Enticing developments: A review of the fiscal incentives used to promote tourism investment

Coupled with a supportive investment incentive framework, Panama’s innate strengths in the tourism industry have made it a natural destination for investment, both foreign and domestic. While in recent years much of that investment has been channelled into Panama City and its growing cadastre of three-, four- and five-star hotels, funds are now beginning to flow away from the capital into developing the country’s leisure, sun and sand, ecotourism and adventure tourism segments.

Indeed, the current administration identified the tourism sector as a strategic economic pillar because of its ability to drive development in rural areas that have yet to reap the benefits of the country’s recent macroeconomic progress. To this end the government passed new legislation at the end of 2012 to entice investors to look at options outside of Panama City.

Rankings

For nearly two decades, Panama has boasted a fairly robust regulatory and incentive framework for the industry, one which has been modified over time to promote different segments of the travel and tourism market. The World Economic Forum’s “Travel and Tourism Competitiveness Report 2013” ranks Panama’s policy rules and regulations 18th out of 140 nations, while the prioritisation of the industry was seen as 32nd. Moreover, the country’s rankings with regards to foreign direct investment (FDI) indicates a very open and supportive framework for foreign investors, as the prevalence of foreign ownership in the industry ranks 9th worldwide, while the business impact of rules and regulations on FDI ranks 5th. In other “business and investor” categories Panama has received high marks: 24th in terms of the number of days to start a business and 32nd in the extent and effect of taxation.

Incentives

Law 8 of 1994 sets out the sector’s regulation and incentive framework, and this has successfully attracted numerous investments over the years, including from major hotel chains such as the Marriott, Intercontinental and Radisson, according to the Panama Tourism Chamber. Not only did Law 8 declare tourism as a sector of national interest, it also called upon the executive branch to assist the private sector by facilitating, expediting and developing tourism activities covered under the law, which it may do by creating special tourism development zones.

The base incentives established under Law 8 of 1994 have been present for almost 20 years, although these offers have since been revised under new legislation.

Law 8 provided benefits such as 20-year duty-free imports and a 20-year exemption for property tax on all hotels investing a minimum of $50,000 (not including the cost of land). Investments of $100,000 or more made in relation to historical landmarks receive a 10-year exemption on property tax on land and a 30-year exemption on improvements made to real property, as well as a five-year exclusion from income tax payments on company profits. Numerous other tourism-related benefits are listed under the legislation such as incentives for mass transportation projects, restaurants and even nightclubs, as long as they are registered within the National Tourism Registry – which was created a part of the same legislation.

Changing Times

Though Law 8 provides the foundation, several pieces of legislation have been passed since that have provided additional protection and benefits, while also revising minimum requirements for investors in the industry. For example, Law 2 of 2006 establishes a special concessionary regime for tourism investments with an eye towards promoting island development. It awards renewable concessionary contracts, each with specific requirements for investment and employment generation.

Law 4 of 2008 reinforced and built upon much of what Law 8 established some years before, while also establishing the Panama Tourism Authority (Autoridad de Turismo de Panama, ATP). Act 481 and Law 80 of 2012 were the most recent pieces of major tourism-related legislation passed. Among other things, they seek to promote investment in the sector outside the capital by providing five-year duty-free imports on materials that cannot be sourced locally and 15-year income tax exemption on investments of $250,000 or more in new construction or $100,000 if the investment is for an improvement to an existing structure. The special incentive regime defined in the act lasts until 2020. Law 80 sets new standards for projects in the capital by granting investments of $8m or more five-year duty-free imports on construction materials and 10 years for furniture and equipment, as well as exemptions on income tax stemming from payments made due to interest earned by creditors. The law also expands on the basic incentive framework by providing benefits for investments made in marine services and convention centres, and also tourism projects related to agro, rural, eco, sporting and cultural interests.

By The Numbers

As Panama’s tourism industry has developed, investments have become more concentrated in the capital. Between 1995 and 2007, investment in the sector under the incentive framework outlined in Law 8 of 1994 totalled $1.56bn from 150 projects, 96% of which went to hotels and public lodging and 83% of which was funnelled into Panama City. However, the last full year of investment statistics from the ATP demonstrate why the government is eager to promote investment outside the capital. In 2011 a total of $452.8m was invested under Law 8; however, 95.7% ($433.4m) of that figure was invested in Panama City, meaning just $19.4m was invested in the provinces. Statistics from the World Travel and Tourism Council (WTTC) indicate that in 2011 total investment in the sector was significantly higher, at $742.2m, than investments made under the incentive framework alone. In 2012 the figure increased 11% on 2011’s total to $823.7m. The WTTC estimates that tourism investment in 2013 will decelerate slightly, though it is still expected to rise at a healthy 8.5% – the 25th-highest growth rate globally and 2nd in the region behind Venezuela. Over the next 10 years, investment is forecasted to rise by 6.0% per year to $1.6bn in 2023. At the national level, the tourism sector’s share of total investment is anticipated to rise from 6.2% in 2013 to 6.8% in 2023.

Government spending in support of the tourism industry has also grown steadily in recent years, averaging growth of 8.7% per year from 2007 to 2012, during which time it increased from $115.9m in 2007 to $176.1m in 2012. That figure is expected to rise 6.8% in 2013 to reach $188.1m, according to WTTC data.

Range Of Offerings

While more than $9 out of every $10 spent by the private sector in recent years has gone towards the building of hotels, government spending has been funnelled towards increasing general tourism offerings in the country. From 2009 to 2014, the ATP’s investment plan called for the government to spend $379m, more than half of which was allocated for the construction of Panama City’s new convention centre. Public funding is also being directed towards the development of the Frank Gehry-designed Biodiversity Museum, as well as the ongoing rehabilitation of the capital’s historic Casco Viejo district.