Lately, we have seen a decrease in international trade and foreign direct investment throughout the world. This was in response to the recent global economic crisis. Now, companies are looking to restructure and adjust their supply chain operations to improve their tax positions.
“According to the World Bank, foreign direct investment in Latin America fell to approximately $77bn, down 42 percent from record highs in 2008. South America declined by about 40 percent to $54bn, and Mexico and the Caribbean saw declines of about 46 percent to $22bn. Despite these drops, foreign direct investment for the region in 2009 was still the fifth-largest amount ever, and Latin America’s growth outlook is expected to exceed that of Europe and the U.S. through 2012.”
Now we are seeing an increase in new investments and other signs that the economy is beginning to recover. Latin America seems to be in line for recovery, falling only shortly behind Asia with “sufficient levels of growth to bring foreign direct investment back above $100bn in 2011, an increase between 40 percent to 50 percent. Brazil in particular is expecting significant growth in foreign investment and infrastructure development as it prepares for the 2014 World Cup and the 2016 Summer Olympic Games.”
Companies are looking to move some business to different jurisdictions. They have to consider legal differences, different currencies, and different customers. Things can get a little complex. The countries in the region are also competing with each other for foreign investment, so this in itself can make things more complicated. The region of Latin American countries has been excluded in the past because of small revenue levels or because of the complexity that arises from special tax laws. Companies have just found it easier to limit themselves to the Asian and European regions.
Now Latin America is proving itself to be more beneficial. The growth potential there is resulting in a “greater focus on supply chain structures in the region”. Companies looking to optimize their supply chain logistics are now looking at Latin American hubs.
Panama has an effective rate of less than 0.75 percent, only 3 percent of the net income earned from foreign operations. Panama is strategically located to be a regional hub. It is in a “favorable tax jurisdiction” with free trade zones and a territorial tax system, and also has a capable infrastructure.
According to an article on Supply Chain Brain’s website, companies should be cautioned that “although territorial jurisdictions offer some significant benefits, they are often perceived as tax havens by other countries in the region, such as Mexico, Brazil and Ecuador, with many countries penalizing certain transactions with low-tax jurisdictions.”