Panama saw international trade changing and, in a moment of crisis, decided to act. In July 2020, in reaction to the economic crisis derived from the Covid-19 pandemic, President Laurentino Cortizo announced a national Economic Recovery Plan with twelve actions in its first phase, which were quickly deployed.

One of those actions was to create a special regime for the establishment and operation of multinational companies for the provision of services related to manufacturing. The regime is known as EMMA and its law was signed by President Cortizo in August 2020, effectively establishing a new model for investment attraction and job creation.

Panama’s focus was attracting light manufacturing companies that were turning to nearshoring, a trend in global commerce that aims to bring production to places near their final markets. This trend is a shift from the tendency to take production mainly to Asian countries because of lower costs — what is commonly known as offshoring.

Panamanian authorities acknowledged that the departure of the United Kingdom from the European Union, the trade war between the United States and China, and the Covid-19 pandemic “have accentuated a trend towards shorter supply chains,” according to the administrator of the Panama Canal Authority, Ricaurte Vásquez.

The EMMA regime is part of this train of thought. It gives multinational companies benefits to establish factories and production plants in Panama to sell their products to countries in the region. The Inter-American Development Bank (IADB) calculates that if Panama increases 1% of its exports to the US it could earn an extra $1,9 billion dollars.

“We have to take advantage of being the country with the best connectivity in the region and go out and tell the world that Panama is the best option for good companies to come,” said Cortizo in 2020. The Minister of Commerce and Industry, Ramón Martínez, added that EMMA companies will transfer technology and knowledge to the country.

The law gives companies that settle under the EMMA regime tax exemptions, labor and immigration benefits, and customs incentives. These companies can also enjoy the benefits of the free economic zones already operating in the country, which, by the way, are on the rise, since the government created five new zones in 2021.

This regime for multinational manufacturing companies was inspired by the success of the SEM regime established in 2007 to attract multinational businesses to establish their regional and global operations headquarters in Panama. Since then, more than 150 companies have made Panama their base, creating more than 7,000 jobs.

Benefits of nearshoring in Panama

To obtain an EMMA license, multinational companies must meet one of two conditions: that their consolidated assets are of $75 million or more, or that they have a minimum of three subsidiaries. Companies with a SEM license can request an EMMA license, and vice versa, so that both regimes are interconnected.

The services these companies should provide in order to opt for an EMMA license are the manufacturing and re-manufacturing of products, machinery and equipment, assembly services, maintenance and repair, conditioning, product development, research and innovation, analysis, logistics, storage, deployment and distribution.

Panama faces a “generation opportunity” with the transformation of global supply chains

Companies operating within this regime have a 5% reduced income tax rate that can be reduced to 2% with tax credits for income tax withheld locally or in other jurisdictions. This incentive will be given after compliance with international standards such as carrying out the activity in Panama and hiring full-time qualified employees.

“This regime will have a high and direct impact on the economy with the initial investment; the generation of jobs for Panamanians, including their training; technology transfer; and the possibility of outsourcing the main activity to be carried out in the Republic of Panama,” explained government official Jeannette Díaz Granados.

“Multinationals, having regional and global operations, manage quality standards and are constantly innovating their products. Precisely, these companies seek to locate in Panama in order to be closer to their consumers to optimize the distribution of their products. All of the above are key aspects for the generation of added value,” she said.

The IADB President Mauricio Claver-Carone declared this past February that Latin America in general and Panama, in particular, are facing a “generational opportunity” because of the transformation of global supply chains. “Countries with greater participation in global value chains are more productive and prosperous”, he said.

A benchmark in Central America

According to data published by the IADB, if Latin America captured 15% of the US imports from its main ten source destinations out of the Western Hemisphere, it could increase its exports of goods by $72 billion per year. Looking specifically at Central America, clearly Panama, along with Costa Rica, is leading this trend.

Nearshoring is a shift in thought for multinationals, too. Before, they were seeking places to produce that were as cheap as it gets, but now supply chain resilience is becoming much more important. In that sense, it certainly helps that Panama has the Canal, a Copa Airlines hub, and five ports that make it attractive for these companies.

“Panama’s role in logistics became more relevant, companies are considering nearshoring, to produce and store closer to their markets and many understand the convenience of using Panama as a regional distribution hub,” explained the Panama Pacifico project CEO Henry Kardonski in an interview with LatAm Investor.

Panama reacted to the nearshoring trend brought by the Covid-19 pandemic and the supply chain crisis by creating the EMMA incentives framework, among other actions. Because of this, Banistmo bank CEO Aimee Sentmat thinks that,”as global supply chains are reshaped, Panama will emerge as a strategic option for the Americas.”