When we talk about Panama, the first thing that comes to mind is the Panama Canal, the famous maritime crossing channel that connects the Atlantic and Pacific oceans, greatly accelerating world trade for more than 100 years.

Over time, Panama became more than a point of passage, evolving into a center of attraction for investments and businesses due to its legislative innovations to attract capital from all over the world, and the easy and very rapid opening process for off-shore companies (which was abused by various companies and individuals worldwide and which led to a global fiscal and media scandal, but which has since been alleviated thanks to the prompt action of the Panamanian authorities). Panama is still a great country to businesses to invest in with many benefits, particularly for those involved with buying and selling goods.

One of the reasons for this is that in the middle of the last century, Panama sought to take greater advantage of the fact that many ships passed through their country with goods and consequently created the Colon Free Zone.

What is the Colon Free Zone, and how does it help businesses?

The Colon Free Zone (Zolicol or ZLC) is a first-generation free zone located within the city of Colon, Panama, on the Atlantic entrance to the Canal. It is located in the southeastern corner of the City of Colon, occupying 2.4 square kilometers, and it is the largest free port area in ​​the Americas and the second largest in the world, after Hong Kong. It generates an annual volume of close to $20 billion dollars per year in imports and re-exports.

The Colon Free Zone allows companies to save money by avoiding many tax obligations (in Panama) related to their commercial activity while operating within this customs area. There are several available tax benefits offered by the Colon Free Zone:

• There is a tax exemption on imported products for re-export
• No import or export fees or quotas are paid
• No taxes are paid for services that have effects abroad
• Taxes are not paid for the profits obtained in operations abroad. The municipal taxes are not applicable to the companies that operate in the Free Zone
• There are no taxes on capital investments
• Low costs in the rental of land and buildings
• Only 5% tax on dividends

Within the zone, companies can enter, store, display, condition, pack, unpack, split shipments, reload, assemble, group, label, mix, conserve and generally perform all activities related to the operation and handling of all kinds of goods, products, packaging and other commercial effects for import, export and re-export.

The zone includes a collection of services and import centers, storage space, packaging and re-export opportunities for products from all parts of the world, in a diverse set of industries ranging from special electrical products to pharmaceuticals or liquors, among others.

Imports mainly come from China, Singapore and the United States, and goods are then most commonly exported throughout South America, Central America and the Caribbean.

How is the Colon Free Zone organized?

The Colon Free Zone is composed of 9 segregated areas. The most well known is the Casco Viejo, where the majority of company showcases and showrooms are concentrated. The second best known is the France Field area, where the merchandise storage center operates due to its proximity to the Manzanillo International Terminal and Colon Container Terminal ports.

The other 7 segregated areas of the free zone are Coco Solo, Coco Solito, December 20, Logistics Park, Enrique Jiménez Airport, Margarita Island and Davis, where companies like HP, Huawei, Koyo, Sanyo and Sony operate multinational distribution centers.

The transportation of goods in the Colon Free Zone operates through a multimodal transport system called the Multimodal Logistics Platform of World Trade. The system integrates the seaports at Manzanillo International Terminal, Colon Container Terminal, and Puerto de Cristobal; the Panama Railroad; the Enrique Adolfo Jiménez Airport and the Panama-Colón Highway. This free zone is visited by some 150,000 tourists a year from all parts of the world, particularly from the Caribbean, Central and South America, and the U.S.

How to operate from the Colon Free Zone

There are three ways to operate from the Colon Free Zone.

1. Leasing available land within the free zone and building a building. This lease can be signed for 20 years with the option to be renewed.
2. Another way is by renting a space destined for that purpose within the Colon Free Zone itself. This lease is monthly and is paid according to the size of the space in square meters, as well as the duration of the contract.
3. Lastly, you can opt for public storage. This is most common when the expected volume of business is not high enough to justify the rental of a space or the construction of a building. In this case a storage company can provide all the required services.

The payment of these services is usually done on a monthly basis, depending on the volume of merchandise stored. For this, previously the person or society must register with the authorities of the Free Zone.

Opportunities abound for businesses in Canada and worldwide

With all of these available benefits, it could be very interesting for some companies in Canada to establish immediate distribution operations of their products for Latin America. By doing so, they could continue taking advantage of the commercial treaties that are in force between Canada and other Latin American countries, reduce the transit time of goods, and offer more agile transactions for Canadian sellers and Latin American buyers. Companies can also hire local staff to improve customer service in their own language. It will be very advantageous for Canadian businesspersons to expand their vision to be more creative with the multiple tools that exist in the zone.

The post How your business will benefit by operating within Panama’s free trade zone appeared first on Trade Ready.

However, those affected companies may avoid the 45% tariff on imports by using a Bonded Warehouse or a Foreign Trade Zone (FTZ). For example, in South Florida, numerous importers bring merchandise into the U.S. that is not intended for U.S. consumption, but rather for exportation and consumption overseas. Those importers can take advantage of either a Bonded Warehouse or FTZ to bypass the 45% duties.

What is a Bonded Warehouse?

A Bonded Warehouse “is a customs regulated warehouse which must comply with strict Custom and Border Protection requirements.” According to the CBP, any merchandise that is stored in the Bonded Warehouse “is under the joint custody and joint supervision of both CBP and the Bonded Warehouse proprietor.”

The most notable rationale to use a Bonded Warehouse is that it offers a duty exemption feature as “it is a secure location where imported goods are stored without the importer or warehouse owner having to pay any duty” before the merchandise has been withdrawn for consumption.

The major benefit is that duties are only paid to CBP “upon withdrawal of the merchandise” for consumption in the U.S.

Imported goods can be stored in the warehouse for up to five years, and those goods can be manipulated or undergo manufacturing operations. “With a Bonded Warehouse, you can store restricted items until you are able to move them elsewhere or get permission to bring them into the country,” according to the regulation.

What is a Foreign Trade Zone?

A Foreign Trade Zone (FTZ) is a secure area that is under CBP supervision, but is not considered within customs territory. The CBP explains that FTZs are “located in or near CBP ports of entry,” and are the American version of what are known in the rest of the world as free trade zones. Both domestic and foreign goods may be placed in an FTZ.

Under the FTZ procedures, there is no requirement for payment of duties on foreign goods while placed in the FTZ. Duties are strictly payable only if those foreign goods enter CBP territory and are for domestic consumption.

Similar to the Bonded Warehouse, the Port of Miami website explains that there are various advantages to choosing an FTZ. “While in the zone, merchandise is not subject to U.S. duty or excise tax” and goods can be transferred to another zone, or exported from the zone without being charged duties.

In contrast to a Bonded Warehouse, goods can be stored in an FTZ for an unlimited amount of time, and manufacturing and manipulation is also permitted within the zone.

Additionally, “[d]uty is payable on either the imported components or the finished product, whichever has the lower rate. There is no duty on waste material or on value added manufacturing such as labor, overhead and profit.”

With an ability to curtail the possible 45% import tax by opting for either a Bonded Warehouse or an FTZ, the time to apply is now.

The post What is Trump’s 45% tariff on Chinese imports, and how can I avoid it? appeared first on Trade Ready.

The Border Adjustment Tax (BAT) is currently a hypothetical plan that has been presented by President Trump and the Republican Party (GOP). While there is growing speculation and uncertainty around this topic, here is what is known thus far, along with some tips for importers to curtail the BAT.

What would the BAT mean for trade?

The BAT would tax goods that are made overseas and shipped to the United States (imports), but would not tax goods that are produced in the United States (U.S.) and sold domestically or internationally (exports).  This would change how foreign and domestic companies calculate the corporate taxes they pay on profits.

As explained by The Economist, “for tax purposes, ‘profits’ would be domestic sales minus domestic costs.” The “border adjustability is all part of a plan to create a destination-based cash flow tax,” Forbes added, which would change the current corporate income tax. The destination-based cash flow tax would cause the tax rate to be lowered to 20% from the current average rate of 39%.

As a result, businesses would be able to write off their capital investments in the year those investments were purchased. They will also no longer have to pay taxes to the IRS for profits they earn overseas, and will no longer have the ability to “deduct interest as a business expense;” the Tax Foundation explained.

Based on an economic theory perspective, import taxes and export taxes would cancel each other out, therefore creating two potential avenues where BAT would not affect trade. Either the dollar might appreciate just enough that imports and exports end up costing the same as they did before the tax; or American prices and wages would rise enough to undo the competitive advantage that border-adjustment confers.

However, if the economy does not adjust to the BAT, importers would end up paying a lot more taxes in comparison to exporters, which could cause an unprecedented surge in inflation.

To prevent a negative impact on the economy, the Federal Reserve would have to provide a way to raise the value of the dollar to ensure taxes on imports and subsidies on exports would offset each other.

Is the BAT a VAT?

Some economists have compared BAT to a Value Added Tax (VAT), which is used in the European Union. In general, they consider the VAT a “broadly based consumption tax assessed on the value added to goods and services.” The Wall Street Journal added that “Businesses along the chain [of production] collect the tax and send it to the government. …it is the consumer who pays the tax, because the final price of the goods and services [consumers] buy reflect all of the taxes that have been charged up that point.”

Some economists consider the BAT, in its current state, to be very similar to the VAT in regards to retail markets, affecting the consumers who purchase personal commodities. For example, apparel stores relying heavily on imported inventory would face a tax bill that can be 3-5 times larger than their actual profits. While economists are not certain what the long-term effects will be, they do predict that in the short term there could be a 15-20% increase in prices on many household items. This could force many middle class consumers to purchase fewer goods.

Does the BAT violate GATT or GATS?

Other economists and members of the World Trade Organization (WTO) believe BAT could violate Article III of the General Agreement on Tariffs and Trade (GATT).

The broad and fundamental purpose of Article III is to avoid protectionism in the application of internal tax and regulatory measures. More specifically, the purpose of Article III, ‘is to ensure that internal measures not be applied to imported or domestic products so as to afford protection to domestic production.’

For the BAT to comply with GATT, any current or future U.S. tax measures “must be levied on imported products at a rate or amount no higher than the rate/amount levied on domestically produced ‘like’ products; and must provide a border adjustment on exports that is no greater than the amount of tax actually levied or owed on those goods.”

Currently, the GOP’s potential plan is in contravention of GATT, as it would give tax deductions for domestically produced goods, while at the same time denying deductions for those same goods that would be imported.

Another issue that could arise within the WTO is whether the BAT would violate the General Agreement on Trade in Services (GATS). The question would then arise, as suggested by PIIE, as to whether the denying a business deduction for an imported service amounts to less favorable treatment than that given to the same service purchased from a domestic supplier. If BAT does create treatment that is less favorable to imported services than to domestic services, then the BAT would also be in violation of GATS.

While there is much uncertainty, speculation of a future BAT will continue to grow. Until the Trump Administration and GOP present a comprehensive plan with congressional approval, one thing is certain: importers have to begin planning now.

The post New trade taxes may be coming – here’s how you could be affected appeared first on Trade Ready.

As the service export industry evolves, businesses face many unique challenges to deliver them.  Some of these issues may look familiar to those with experience in exporting commodities, while others are tax considerations and compliance provisions that relate directly to the service exports industry.

In previous articles, we’ve talked about the different ways service exports can be delivered.  In this article, we’ll look at what you need to consider when sending employees to represent your company by delivering services remotely to foreign locations.  These services vary widely and might be provided in a number of different ways. The commonality among them is that an idea is created that has value and is shared across national boundaries.

In today’s world, this sharing could occur in any of the following ways:

• Sending documents or ideas via email
• Through the cloud (sharing files on Drop or DropBox, for example)
• Sending hard copies (paper or USBs) of designs and ideas via express mail
• By fax
• Sharing ideas or providing solutions by telephone (landline, cellular, or VOIP)
• By “remoting” into another computer or IT system using a software program (think of the IT person in the Philippines who takes control of your desktop to troubleshoot a problem)

Are there any risks associated with these exports?

The technology and processes to accurately track all of these mostly virtual activities do not yet widely exist.  Remote service exporters should note, however, that governments worldwide are aware of these growing activities, and are actively working on ways to track and tax them more effectively.  There are certainly ways you might get tripped up, so you should be cognizant of the risks and address them appropriately.

The three primary types of compliance risks to consider when providing services:

(1) Export compliance

(2) Taxes

(3) Data privacy concerns in the case of remote access

Let’s look at each of these in more detail.

1. Export compliance still applies to remotely-provided services

Transmissions of concepts, drawings, ideas, and information are still deemed to be exports under the laws of Canada and the U.S.

If encrypted technology is used to remote into a foreign system, you should check to make sure it is not subject to licensing requirements.

In addition, the destination country will need to be checked against country restrictions.  The customer should also be checked against any list of denied parties or other known bad actors.

Sometimes, while executing a project remotely, assistance may be needed from a local firm.  In this case, your company must have a process for ensuring this company and its principals are also screened.

Key recommendations: 

• If the services are related to any kind of product sale, make sure you consider all the necessary related services BEFORE you sell the product to a particular country. Do this so that you can consider any export issues related to the services as part of the product sale – don’t just evaluate the “exportability” of the product alone.
• If you provide only services, remember that you are still exporting. Before you agree to provide services, ensure that you have checked all the relevant export compliance issues (e.g., verify that the customer is not on any denied party or other bad actor list, make sure that the country where the service is being delivered does not have restrictions; make sure the contract paperwork does not contain anti-boycott language; investigate “red flags,” etc.)
• Be sure to check any licensing requirements software on encrypted software used to “remote” into foreign computer systems.

2. Consider the tax risks

The tax risks primarily relate to income tax or value-added tax (VAT).  Let’s look at each in a little more detail.

Income tax/permanent establishment (PE) risk

This risk arises when a company located in one country starts doing things that trigger corporate income tax in a foreign country.  Governments everywhere will try to tax productive activities whenever they can. 

Certain “de minimis” activities are allowed (usually spelled out by a tax treaty between the two countries), but once that threshold is crossed, local authorities will attempt to assess income tax on the local activities.

Unfortunately, there is no agreed-upon set of principles among countries for remote or virtual services. In fact, there is considerable disagreement about their treatment.  This is an area where the tax laws have lagged significantly behind the reality of how many services are delivered today across borders.

The reality is that companies providing only export services to a country (with no other types of economic activities occurring there) are probably at a low risk of triggering any local income tax obligations.  Generally, among the 38 members of the Organization for Economic Cooperation and Development (OECD), providing less than 181 days’ worth of services remotely will not create income tax risk.

However, companies that provide services but also do other activities in that country, such as sending employees there to provide onsite services, operating a warehouse, or having a sales agent there have a significantly greater risk profile.

These companies need to have a system to track all their various activities in each country.  Companies that fail to track all of these activities are at a much greater risk of falling into the PE trap. Make sure you obtain good international tax advice if you conduct business in a foreign country beyond the remote provision of services.

Value-added tax, or VAT

VAT may be assessed on the transaction because the service export is deemed to occur in the foreign country.   For example, Singapore has clearly taken the position that all services provided via the internet should include local VAT tax.  There are new EU VAT rules applicable to services that will come into effect in January of 2017, and several other countries have introduced similar legislation.

These laws will mean that companies providing certain services to foreign countries will be obligated to add local VAT to their invoices.  This will be a true added cost of the service, since many foreign companies will be unable to offset this cost, or will find it inconvenient to recover it (in countries where it can be recovered).

As noted previously, most governments’ ability to actually track these virtual services remains limited. However, there is a huge difference between not collecting VAT because the local law is unclear versus not collecting VAT that is legally obligated in the hopes of not getting caught.

Exporters providing virtual services in particular will want to closely monitor developments around this topic, as it is evolving rapidly.

3. Get to know data privacy laws

Remoting into foreign computers, whether to troubleshoot and fix software bugs, to share raw data, or to conduct “white hat hacking,” is becoming increasingly common.

Anytime someone from one country has access behind the firewall of another country’s system, there are not only data security issues, but also data privacy considerations.

In much of the world, personal data is protected, and the type of data protected is quite broad.  For example, in the EU, it is against the law for a company in the U.S. to have access to any personal data residing on a server in Europe – including office telephone numbers, employment history, or dietary needs – without adequate data protection programs in place.

If your company is providing services where this could occur, become familiar with any applicable data privacy laws, and design an appropriate compliance program.

Key recommendations:

• Involve your tax team early in the planning process. If you don’t have an in-house tax resource, help educate your finance team so that they understand the importance of getting good external international tax planning advice.
• Become familiar with the various country laws assessing VAT on services, and monitor developments closely.
• Consider data privacy regulations when “remoting” into foreign computers

The service export industry is growing rapidly around the world, and things aren’t getting any simpler for those involved.  Although difficult to systematically check today, rest assured countries around the world are working aggressively to better track and monitor many types of remotely-provided services that increasingly cross borders.

The post Why you need to worry about compliance issues even when providing export services remotely appeared first on Trade Ready.