PANAMA: EXECUTIVE SUMMARY

Panama Executive Summary

Panama Is An Independent Country With A Canal

The Republic of Panama, between Colombia and Costa Rica, has a population of just over 3.4m 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. The pro-business Ricardo Martinelli has been President since July 2009.

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. Inevitably, the world financial and economic crisis dampened growth in 2009, falling to an estimated 2.4%.

GDP per head is $11,900 (2009 est) at Purchasing Power Parity and unemployment levels are at 7.13% (2009 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 bound by its commitments.

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. Although Panama has set about negotiating tax agreements in response, as of 2010 it remains a 'grey-listed' country.

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.

Further fiscal reforms in 2009 and 2010 brought about changes to capital gains tax with regards property sales, and will lower the headline corporate tax rate to 25% for all companies by 2014.

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