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Panama: Country and Foreign Investment

Executive Summary

An Independent Country with a Canal

The Republic of Panama lies between Colombia and Costa Rica and has a population of 4.1 million and a land area of 76,000 sq. km. Panama is a sovereign democracy with a presidential style of government.  The current president, Juan Carlos Varela, is a former businessman. The climate is tropical.

Panama was part of Colombia until 1903, when, with backing from the United States, it declared independence. The USA gained the rights to start working on a canal. Work began in 1903 and was completed in 1914. In 1999, the canal and all its US facilities and bases reverted to Panama, lending a major economic benefit to the country.

The official language is Spanish, but English is often used in business circles. Panama's official unit of currency is the balboa (PAB), which is pegged at parity to the dollar. However, there is no Panamanian paper currency and even coins are a mixture of US cents and Panamanian centesimos. Hence the US dollar is the de facto official currency for all but minor transactions.

Economy Continues to Thrive

The service sector contributes more than three-quarters of Panama's economy, which is based on banking, tourism, mining and commerce. The free zone in Colón, the country's second city, is very successful and generates around 10% of GNP.

From 2011 to 2014, Panama enjoyed a real boom: GDP growth rates hovered around 10%. Groweth has been more muted since then, but is still fluctuation around a healthy 5% . Of more concern is the unemployment rate. It has increased steadily since 2012 and in the first quarter of 2017 was at 6.1%. GDP per head at purchasing power parity was US$21,335 in 2017.

FATF and OECD Blacklists

In June 2000, Panama was identified by the Financial Action Task Force on Money Laundering (FATF) as a 'non-cooperative tax haven'. As a result, Panama joined 14 other tax jurisdictions on the 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. Panama was removed from the blacklist and praised by the FATF for its substantial efforts to conform to 40 recommendations set out in a code of good practice governing money laundering.

The country continued to make progress, and in February 2016 it was removed from the FATF’s list of monitored countries. However, in January 2018, the Mutual Evaluation Reort on the Republic of Panama was issued. It made several recommendations as to how Panama could reduce its risk of dubious or illicit asset placement.

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. Panama has set about negotiating tax agreements in response and signed its twelfth information exchange agreement in June 2011.

Panama's Low-tax Specialisations

Panama has territorial taxation, thus only locally sourced income is taxed. There are no 'offshore' regimes as such other than the Colón 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 2012 there were 93 licensed banks, of which 28 had international licences; Panama also has 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  legislation for captive insurance companies which is little used.

Moderate Taxation for Local Business

Locally sourced profits are taxed at up to 25%; for individuals, 25% 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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