PANAMA: COUNTRY AND FOREIGN INVESTMENT REGIME

Panama Geography

The Republic of Panama lies in Central America between the Caribbean Sea and the North Pacific Ocean. There are land borders of 225 km with Columbia (on the west) and 330 km with Costa Rica (on the east). The land area totals 75,990 sq km. The capital is Panama City. The Panama Canal links the North Atlantic Ocean via the Caribbean Sea with the North Pacific Ocean.

The topography is varied. There are mountains towards the Caribbean coast, while small hills and vast plains lie towards the Pacific side. The climate is tropical with prolonged rainy periods between May and January. There is a brief dry season between January and May.

The highest point is Volcan de Chiriqui at 3,475 m. Panama's natural resources include copper among other minerals, mahogany forests and fish, especially shrimp.

Panama's international airport in connected by many international carriers to most world centres. There are two ports, Balboa and Cristobal (at either end of the canal). The time zone is 5 hours behind GMT (= US Eastern time).

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Panama Population, Language and Culture

In July, 2007, the population of Panama was estimated at 3,242,173 with half the population residing in urban areas, and the majority of those (over 1m) in Panama City itself. Spanish is the official language, but English is widely spoken and understood in major cities.

Panama was occupied by more than 60 Indian tribes in the first part of the 16th century. The Spanish discovered the Isthmus in 1501, and founded Panama City in 1519, with a Governor appointed by the King of Spain. Panama was the base for Spanish expansion on the Pacific coastline of Central and South America.

During the independence wars of the Spanish colonies, Panama allied itself with Colombia until in 1903 it re-asserted independence and became the present Republic of Panama.

The canal was built between 1904 and 1914 by the US. It spans 81.3 km between the Pacific Ocean and the Caribbean sea. In August 2002, after five years of operations, expansion of the Galliard Cut was completed, allowing two Panamax-sized vessels to pass through simultaneously.

In October, 2006, 79% of Panamanian voters approved a $5.25bn plan to expand the Panama Canal even further. Panama's President Martin Torrijos said that the vote on expansion of the Canal was the most important national vote since Panama gained its independence.

Under the expansion plans, two 3-chamber locks will be constructed at both ends of the canal. This will create a third lane of traffic wide enough to handle the largest of modern container ships and tankers. New approach channels will also be prepared, whilst existing channels will be dredged to ensure large craft can enter the system.

The project will take about seven years and employ up to 8,000 people.

Panama retains many evidences of the old colonial regime architecturally and culturally, but Panama City is a highly sophisticated modern metropolis. Roman Catholicism is the dominant religion.

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Panama Government

The Republic of Panama is an independent, sovereign state. The democratically elected government has three branches: the Executive branch comprises the independently-elected President and two Vice-Presidents, who appoint a cabinet of twelve Ministers of State; the elected unicameral Legislative Assembly is made up of 79 deputies (this will reduce to 71 in 2009); the Supreme Court of Justice has nine judges appointed for 10-year terms, and there are two lower levels of court.

There are political parties: until late 1999 a coalition of the Democratic Revolutionary Party, the Popular Nationalist Party and the National Liberal Party was in power, led by President Ernesto Balladares. From September 1999 until May 2004, a coalition led by the Arnulfista party governed, led by President Mireya Moscoso, widow of former long-time president Arnulfo Arias Madrid. President Martin Torrijos (son of Omar Torrijos, who ruled Panama between 1968 and 1981) is the current head of state, with Democratic Revolutionary Party and Popular Party forming the coalition government.

After losing the presidential battle in 1999, Torrijos assumed leadership of his father's party, sought to reform it, and created a platform based on combating corruption, boosting employment, and reforming Panama's fiscal system.

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Panama Economy and Currency

The unit of currency used in Panama is the Balboa (PAB), which is pegged at parity to the dollar. There is no Panamanian paper currency and the US dollar is the de facto official currency for all but minor transactions. As a result, the Government cannot print money, and inflation is low, estimated at 1.1% (2006 est)

The outgoing administration in 1999, that of Ernesto Balladares, had tried, with some success, to reverse the fairly dire economic situation of the 1980s which accompanied and may have been linked to national drug-dependence, culminating in the US invasion in 1989.

Extremely high external debt, which had led to Panama's exclusion from world capital markets, was addressed in 1996 with a Brady-bond restructuring. In parallel, the Government pursued an aggressive policy of trade and economic liberalisation, including privatisation of key assets, which has begun to have an effect.

Leaving aside the difficult subject of drugs, the economy in Panama is focussed on banking, mining, commerce and tourism, with the canal and the shipping business generally playing an important role. The total value of the financial sector's assets (as at the end of June 2003) was $32.5 billion. The Government has introduced many investment incentives (see below). Copper mining began to have significance only quite recently, but Panama is now emerging as one of the world's major producers, with gold mining also making a contribution.

The Colon Free Trade Zone (see below) has enjoyed major success, and now accounts for around 10% of GNP. Other free trade areas are being created.

In the 1990s, growth had been running at 4% with low inflation, however it fell from 2.5% in 2000 to only 0.3% in 2001 and about 0.8% in 2002. Growth picked up again in 2003 to 4.1% and jumped to 6% in 2004, due partly to a one-off tax break aimed at investors in housing construction. Under Torrijos Panama is enjoying something of a boom; growth was 8.1% in 2006 and, according to some estimates, could exceed 10% in 2007.

In October, 2006, the World Bank’s Board of Directors approved a $60 million loan for Panama to support the Government’s public finance reform program, which represents an important step in a long-term partnership between the Bank and the Government of Panama.

“Panama’s economy has grown at a rate of more than 6 percent during the past three years, and the growth rate is expected to reach 7 percent this year,” said Jane Armitage, World Bank director for Central America. “This excellent growth performance in part reflects the past efforts by the Government of Panama to restore greater fiscal discipline and thereby strengthen the overall foundation for sustaining broad-based economic growth.”

GDP per head is $8,200 (2006 est) at Purchasing Power Parity and unemployment levels are at 8.8% (2006 est). As of 2006, Panama's GDP was valued at $26.16 billion.

In February, 2005, ratings agency Standard & Poor's announced that it had revised its outlook on Panama’s long-term sovereign credit rating to 'stable' from 'negative,' whilst also affirming its 'BB' long-term sovereign credit rating.

According to S&P credit analyst Lisa Schineller, the stable outlook reflected anticipated improvement in the government’s fiscal deficit and debt situation following passage of a fiscal reform package, which introduced a tax on company revenues, in addition to a levy on firms doing business in the Colon Free Trade Zone.

"President Martín Torrijos and his economic team recognize that fiscal reform was and is necessary to stem the increase in Panama's debt burden and strengthen creditworthiness," observed Ms Schineller.

S&P expected that Panama’s fiscal reforms would significantly reduce the general government deficit.

In the fall of 2005, Panama took advantage of its improved rating to file a shelf issue of $2 billion worth of debt with the US Securities and Exchange Commission (SEC). Panama said it planned to issue the securities to raise money for general refinancing and other spending needs. The ‘shelf registration’ allowed Panama to sell securities in one or more offerings, determining details such as size and price at the time of sale.

Panama is a well-located, well-endowed and well-educated country which has been held back by corrupt and ineffective leadership. If the Government manages to continue with business-friendly and liberal policies, the country will be successful.

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Panama Entry and Residence

Panama classifies foreigners entering the country as Tourists, Temporary Visitors, Special Temporary Visitors, Tourist-Pensioners, Immigrants and Investors.

Short-stay visas are issued freely; the Tourist-Pensioner visa is given to those who can demonstrate a designated monthly income from interest on time-deposits in a Panamanian bank; the Investor's visa is for those who invest their own capital into local business activity. Immigrant visas cover long-stay working residents.

The employment market is quite closely regulated: the law sets maximum percentages for the employment of foreigners in a business according to its sector. Usually the figure is 5%. However, foreign companies are allowed to fill senior positions with expatriates, up to a maximum of 12% of the staff. It may be possible to agree a higher percentage with the Ministry Of Labour, which is responsible for issuing work permits.

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Panama Business Environment

In terms of business and communications infrastructure, the long-term US influence on Panama has been very beneficial, Panama City in particular having the highest international standards. The well-established banking sector, however doubtful some of its antecedents, has also demanded high standards.

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Panama Import of Foreign Capital

There are no exchange controls in Panama and there is no Central Bank. Foreign investment is welcomed, and may be freely repatriated.

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Panama Foreign Investment Regime

The Panamanian government offers foreign and domestic investors alike a range of incentives.

Under Cabinet Decree 413 of 1970 and Law 3 of 1986, companies in manufacturing and processing industries which export all their production receive exemption from most direct taxes and from import duties on machinery and equipment. To take advantage of the incentives, a company needs to register with the Official Registry of National Industry, a department of the Ministry of Commerce and Industry.

These laws were followed by Law 28 of 1995 which offered superior incentives, but only to companies which give up their registration under the previous laws and re-register under the new Law. The main benefits of registration under Law 28 were as follows:

Other investment incentive schemes apply to agriculture, forestry and housing development, and various aspects of the tourist industry. Tourist sector investments worth more than $300,000 (in the city) or $50,000 (in the countryside) attract exemption from import duties and real estate taxes for 20 years, exemption from capital taxes, and accelerated depreciation.

Under Law No. 25 of 1992 (as amended by Law No. 28 of 1996) export processing zones can be established by companies singly or in groups, in which all activities, including support services, are exempt from direct and indirect taxation, and from import duties; in addition, dividends and interest payments are exempt from withholding taxes. These incentives are particularly aimed at making use of the extensive facilities becoming available throughout the country as a result of the departure of US forces during the hand-over of the canal to Panama.

In 2003, in partnership with the World Bank's International Finance Corporation, the Panamanian government made plans to transform the American military's Howard airforce base into a special economic zone with tax incentives and high-tech logistical and telecommunications facilities. It was estimated that the project would attract some $600 million in investment and create 20,000 jobs over the next two decades.

In May, 2005, Panama amended its Petroleum Free Trade Zone legislation, including an increase in the period covered by a permit from one to firve years. Other changes included:

No existing tax incentives were affected by the changes. Petroleum Free Zones were created under Decree No. 29 of July 14, 1992 for foreign or domestic companies and individuals involved in importing, refining, marketing or distributing petroleum or derivative products. Investors are required to contract with the Ministry of Commerce and deposit an amount equal to 1% of their investment up to a designated maximum amount. Investors also are expected to employ Panamanians except for skilled technicians and managers and maintain a minimum environmental liability insurance policy for US$1,000,000. Local products must be used if available at competitive prices.

Qualified investors can engage in the following activities: Lease or acquire property and construct port facilities, including docks for loading and unloading petroleum shipments; Build, install and operate refineries and pumping facilities, construct storage tanks, pipe lines and other equipment for processing petroleum or preventing fire or spillage; and Import, store or handle petroleum for export or marketing and distribution within Panama.

Petroleum imported into the Zone is exempt from import duty or taxes and is exempt from sales tax if sold within the Zone: Enterprises operating in a Zone are eligible for the incentives under Investment Promotion Law 3 of 1986.

In September, 2005, the government approved a plan by the Canadian-based mining firm Petaquilla Minerals Ltd and its partners, Teck Cominco and Inmet Mining, for a multi-phase mine development plan involving a number of tax incentives.

The acceptance of the plan by the Panamanian government meant that the terms of the Ley Petaquilla, a contract law passed by the Panamanian Government in 1997 setting out the terms governing the development of Petaquilla's mining concessions, could be initiated.

The Ley Petaquilla sets out stable and guaranteed land tenure for an initial term of 20 years, with two options to renew for another 20 years each. It also incorporates a favourable tax regime for the mining partnership, which includes: an accelerated depreciation and depletion allowance; exemption from import duties all supplies and equipment; exemption from all income taxes (except the mineral production royalty) until the retirement of all construction financing; and exemption from withholding tax on interest payments to foreign lenders or dividends to foreign shareholders.

Furthermore, future changes in legislation that are inconsistent with Ley Petaquilla won't apply to the owners.

The first phase in the plan is the development of the Molejon Gold Deposit which commenced in 2006. The development of the Petaquilla copper deposit is included in subsequent phases of the plan, and will be the responsibility of Minera Petaquilla S.A., the joint venture company owned by PTQ, Teck and Inmet.

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Panama Stock Exchange

Since its creation in 1990, the Panama Stock Exchange has been an important part of the development of Panama's role as a regional financial centre. Most transactions centre on government bonds. The exchange is the only dollar-based securities market in the region. The main corporate candidates for listing are the many companies of Central America and the northern countries of South America that have strong balance sheets but are too small to issue shares in New York. There are about 100 companies listed on the exchange. Trading turnover during 2004 was about US$3.5bn. Capitalisation of the 23 companies making up the Exchange's index was about US$4 bn at the end of that year.

Bolsa de Valores de Panamá, S. A., (the Panama Stock exchange) is a corporation organized under the Laws of the Republic of Panama. Its shareholder base is made up of the main local banks, including Banco Nacional de Panamá (National Bank of Panama) as well as commercial, insurance and industrial corporations and concerns, businessmen, professionals and stockbrokers.

There is a Board of Directors, made up of nine principals and nine substitutes. Additionally, five committees oversee the Panama Stock Exchange: the Executive Committee, the Technical Committee, the Trading and Internal Regulations Committee, the Stock Market Operations Oversight Committee, the Audit Committee.

The Panama Stock Exchange's operations are performed through qualified intermediaries who, with the PST's prior authorization, are entitled access to the floor when in session. These people, also known as stockbrokers, act on behalf of corporations which have bought seats on the Exchange.

Transactions can be cleared exactly three days after the transaction (t+3), or at Term whenever the parties agree to deliver the money or securities, or both, at a future date, within the limits set by the Board of Directors, notwithstanding the fact that the parties may decide to settle the operation before the expiration of the agreed term.

Electronic trading began to replace the open outcry system in 2003, and the Stock Exchange now operates an electronic trading system with remote trading terminals for all Stock Exchange seatholders. In certain special circumstances where the electronic system fails, the BVP has adopted open outcry trading norms for used on the Stock Exchange floor with a physical presence of the participants.

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Panama Colon Free Zone

The Colon Free Zone was established by Law No. 18 of 1948. The Free Zone is in the city of Colon at the Atlantic entrance to the canal, and has been extremely successful - more than 1,000 companies are established there, shipping more than $9bn of goods annually.

All kinds of processing and manufacturing are permitted within the Free Zone, while administration can be conducted from inside or outside the zone. 80% of a company's output must be exported; the remainder can be sold internally (separate books have to be kept).

Companies established in the Free Zone are largely free of taxes - see Offshore Legal and Tax Regimes for further details.

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