities, such as employment generation and sustainable development, rather than relying solely on low tax rates.
Quiñones added that aligning with global tax standards does not necessarily mean abandoning economic incentives. Instead, countries like Panama could reform their incentive structures to focus on fostering innovation, technological advancement, and green investments. “The global minimum tax offers an opportunity for countries to rethink their economic models and adopt more sustainable approaches to development,” she said.
Regional Dynamics and Competitive Pressures
Panama is not the only country in Latin America grappling with the challenges of the global minimum tax. Neighboring countries also evaluate their options, creating a competitive environment where jurisdictions vie for multinational investment. If Panama delays implementing the tax, it risks being perceived as a less attractive destination for multinationals in Panama concerned about compliance with global tax rules. Conversely, swift implementation could place Panama ahead of the curve, signaling its commitment to transparency and fairness.
The Path Forward
To navigate these challenges, Panama must engage in a comprehensive dialogue with stakeholders, including tax experts, multinationals in Panama, and international organizations. This dialogue should aim to identify practical solutions for implementing the tax while preserving the country’s economic competitiveness. It should also focus on building the technical capacity of tax authorities and ensuring that the tax system is transparent and predictable.
Additionally, Panama could leverage the global minimum tax to strengthen its fiscal position and invest in areas that enhance its long-term competitiveness, such as education, infrastructure, and sustainable development initiatives. By adopting a strategic approach, Panama can position itself as a leader in implementing global tax reforms while reaping the benefits of increased revenue and enhanced economic resilience.
Conclusion
The 15% global minimum tax represents a significant shift in international tax policy, with far-reaching implications for countries like Panama. While the tax offers the potential for substantial revenue gains, it also presents operational and strategic challenges that must be carefully addressed. By balancing the need for tax equity with the imperative to attract and retain multinationals in Panama, the country can navigate this complex landscape and emerge as a key player in the evolving global tax framework.