PANAMA: DOUBLE TAX TREATIES

Panama Double Tax Treaties

Since Panama does not levy taxes on foreign source income, it has until recently refrained from negotiating double tax treaties. However, renewed pressure from the OECD and the G20 on the issue of tax transparency has forced the country into a rethink.

In April 2009, following that month's landmark G20 summit in London, Panama was placed on the OECD's 'grey list' of territories which have committed to, but not yet substantially implemented, the internationally agreed standard in tax transparency and information exchange. Later that month, the government of Panama announced the conclusion of the first round of negotiations towards a double tax agreement with the Netherlands, including tax information exchange provisions in line with the OECD standard. Panama’s deputy Economy Minister, Frank De Lima explained at the time that these negotiations "marks progress towards the removal of Panama from the Organization for Economic Cooperation and Development’s ‘grey list.’"

In 2010, Panama also agreed to launch negotiations towards a double tax avoidance agreement with Japan and Singapore, including information exchange provisions. Negotiations towards an agreement for the exchange of tax information with France were also launched in May 2010.

Jurisdictions must conclude a total of twelve TIEAs to gain a place on the OECD white list of territories that have substantially implemented the internationally agreed standard and avoid the prospect of international sanctions.

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Panama Other International Agreements

Mutual Assistance Treaties: Panama has concluded mutual legal assistance treaties with the US, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Colombia. The treaties operate at the administrative level: in other words, Court procedures are not required, although there is an appeal procedure. The treaties cover serious crime, but do not include fiscal crime. The Panamanian authorities do not entertain requests for information on fiscal matters.

Panama's Inclusion on FATF Blacklist: In June 2000, Panama was identified by the FATF as a non-cooperative tax haven in the global fight against money-laundering. The result of this was that Panama was one of fifteen tax jurisdictions placed on an FATF blacklist. Each offending tax haven had a year in which to correct its regulations and legislation.

The FATF released its annual report in June 2001, in which the organisation revised its list of countries and territories deemed non-cooperative. Only four were removed from the list, including Panama (the other three being the Cayman Islands, Liechtenstein and the Bahamas). Panama was praised by the FATF for its substantial efforts to conform to forty recommendations set out in a code of good practice governing money laundering.

In 2000 Panama had adopted four anti-money laundering decrees: Legislative Assembly Law No. 41 of October 2, 2000, entitled "Capital Laundering" and amending the Penal Code by imposing harsh penalties of up to ten years imprisonment for publicly breaching the secrecy of information or carrying out unlawful transactions related to capital laundering; Legislative Assembly Law No. 42 of October 2, 2000, setting down Measures for the Prevention of the Crime of Capital Laundering; Ministry of the Presidency Decree No. 136 of October 3, 2000, creating the Financial Intelligence Unit for the Prevention of Capital Laundering; and Executive Decree No. 213 of October 3, 2000, amending the 1984 Decree relating to the practice of trusts and making it compulsory for banks and certain financial institutions to render information on "suspicious transactions".

US Treasury Advisory Information

Consequent to the original FATF blacklisting of Panama, the US Department of State issued an Advisory against the country. The US Treasury Secretary, Larry Summers, warned that the Advisory was a caution to US financial institutions to give extra scrutiny and caution to transactions with Panama.

However, with the news that the FATF had found Panama to be fully compliant with all forty of the organisation's recommendations and the country's subsequent removal from the blacklist, the Treasury Department announced that the advisory was no longer necessary. Thus US-based banks and other institutions no longer needed to apply enhanced scrutiny to transactions involving Panama.

Free Trade Agreements At the conclusion of the fourth Taiwan-Latin American leaders' summit in Taipei in October, 2003, the Presidents of Panama and Taiwan signed a Free Trade Agreement that saw tariffs abolished on many goods from 2004, making provision for greater market access between the two nations, as well as reduced duties on agricultural and industrial products, investments, services and telecommunications.

Under the terms of the agreement, 6,200 categories of goods, or 71% of exports from Taiwan to Panama are exempt from duties, whilst 4,160, or just under 50%, of goods exported in the opposite direction are free from tariffs.

It is expected that by 2014, 97% of exports from Taiwan to Panama, and 95% of trade flowing from Panama to Taiwan will be free from duties.

A trade agreement between the United States and Panama appeared to be on course in August, 2003, after President Bush informed then President Mireya Moscoso in a meeting that he wished to move negotiations forward.

In the first positive step towards the crystallizing of a deal between the two nations, Mr Bush assigned then US trade representative Robert Zoellick to the case, stating that he wished to "accommodate" Panama in any future deal.

President Moscoso told reporters following the meeting that: "There's good will, and that's what we wanted to hear," adding that the trade deal may help Panama clear its massive trade deficit with the United States, which currently stands somewhere around $665 million. However, the US government has rejected the idea of giving Panama a seat at the free trade pact of Central America negotiations.

Further progress was reported in November, 2004, when the fifth round of free trade talks took place. After the meeting, at which the issues of intellectual property, rules of origin and sanitary standards were discussed, Panamanian negotiator Estif Aparicio revealed that the two parties "came closer in their proposals". He went on to add that: "There has been significant progress and (some chapters) are virtually wrapped up."

By 2007, both sides had reached agreement on the FTA, which was signed in June of that year by the two governments, and ratified by the Panamanian congress in a 58 to 3 vote in July 2007. This comprehensive free trade agreement covers trade in goods and services, intellectual property rights, investment, telecommunications, labor and environment, and government procurement.

The US Congress, on the other hand, has refused to ratify the agreement, in large part due to the Democrat majority's and the Obama administration's concerns over Panama's status as a 'tax haven.'

In May 2009, influential Senate Democrat wrote to President Obama urging him to make approval of the Panama FTA “contingent on Panama’s cooperation with efforts to combat international tax evasion.”

“In this time of economic distress, we can no longer afford to ignore the billions of dollars of tax revenue lost to the US Treasury due to the bank secrecy practices of Panama and other tax havens,” Levin wrote.

Congressional negotiators and US trade officials have made encouraging noises about progress towards US ratification of the FTA, but as of 2010 the deal remains in limbo.

Bilateral ties between Panama and Singapore were further strengthened in March 2006 by the signing of the Panama-Singapore Free Trade Agreement (PSFTA).

The PSFTA is a broad-based and comprehensive agreement, covering issues such as trade in goods and services, customs procedures, financial services, investment, telecommunications, e-commerce, competition policy and government procurement. It also provides for collaboration between Panama and Singapore in areas such as investment promotion and science and technology.

The PSFTA will provide Panamanian and Singaporean companies with enhanced access to each other’s markets, and will boost the growing trade and investment links between Singapore and Panama, according to a statement from the government of Singapore.

Under the Trade in Goods chapter, tariffs on 98% of Singapore’s domestic exports will be eliminated upon entry into force of the agreement. Key exports that will benefit include orchids, beer, processed foods, refined oil, chemicals, paints and varnishes, auto parts, engines and electronics. For its part, Singapore has committed to providing duty-free access to all Panamanian goods immediately upon the entry into force of the FTA.

Under the Cross Border Trade in Services chapter, service suppliers from Panama and Singapore are guaranteed non-discriminatory access to each other’s markets. Singapore companies in sectors such as computer & related services, real estate services and distribution services are among the key beneficiaries of this chapter. The chapter also contains an annex on maritime transport services which grants Singaporean vessels the same treatment as Panamanian vessels in Panamanian ports and vice versa.

The Investment chapter grants investors from Panama and Singapore greater certainty over their investments in each other’s markets with safeguards against unreasonable expropriation, and provisions for non-discriminatory treatment and dispute settlement.

In May 2006, the European Union announced plans to launch free trade agreement talks with six Central American countries and four countries of the Andean Community. The negotiations will initially involve Guatemala, El Salvador, Honduras, Nicaragua, Costa Rica and Panama.

In June 2006, Chile and Panama signed the free trade agreement they reached in February 2005. The agreement opened up 92.5% of the Chilean economy to Panamanian producers.

The 10-year negotiation process was interrupted between 1998 and 2004 due to differences over financial services.

Alejandro Ferrer, Panama's Minister of Commerce and Industry said that most Panamanian products would enjoy a zero tariff when entering Chile's market.

Chile is Latin America’s heaviest user of the Panama Canal, with 50% of the country’s external trade reliant on the thoroughfare. Last year, exports from Chile to Panama totaled $111.5 million, while imports from Panama reached $10.8 million.

The agreement includes protection for several Panamanian industries, including many agricultural products such as coffee, rice and sugar. Other agricultural products are still excluded from the agreement; and talks on financial services are also continuing.

In July 2007, Panama also agreed a free trade deal with Costa Rica. The agreement will result in the removal of tariffs on 93% of industrial and agroindustrial products, although barriers on certain industrial goods are not scheduled to phase out completely for eleven years, while some agricultural products will have schedules for reduction of duties as long as 16 years.

The agreement also opens up Costa Rica's monopolistic telecoms market to Panamanian operators, and the the Instituto Costarricence de Electricidad will be able to offer services in Panama.

Negotiations on a Free Trade Agreement between Panama and Colombia began in earnest on February 10, 2010, and Colombian President, Alvaro Uribe expressed hope at the time that an agreement could be achieved in a matter of weeks.

Following preliminary talks in January, Panama’s Vice Minister of Trade Francisco Alvarez De Soto, in an interview with Bloomberg, spoke of the two countries' political will to sign an agreement.

"Panama would be an interesting market for Colombia,” De Soto told Bloomberg in an interview in Panama City.

Trade between the two countries in 2009 amounted to USD466m, with Colombian exports to Panama accounting for the majority, with USD319m. The FTA could boost trade by ten times as much over the next five years, De Soto said.

On May 14, 2010, a free trade agreement between Canada and Panama was signed by the Canadian Minister of International Trade, Peter Van Loan and Panamanian Minister of Commerce and Industry, Roberto Henríquez.

The Canada-Panama free trade agreement will eliminate tariffs on over 90% of Canada’s present exports to Panama, across a range of sectors, including industrial, agricultural, forestry, fish and other seafood. It will also expand market access for Canadian services providers in such areas as information and communication technology, and energy and financial services.

The agreement will need the approval of the legislative bodies of both countries before it can enter into force.

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