New Law: Tax to Hydroelectric Generation Plants

The former legislative period 2002-2003 ended with the merger of three (3) bill proposals, all of which provides tax incentives for the establishment of hydroelectric power plants in the country of Panama.

This unified text for one single Bill came as a result of a meeting held between the Regulating Entity of Public Services (Ente Regulador de los Servicios Públicos (ERSP) and the Commission of Public Treasury, Economic Planning and Policies (Comisión de Hacienda Pública, Planificación y Polí­­tica Económica) of the Legislative Assembly.

The proposed bills were: (1) Bill No. 8 whereby it is adopted a tax incentive regime for the promotion of hydroelectric generation plants and other new and renewable sources, and other provisions are established; (2) Bill No. 50 of September 16, 2002, whereby it is adopted a tax incentive for the promotion of hydroelectric generation plants and other new and renewable sources; and (3) Bill No. 60 of September 23, 2002, whereby it is established a tax incentive regime for the increase of electric generation plants of new and renewable sources. These bills were merged into Bill No. 129 of December 10, 2002, whereby it is established a tax incentive regime for the development of electric generation plants of new and renewable resources and other dispositions are issued.

This new Bill keeps the main objective of the former three to provide the correct incentives for the construction and exploitation of Mini-Hydroelectric Central Systems, Hydroelectric Centrals and Centrals of other Renewable Resources.

As a result of the fusion of the three (3) bills, the issues in debate among the three were defined as follows:

• Definition of a mini-hydro. As defined by Bill No. 60, it has been proposed as Central Systems of Mini-Hydros, those plants or group of generation plants with an installed capacity up to less than 10 MW.
• Further to the previous definition, small Hydroelectric Central Systems are defined as those plants or group of generation plants with an installed capacity of 10 MW up to 20 MW.
• Central Hydroelectric Systems are those with an installed capacity greater than 20 MW.
• With respect to the direct sales/purchases of energy to a distributing company, it has been established that these direct sales can be made by a generating company of Mini and Small Hydroelectric Central Systems and of Central Systems of other Renewable Sources, generators of electricity to a distributing company without being it necessary the process of free concurrence.
• As established in all three proposed bills, it is provided a modification to Article 55 of Law No. 6 of 1997 (The Regulatory and Institution Framework for the Provision of the Public Service of Electricity) whereby as of the sixth year of said law the granting of concessions regarding hydroelectric and geothermal generation will not be subject to the requirement of concurrency.
• Tax exemption is granted from all taxes and fees that may be caused due to the importation of equipment, machines, materials, spare parts and others necessary for the construction, operation and maintenance of Mini-Hydroelectric Central Systems, Hydroelectric Central Systems and Other Renewable Sources. This incentive will be also applicable to those Systems that are in construction at the moment of enactment of this law. The recognition of these exemptions must be requested before and granted by the General Directorate of Revenue.
• Additionally, all three proposed bills established that in order to benefit from the incentives granted in this Law, the company must keep in-force a concession or license as established in Law. No. 6 of 1997. It is understood that persons that have requested a concession prior to the approval of this Law and that have not yet begun construction, may benefit from the same.
• Tax incentives are set forth for Mini-Hydroelectric Central Systems, Hydroelectric Central Systems and Other Renewable Sources Central Systems and will vary according to the capacity of each system. Plants up to 20MW may sell and purchase directly from distributing companies, subject to two conditions. Plants up to 50 MW will not be subject to transmission charges during the first 3 years of operation and as of the fourth year will pay only 10%, as of the fifth year 25%, sixth year 50%, seventh year 60% and as of the eighth year 100%.
• Corporations that develop new projects or increases the capacity of production of energy can choose to obtain from the State a credit for the certificates of reduction of carbon dioxide (CO2) equivalent for a year, accumulated during the period of the concession or license, which can only be used up to 50% of the income tax paid in the determined fiscal period. The reference price to pay for gas ton will be of B/.4.00 per ton of CO2 per year. Companies that have acquired certificates of reduction of CO2 emissions equivalent for a year term at an international level cannot opt for these certificates nationally until the international certificate expires. This credit will be limited to a maximum of 25% of the total investment of the project or of the investment in the increase of the capacity of production of energy.
• The final tax incentive granted by all three proposed bills is a tax credit for a maximum of 5% of the total value of the direct investment in concept of works, that after the construction of the plants will be converted into infrastructure of public use, such as highways, streets, bridges, sewages, schools, health centers and others of similar nature. This credit cannot be object of compensation, assignment or transfer.
• Lastly, the new Bill provides for a participation of the State in the performance of studies for the development of renewable energy resorces. It is stated that the costs related to the basic studies, of advanced recognition or of pre-feasibility of sources of renewable energies, with the geotechnical and on-site investigations must be approved by the ERSP and the Commission, and will later, be paid with resources of the national budget and charged to the companies that develop generation projects based upon the before-mentioned studies as soon as these begin commercial operations. This concept is to be included in the last paragraph of article 82 of Law No. 6 of 1997.
• This new Bill will be re-submitted to the Senate in the next period which begins on March 1, 2003. We will keep you informed of new developments.

Should you have any questions or would like more information regarding this matter, please contact Dr.Juan Francisco Pardini at pardini@padela.com.