Panama Executive Summary
Panama
Is An Independent Country With A Canal
The
Republic of Panama, between Colombia and Costa
Rica, has a population of 3,309,000 (July 2008
est) and a land area of 76,000 sq km. The climate
is tropical. Panama is a sovereign democracy with
a presidential style of government. A pro-business
government fell from power in 1999 and a new president,
Mireya Moscoso made populist promises. However,
In May, 2004, Martin Torrijos (son of Omar Torrijos,
who ruled Panama between 1968 and 1981) was elected
President. 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.
Panama
was part of Colombia for a while until the US
helped it to become an independent country alongside
construction of the famous canal, beginning 1903.
As of the end of 1999, the canal and all its US
facilities and bases reverted to Panama, creating
a major economic opportunity for the country.
The official language is Spanish, but English
is understood in business circles. Panama's currency
is effectively the US dollar, with the official
Balboa pegged to the dollar but used only for
small transactions.
Highly-Indebted Economy Is Recovering
The
service sector contributes more than three-quarters
of Panama's economy, which is based on banking,
tourism, mining and commerce. The Colon Free Zone
is very successful, accounting for around 10%
of GNP. The Balladares administration pulled Panama
back from a very poor situation between 1994 and
1999, reorganising debt, trimming state expenditure,
liberalising and privatising. The government is
trying to make productive use of the canal's facilities
with export processing zones and many investment
incentives.
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, exceeded 10% in 2007
and was 8.3% in 2008.
GDP
per head is $11,900 (2008 est) at Purchasing Power
Parity and unemployment levels are at 6.3% (2008
est).
FATF/OECD
Blacklists
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.
Although
along with many other offshore jurisdictions Panama
issued a 'commitment' letter to the OECD in 2001,
following agreement on the EU's Savings Tax Directive
in 2003, Panama told the OECD that it considered
there was no longer a 'level playing field' and
that it did not consider itself by by its commitments.
Panama's Lowtax Specialisations
Panama
has territorial taxation, thus only locally-sourced
income is taxed. There are no 'offshore' regimes
as such other than the Colon Free Zone and the
export processing zones. There are more than 120,000
companies in Panama, most of which trade or hold
assets externally. It is reasonably easy to form
corporations, and privacy is assured. There are
no tax treaties. Banking and shipping are Panama's
two main 'offshore' industries.
In
mid 2005, there were 80 licensed banks, of which
30 had international licences, and Panama is the
world's largest shipping registry. Once, it would
have been fair to say that drug running and money-laundering
were well-rooted in Panama, but with lots of US
pushing and shoving, the country seems to have
moved in a better direction lately. There is a
small but growing stock exchange, and there is
'captives' legislation which is little used.
Moderate Taxation For Local Business
Locally-sourced
profits are taxed at up to 30%; for individuals,
27% is the top rate of a sliding scale. There
is no capital gains tax but gains on real estate
count as income. There is a small withholding
tax. All foreign-source income is tax-free. There
is VAT, and import duties, but these have been
reduced substantially in recent years. The Government's
extensive investment incentive programmes give
substantial tax benefits to incoming investors
in many sectors; and the free zones are ideal
for locating regional distribution centres. No
company with exclusively external assets and commercial
operations will pay tax.
The promised fiscal reforms which were implemented
in 2005 involved some extra turnover taxation
and changes to VAT which were unwelcome to business
but helped to improve the country's standing with
rating agencies and the IMF.
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