How countries in the Americas are inviting business and driving growth

Overview

Mention of South America may bring certain historical associations of instability, but this is changing, and the region now offers a wealth of opportunity – especially for US-related offshore work. South America is proving an increasingly powerful competitor to the likes of India and the Philippines – and a desirable location for companies seeking a more favorable time zone for working with the US.

“Even some of our European colleagues are starting to ask us questions about South and Central America on behalf of their EU-headquartered companies,” says Frabotta.

Those companies will have no shortage of options. Brazil, which currently receives the region’s highest share of foreign direct investment, is a vast and diverse location, popular for everything from consumer and industrial products to the agro-sector, thanks to its large, youthful population, rising middle class and reasonably priced workforce.

Colombia is proving particularly attractive to companies in agriculture and consumer products, as it offers a lower cost of doing business than many of its neighbors. Argentina, meanwhile, has developed such expertise in shared services, call centers and back-office operations that it now provides a viable alternative to established players like India.

“Argentina offers a workforce that’s skilled in English as well as Spanish, together with an attractive overall cost structure so it can serve South and Central America, as well as the US market and others,” says Scott Mackay, EY Americas Global Incentives, Innovation and Location Services Co-Leader.

What the region offers

Incentives overview

The diverse nature of the region naturally brings with it a range of differing incentives. Some are relatively new, while others, such as the Investment Promotion Regime in Uruguay – which provides tax benefits for domestic and foreign investors with the aim of promoting specific activities and investment projects within the country – are well-established.

There are also some common trends to be found. The majority of countries are home to Free Trade Zones (FTZs), for instance, with Argentina, Brazil, Chile, Colombia, Ecuador, Paraguay and Uruguay offering incentives here across income tax, withholding tax, import tax and indirect tax.

Rates vary on a country-by-country basis and additional factors can also come into play, such as lower customs taxation when trading with fellow Mercosur countries – the trading bloc that includes Argentina, Brazil, Paraguay and Uruguay as states parties.

Indeed, many South American countries have focused on modernizing their customs regimes to make them more attractive. “Incentives for exports are generally similar in their structure,” explains Fernanda Salzedas, Senior Manager, Brazil Tax Desk, Indirect Taxes & Global Trade, Ernst & Young LLP. “A number of countries, for instance, grant a tax suspension on the import of the raw materials used in the production of goods that are to be exported later.”

She cites the Temporary Admission Regime in Argentina, and RECOF in Brazil as examples of this, but highlights how the management of the regimes varies. In Brazil, for instance, this is through digital ancillary obligations, which differs from other countries in the region.

Notably, Brazil presents distinct opportunities and challenges with regards to incentives because of its sheer size. Like the US, incentives can be offered on a federal, state and municipal level, which means that some states – such as Manaus, which is home to one of the largest FTZs – are able to offer more attractive incentives. The downside here is that FTZs can often be in remote locations, which provides logistical challenges.

Salzedas points out that while countries continue to update and implement incentives, one key factor to consider is the existence of free trade agreements (FTAs). “Maximizing the use of FTAs is an important way of reducing costs,” she says. “Taking into consideration agreements between Latin American countries is key to optimizing costs upon importation.”

R&D incentives

Of all the countries in South America, Brazil is the furthest advanced in terms of R&D incentives. The research super-deductions it offers can be as high as 180%.

Other incentives regimes are just getting off the ground. Chile offers a small range of R&D credits, as does Colombia. Even Bolivia is steadily creating new R&D incentives. So, while South America is still better known as a manufacturing base than an R&D hub, the region is clearly keen to court that high-value work.

“Everyone has to start somewhere,” says Smith. “And South American countries are beginning to offer R&D incentives to attract companies and begin building that base – seeking to draw skilled individuals to the country, and to repatriate young talent who have left the region to gain experience elsewhere.”

In order to do this, Brazil, as an example, is not being overly restrictive on the sectors eligible for R&D incentives, but the approval process can be challenging. “Brazil is open to pretty much any sector that can prove an investment in R&D,” explains Ricardo Ferreira da Costa, Senior Manager, Tax, Ernst & Young Assessoria Empresarial Ltda. “However, to take advantage of an R&D incentive – the use of R&D expenses to reduce the calculation basis of corporate income tax – taxpayers must follow a strict process with the authorities.”

It is worth noting that some of the R&D incentives in place in South America are temporary measures, something that will need to be factored in as part of any decision-making process.

Sustainability incentives

The landscape for sustainability incentives in South America is less expansive than North America. The incentive and credit programs currently in play focus on a range of activities, including the decarbonization of the fuel sector in Brazil (CBIO certifications – Decarbonization Credit), to excise tax benefits for production of lower emission cars, as well as tax incentives for companies investing in renewable energy sources.

In Brazil, this latter area includes a VAT exemption which applies to acquisition of relevant material and equipment for the implementation of solar plants and wind farms. This is typical area of focus according to Ferreira da Costa.

“Most of the green incentives in Brazil right now are related to exemption of taxes on capex expenses,” he explains. “In the best-case scenario, it can reduce up to 30% of taxes on the acquisition of goods that will be used to generate green energy.” 

Argentina has also been particularly prominent in renewable energy, through its RenovAr financial mechanism, which was created, in part, to attract foreign investment and reduce renewable energy project prices. This project includes a range of incentives including federal tax breaks and loan guarantees.

As with the rest of the world, emissions are another area of focus. Countries such as Chile, Colombia and Argentina are increasingly considering placing a price on emissions by adopting carbon taxes. Companies could then begin to invest in sustainability projects, improving the efficiency of operations or adopting renewables.

These countries are also putting climate change at the center of their COVID-19 recovery plans, allocating financial resources for sustainability-related projects.

Overview

Central America, sandwiched between the huge and lucrative markets of North and South America, has an uneven reputation for being a choice region for conducting international business.  

Made up of seven small countries – Belize, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama⁴ – some jurisdictions have struggled with hyperinflation and authoritarian regimes even as others invest in infrastructure, talent and stability.

Yet while certain Central American states are unlikely to top any list of desirable business locations, other centers in the region are garnering attention.

Costa Rica, for example, boasts a young talent pool – 25% of its five-million-strong population⁵ are millennials – a well-regarded free education system and a stable economy and democracy (it hasn’t even had an army since 1948).

When Intel opened a microprocessor plant in Costa Rica in the late 1990s, it was seen as a pioneer – the country now hosts the likes of Amazon, IBM, Accenture and P&G, as well as an Intel R&D center. The Macroeconomic Program of the Central Bank of Costa Rica (BCCR) of 2019-2020 has since driven heavy investment in its infrastructure. 

Panama, meanwhile, has built on its historic strategic importance – it bridges the two American continents and boasts its eponymous canal – to become one of the region’s most powerful logistics hubs. With a fast, reliable and sympathetic customs function, logistics contributes to around 20% of Panama’s GDP, employing around 9% of its workforce⁶. It also has a stable government and dollar economy.

It’s no surprise then that Panama and Costa Rica have gained traction, especially among US and Canada-focused companies seeking a location for their back-office or logistics functions.

“These are small, dynamic countries, each with a highly qualified workforce,” says Naumoff. “And they’re actively looking to attract more FinTech, shared services, call centers, regional headquarters, logistics firms and diverse industrial manufacturing.”

What the region offers

Incentives overview

“Both Panama and Costa Rica offer a different range of incentives, which benefit employment generation, free trade of goods, as well as making both economies more competitive,” says Carolina Palma, Senior Manager, Trade and Customs, Ernst & Young S.A.

In Panama, one such incentive is the Sede de Empresas Multinacionales (SEM), or the Multinational Headquarters Regime. This seeks to attract and promote investment, job generation and technology transfer. Qualifying organizations are able to carry out a range of activities, such as the provision of accounting services or operations support for the business group.

Incentives under the SEM regime include 5% corporate income tax, 2.5% income withholding tax and exemptions for dividend tax, complementary tax and notice of operation tax.

Both Costa Rica and Panama provide significant tax holidays for companies locating in their flagship economic development zones. The incentives here are incredibly compelling, across income tax, withholding tax, import tax, indirect and other taxes – as well as payroll subsidies and infrastructure assistance.

Panama is particularly well-recognized for its enterprise zones, most notably Panama Pacifico – on the Pacific side of the country – and the Colon Free Trade Zone on the Atlantic side. Activities allowed in these zones are various and include provision of services related to aviation and airports, call centers, logistics services, and international sales of goods and products through e-commerce.

Incentives in both zones are generous. In Panama Pacifico, for instance, these include up to 0% for corporate income tax, a 0% income withholding tax, a dividend tax of up to 5%, a complementary tax of up to 2%, and a notice of operation tax of up to 0.5%. Also, there is 0% VAT for billing local services and 0% VAT for the acquisition of goods, as well as 0% on customs duties introduced to the Panama Pacífico Area.

In Costa Rica, incentives are regulated under the Free Trade Zone (FTZ) Regime. FTZs are open to export manufacturing companies, export trade companies (not producers), export service companies, organizations engaged in scientific research, or manufacturing firms with no export requirements.

The tax incentives for the FTZ regime in Costa Rica include corporate income tax that ranges from 0% to 15%, and all FTZ companies enjoy 100% exemption for import and export duties, excise taxes, and remittances repatriation tax. Also, taxes on net assets, real estate and real estate transfer are exempted for 10 years.

R&D and sustainability incentives

Neither Panama nor Costa Rica offer a dedicated incentives regime for sustainability or R&D, but both are included in the list of qualifying criteria for the comprehensive suite of incentives listed above.

So, companies pursuing sustainable methods or R&D work are well-placed to benefit – provided they meet certain other requirements, including guaranteeing jobs and significant investment. And due to the generous nature of these tax breaks, any further incentives are likely to come in other forms.

“The likes of Costa Rica and Panama are beginning to give more incentives for sustainability, but they won't come in the form of tax cuts, as the 0% tax incentive being offered in the Free Trade Zones is already as good as you can get,” says Palma.

“Instead, sustainable companies may get preference when applying to public-private partnerships and other public works. In Panama, for example, the government recently sought bids for work on the Panama Canal and offered favorable terms to sustainable companies.”

While the Americas clearly represents a huge opportunity – offering safe and established centers as well as dynamic untapped potential – making inroads is certainly not without complexity. South and Central America, for instance, may present some serious logistical challenges.

“Even in Brazil, one of the region’s more developed countries, power outages may disrupt manufacturing, while under-developed roads, airports and ports beyond the major centers can make shipping goods a challenge,” says Naumoff.

South and Central American incentives can prove equally inaccessible. They’re often not as well publicized as in the North, and their assignment and application can involve a level of subjectivity that demands careful navigation too. 

Yet it’s not just South and Central America that pose problems for businesses looking to locate. The US, which particularly offers a vast array of incentives, catalyzed the hyper-competitive nature of the state system. But leveraging them can prove challenging, especially when the real value of an incentive is often far more nuanced than it first appears.

“As many cash grant programs aren’t even advertised, a company may find itself agreeing to certain terms without understanding the gains they could have made from other approaches,” says Mackay. “Decision-makers also have to consider the true cost of setting up business, from construction costs to taxes on materials, labor and other embedded expenses, not to mention the complexity of other factors, such as local labor laws.” 

Making an informed decision regarding new locations requires a comprehensive model that shows the true cost of doing business in a particular country, and potentially in specific regions and cities within it.

So, whether exploring the benefits of younger economies such as Costa Rica and Panama, or the more tried and tested routes of Brazil, Mexico, the US or Canada, it’s critical that businesses seek solid advice from those with a presence on the ground. 

A knowledgeable adviser will help determine if a given location offers the best possible fit in everything from supply chain to workforce. They can also help drive value from the wide range of incentives being offered and help ensure that this remains beneficial even when weighed against the true cost of doing business in that location.

Not only will they understand the hidden costs and risks, they may even hold meetings with state and local government officials, laying out all the potential benefits the company could bring the region in terms of capex and job creation, and negotiating the best incentives.

That business will then have the best possible understanding of its potential outlay, the cost and logistical challenges, and the real value of the incentives on offer. And it will be well-positioned to prosper – whether it’s a social start-up in Silicon Valley, a Panama logistics hub, or a back-office operation in Buenos Aires. 

Summary

From Canada in the north, all the way down to Argentina, the Americas presents businesses with a truly fascinating and diverse set of incentives. With the options changing on a regular basis, navigating the possibilities can be challenging. Working with experts who understand the markets on a country-by-country basis can help with critical decision-making.