Copa Holdings (CPA) Risk Analysis

We cannot ensure that our current tax rates will not increase. Our income tax expenses were $97.0 million, $40.2 million and $10.5 million in the years ended December 31, 2023, 2022 and 2021, respectively, which represented an effective income tax rate of 15.9%, 10.4% and 19.3%, respectively. We are subject to local tax regulations in each of the jurisdictions where we operate, the great majority of which are related to the taxation of income. In some of the countries to which we fly, we are not subject to income taxes, either because those countries do not have income tax or because of treaties or other arrangements those countries have with Panama. In the remaining countries, we pay income tax at rates ranging from 7% to 35% of income. Different countries calculate income in different ways, but they are typically derived from sales in the applicable country multiplied by our net margin or by a presumed net margin set by the relevant tax legislation. The determination of our taxable income in certain countries is based on a combination of revenues sourced to each particular country and the allocation of expenses of our operations to that particular country. The methodology for multinational transportation company sourcing of revenues and expenses is not always specifically prescribed in the relevant tax regulations, and therefore is subject to interpretation by both us and the respective taxing authorities. Additionally, in some countries, the applicability of certain regulations governing non-income taxes and the determination of our filing status are also subject to interpretation. We cannot estimate the amount, if any, of potential tax liabilities that might result if the allocations, interpretations and filing positions used by us in our tax returns were challenged by the taxing authorities of one or more countries. If taxes were to increase, our financial performance and results of operations could be materially and adversely affected. Due to the competitive revenue environment, many increases in fees and taxes have been absorbed by the airline industry rather than being passed on to the passenger. If we were to pass any of these increases in fees and taxes onto passengers, we may no longer compete effectively as those increases may result in reduced customer demand for air travel with us, thereby reducing our revenues. If we were to absorb any increases in fees and taxes, the additional costs could have a material adverse effect on our results of operations. The Panamanian tax code for the airline industry states that tax is based on net income earned for passenger and cargo traffic with an origin or final destination in the Republic of Panama. The applicable tax rate is currently 25%. Dividends from our Panamanian subsidiaries, including Copa, are separately subject to a 10% percent withholding tax on the portion attributable to Panamanian-sourced income and a 5% withholding tax on the portion attributable to foreign-sourced income. Additionally, a 7% value added tax is levied on tickets issued in Panama for travel commencing in Panama and going abroad, irrespective of where such tickets were ordered. If such taxes were to increase, our financial performance and results of operations could be materially and adversely affected. We received notifications from the tax authorities in Panama in February 2020 and in Colombia in November 2020 and March 2016. We, along with our tax advisors, have concluded that it is unlikely that we will need to allocate resources to settle these claims. This conclusion is based on the strength of our defense arguments and the fact that both cases are in the preliminary stages. In February 2020, we received two notifications from the tax authorities in Panama related to a tax audit process that began in 2019. The notifications include potentially significant adjustments to the reported dividend tax for the years 2012 to 2016 and income tax for the year 2016. We have filed an administrative appeal, which is the first legal stage under Panamanian laws. We, along with our tax advisors, have concluded that is probable that our tax position will be upheld. As a result, it is not probable that we will incur any significant additional tax as a result. According to Panamanian laws, the statute of limitations is three and 15 years for income tax and dividend tax claims, respectively. We may face increased taxes in future periods as a result of the global minimum tax, a critical element of the Base Erosion and Profit Shifting ("BEPS") initiative. On October 8, 2021, 136 countries, including Panama, reached an agreement for a two-pillar approach to international tax reform, integral to the BEPS project. Among other things, Pillar One proposes a reallocation of a proportion of taxes to market jurisdictions, while the Pillar Two Global anti-Base Erosion rules ("GloBE Rules") propose four new taxing mechanisms under which multinational enterprises ("MNEs") would pay a minimum level of tax ("Minimum Tax"). The Subject to Tax Rule is a tax treaty-based rule that generally proposes a Minimum Tax on certain cross-border intercompany transactions that otherwise are not subject to a minimum level of tax. The Income Inclusion Rule (IIR), the Under Taxed Payments Rule (UTPR), and the Qualified Domestic Minimum Top-up Tax (QDMT) generally propose a Minimum Tax of 15% on the income arising in each jurisdiction in which an MNE operates. On December 18, 2023, Pillar Two legislation was enacted in Ireland, the jurisdiction of the special purpose vehicles owned by the Company that beneficially own 75 aircraft of the Company's fleet. The income inclusion rule (IIR) and qualified domestic minimum top-up tax (QDMTT) provisions will apply for fiscal years beginning on or after December 31, 2023. The undertaxed profits rule (UTPR) will apply for fiscal years beginning on or after December 31, 2024 and will come into effect beginning January 1, 2024. Since the Pillar Two legislation was not effective as of the reporting date, the Company has no related current tax exposure. The Company applies the exception to recognizing and disclosing information about deferred tax assets and liabilities related to Pillar Two income taxes, as provided in the amendments. At the date when the financial statements were authorized for issue, no other of the jurisdictions in which the Company operates had enacted or substantively enacted the tax legislation related to the top-up tax. As of December 31, 2023, the Company did not have sufficient information to determine the potential quantitative impact. The impact of changes in corporate tax rates on the measurement of tax assets and liabilities depends on the nature and timing of the legislative changes in each country.

In 2023, a portion of our revenues were derived from tickets sold through third-party distribution channels, including those provided by conventional travel agents, online travel agents ("OTAs") or tour operators. We cannot assure that we will be able to maintain favorable relationships with these ticket sellers. Our revenues could be adversely impacted if travel agents or tour operators elect to favor other airlines or to disfavor us. Our relationship with travel agents and tour operators may be affected by: - the size of commissions offered by other airlines;- changes in our arrangements with other distributors of airline tickets; and - the introduction and growth of new methods of selling tickets. These third-party distribution channels, along with global distribution systems ("GDSs") that travel agents, OTAs and tour operators use to obtain airline travel information and issue airline tickets, are more expensive than those we operate ourselves, such as our website. Certain of these distribution channels also effectively restrict the manner in which we distribute our products generally. To remain competitive, we need to successfully manage our distribution costs and rights, increase our distribution flexibility and improve the functionality of third-party distribution channels, while maintaining an industry-competitive cost structure. These initiatives may affect our relationships with our third-party distribution channels. Any inability to manage our third-party distribution costs, rights and functionality at a competitive level or any material diminishment or disruption in the distribution of our tickets could have a material adverse effect on our business, results of operations and financial condition. In September 2022, Copa Airlines implemented a channel differentiation strategy ("Copa Connect") with the objective of shifting sales to more cost-efficient channels. This strategy adds a distribution surcharge to the fare for tickets purchased through the traditional travel agency GDS channel in order to partially offset the higher cost of this channel. For travel agencies, and their customers, who want to avoid the GDS distribution surcharge, we have offered alternatives leveraging the IATA "New Distribution Capability" (NDC) standard.

An accident or incident involving one of our aircraft could involve significant claims by injured passengers and others, as well as significant costs related to the repair or replacement of a damaged aircraft and its temporary or permanent loss from service. We are required by our creditors and the lessors of our aircraft under our operating lease agreements to carry liability insurance, but the amount of such liability insurance coverage may not be adequate and we may be forced to bear substantial losses in the event of an accident. Our insurance premiums may also increase, or we may lose our eligibility for insurance, due to an accident or incident affecting one of our aircraft. Substantial claims resulting from an accident in excess of our related insurance coverage or increased premiums would harm our business and financial results. Moreover, any aircraft accident or incident, even if fully insured, could cause the public to perceive us as less safe or reliable than other airlines, which could harm our business and results of operations. The Copa brand name and our corporate reputation are important and valuable assets. Adverse publicity (whether or not justified) could tarnish our reputation and reduce the value of our brand. Adverse perceptions of the types of aircraft that we operate arising from safety concerns or other problems, whether real or perceived, or in the event of an accident involving those types of aircraft, could significantly harm our business as the public may avoid flying on our aircraft. See "-If we are unable to successfully operate new aircraft due to safety concerns, in particular our new Boeing 737 MAX aircraft, our business could be harmed."

In 2023, approximately 64.3% of revenues and 79.2% of expenses were denominated in U.S. dollars (for 2022, U.S. dollar-denominated revenues and expenses were 63.3% and 77.3%, respectively). A significant part of our revenue is denominated in foreign currencies, including the Colombian peso, Brazilian real, Argentinian peso and Mexican peso, which represented 10.0%, 7.7%, 5.1% and 3.5%, respectively (for 2022, these foreign currencies-denominated revenues were 12.1%, 8.0%, 4.6% and 2.6%, respectively). If any of these currencies decline in value against the U.S. dollar, our revenues, expressed in U.S. dollars, and our operating margin would be adversely affected. We may not be able to adjust our fares denominated in other currencies to offset any increases in U.S. dollar-denominated expenses, increases in interest expense or exchange losses on fixed obligations or indebtedness denominated in foreign currency. We are also exposed to exchange rate losses, as well as gains, due to the fluctuation in the value of local currencies against the U.S. dollar between the times we are paid in local currencies and the time we are able to repatriate the revenues in U.S. dollars. Typically, this process takes between one and two weeks in most countries to which we fly.