(English) From Ghetto to Global Port: Panama Maritime Power

Eduardo Morgan Jr.

Before I start my presentation, I believe it is important to refer to the following exchange of letters:

AUGUST 18, 1904

From John Hay, Secretary of State, to Jose Domingo de Obaldia, Ambassador of Panama in Washington, who had objected the appropriation of the ports of Panama and Colon by the United States.

“Before an official response to the matters presented therein, I venture to inquire whether the present communications were written in the light of the note from Mr. Bunau-Varilla, dated last January 19, regarding the interpretation of certain paragraphs of the treaty. For your convenience, I enclose a copy of that note.”[1]

From Bunau-Varilla to J. Hay, January 19, 1904:

“I do not hesitate, sir, to offer you in my name and of my Government, the following explanation on the meaning of the clauses which have not been deemed sufficiently outlined by the committee of the Senate…

“HARBORS ADJACENT TO THE CITIES OF PANAMA AND COLON 

The harbors adjacent to the cities of Panama and Colon (adjacent from “ad jaceus”: lying at the side of) are, in my understanding, the harbors in contact with said cities and their communication with the sea.”

Here Bunau-Varilla tells Hay, or rather convenes with him, in a document that shows all the infamy of this treaty, that the harbors of Panama and Colon excluded by the treaty, are not those of La Boca and Cristobal, the only ports existing in the area, but the piers for small boats and fishing boats that were only used during high tide.

“LIMITATION OF TOWNS”

I understand that the expression ‘the cities of Panama and Colon’ does not appear to the committee of the Senate to sufficiently define the space that remains outside of the zone.

“In my conception, the expression ‘cities of Panama and Colon’ corresponds to the actual space covered by the two actual agglomeration of houses, and cannot be understood as referring to any administrative definition that covers a theoretical surface.

“ I consider that the United States is not bound to give one inch outside the actual area covered by the agglomeration in both cases, and that no protest can be raised if it does not allow a suburban space to be added to the actual surface for the ulterior development of the towns.”[2]

INTRODUCTION

Mr. Enrique de Obarrio, President of APEDE, Mr. Vicente Pascual, President of the Organization Committee of CADE 2005, friends:  

I chose to start my presentation in this manner so I could create on those present, a sense of the difficult circumstances surrounding the birth of our beloved country, and the contribution by our forefathers and first generation of Panamanians to prevent such an unjust treaty from drowning us into the most abject misery, and laying the ground for a 100-year long battle that reached its end when we recovered our sovereignty and geographical position.

Rather than turning Panama and the port cities of the Canal into an emporioum, the Hay-Bunau-Varilla treaty deprived us of access to the sea, thus converting us into a ghetto.

But Panamanians refused to accept the loss of their sea and, furthermore, of their dignity. As shown in the letter from De Obaldia, from the very beginning of our relation with the great power, Panama always wielded its dignity and respect to its sovereignty as essential arguments in the permanent claim of the rights infringed by the treaty.

I repeat, Panamanians did not accept the loss of their sea. I invite you to travel back to those first years of the Republic and to imagine, for a moment, one of those Panamanians furtively climbing Cerro Ancon to contemplate from above the harbor that had just been snatched away from us. But the eyes of this Panamanian can see beyond the injustice. His visionary eyes seeing beyond the islands of Naos, Perico and Flamenco, lost in the wide open ocean where he places all his hopes:  that someday, somehow, we will escape the ghetto that the great power of the North created for us.

II. FIRST STEPS

A. Law 63 of 1917[3]

This visionary law is Panama’s first step towards becoming a global port. It is an amendment and addition to the Tax Code and its first chapter says it all: ON THE NATIONALIZATION OF VESSELS.[4]

I do not know who were, the Panamanians who realized that sea trade was becoming global and that a flag not constrained by the nationality of the owner and of the crew was needed; one that would allow the ship owners to keep control over their ships to operate them efficiently, thus reducing the costs of world commerce?  But, the Gazette where this law was published, shows that the Executive Branch was comprised of true national leaders: the President was Ramón M. Valdés; Eusebio A. Morales was Secretary of Government and Justice; and Narciso Garay, Aurelio Guardia, Guillermo Andreve and Antonio Anguizola held, respectively, the Secretaries of Foreign Affairs, Treasury, Public Instruction and Promotion.

B. First Ship Registered

The 1,141-ton ‘Belen Quezada’, ,was the first merchant ship to carry our flag; it was transferred from the Canadian register to the Panamanian register, in Vancouver, Canada. Its owners were a group of Central American investors that included a Panamanian: Enrique Clare. The register is dated August 20, 1919. The Americans were suspicious that the ship had been registered in Panama to illegally traffic liquor into the United States (where prohibition was then in force), but it was never caught in this activity. Its first cargo was wood for Cuba. An interesting piece of information: Costa Ricans confiscated the vessel in Punta Arenas during the war of Coto, and intended to use it for transporting 500 soldiers to invade Panama but by then, the conflict had ended. The Costa Ricans kept it as a spoil of war, and renamed it ‘Costa Rica’. It ended as scrap metal in Guayaquil in 1925.[5]

The benefits of the incipient merchant marine register for the world became evident in the registration of several vessels that had been taken during World War I by the United States as spoils of war; this way they did not compete with the American ships. Thus, the United States put them up for sale on the condition that they were to be registered in a different register. The buyers decided to use the Panamanian flag; the register was approved by the U.S., which authorized the transfer of their vessels to other flags. This authorization gave recognition to our register and we started to  grow as an alternative for ship owners to keep control of their vessels and crews.[6]

The first Greek ship owner to use the Panamanian flag was Aristotle Onassis, driven by a conflict with the Consul of his country in Rotterdam because of  the nationality of a cook. Today, Greeks and the Japanese are the major users of our register.[7]

C. The System is Perfected: Law 32 of 1927[8] on Corporations and Territorial Source as Tax Principle

The flag needed a complement for processing the ownership of the vessel and, at the same time, to facilitate the procurement of financial support for the ship owner. Although the Panamanian register allowed the owner, be it a natural person or legal entity, to be of any nationality, the global commerce lacked an entity that was simple enough to manage, yet able to provide legal safety to owners and creditors. To fill this vacuum, brilliant Panamanians came up with Law 32 of 1927, known as the Corporations Law.[9] An instrument was sought that would permit, in an increasingly interconnected world, citizens of different nationalities to do business with each other in different countries. As a model, Panamanians used the laws of the States of New York and Delaware that, in fact, had been enacted for the purpose of facilitating the conduct of business among residents of different Stes of the Union. Panama expanded the concept to the world. An essential complement to this law was the tax system created for Panama by our forefathers, which limited the taxation of income to the territorial source. Therefore, users of our flag and corporations only had to concern themselves with their personal taxes but not with paying taxes to Panama over income from foreign sources. Hence, the territorial tax became an essential pillar, the cornerstone of the System.

D. Reasons for the Existence of Open Registers

Vessels are valuable commercial assets. They can be bought, sold, mortgaged, and chartered. They require responsible officers and crews for their operation and international certifications (known as Technical Certificates) in order to navigate and to reach foreign ports. In addition, they need competent professionals for trade transactions as well as support, protection and services from their Flag State. The key to a successful open register is to be, above all, a facilitator so the activities the ship owner needs to carry out, (such as registration, financing, labor issues, chartering, obtainment of Technical Certificates, etc.,, up to the striking-off from the Register, be it by a change of flag or because of dismantling or sinking),  are done swiftly and according to the law. Under the Panamanian register, ship owners keep control of their property and the financing agent, usually a bank specialized in maritime credit, feels confident on the security offered by Panamanian mortgages. Aside from this, they count on the support of Panamanian lawyers with a long tradition of competing to offer good service and reasonable prices, as well as maintaining contacts with foreign lawyers and banks in the major maritime financial centers. Another essential support to the ship owner is the consular corps with offices located in the main ports of the world. In a traditional or closed register the ship owner, or company owner of the vessel, is subject to several controls established by the flag country, making it difficult to handle vessels as commercial instruments. It is incorrect to say that ship owners seek open registers to save taxes; this is far from being true. Almost all developed countries subsidize their merchant marine and assess a fee on the efficient operation of the vessel more particularly, in respect with the crew, but they also establish restrictive provisions on sales to other registers, that delay the transactions. Banks that provide financing to ship owners are also a determining factor in choosing a flag, since a Register is required both to provide guarantee for its credit, but also to allow, if necessary, for swift disposal of the vessel and that the purchaser may transfer to another register without needing to go through unnecessary red tape.

III. PANAMA, THE NUMBER ONE REGISTER IN THE WORLD

Today, 85 years after the passage of that first merchant vessel, the “Belen Quezada” (later named the “Costa Rica”), our register has grown to monumental proportions. Panama’s leadership is absolute, with a tonnage twice the size than that of Liberia (still its closest competitor), and almost four times larger than that of The Bahamas, which is the third largest.

The size of a Register may be assessed vis-à-vis the percentage of its contributions to the budget of the International Maritime Organization (IMO). The ten largest contributors (in Sterling Pounds) to the 2004 budget and the percentages of their contribution were:

Largest Contributors[10] toIMO Budget*in Sterling Pounds
Panama	3,827,870	17.0
Liberia	1,533,253	6.8
Bahamas	1,055,036	4.7
Greece	938,029	4.2
United Kingdom	843,330	3.7
Japan	805,998	3.6
Malta	787,405	3.5
The United States	704,551	3.1
Cyprus	695,084	3.1
Norway	681,133	3.0

IV. BENEFITS FOR PANAMA FROM THE REGISTER OF VESSELS, CORPORATIONS AND PRIVATE INTEREST FOUNDATIONS

All that we have said until now sounds good and should make us feel proud, but, you may be asking yourselves (with justified reasons): How do we benefit from being the number one merchant marine; from our open corporate register and fiscal territoriality? That is, what did we get by escaping from the ghetto into which Bunau-Varilla and John Hay had put us? And how can we make the oceans of the world  and our corporations essential instruments of international trade?

A. Direct Income to the State

This is the net income received in 2004, by the National Government, from the Register of Vessels and annual fees on Corporations and Private Interest Foundations, plus the income of the Public Registry obtained from both activities and the use of notary paper:

Direct Income to the State
Vessels(taxes, fees, int’l fishing licenses, officers and seamen cards)	$64,766,689
Corporations and Private Interest Foundations(license fee and surcharges, 2003 figures)	$39,729,266
Public Registry** 80% of its total has been taken to reflect international portion	$19,216,894
Others(notary paper: deeds and mortgages on vessels, corporate deeds)	$1,332,000
Total	$125,044,849

 

B. Direct Income for the Private Sector and Notaries

Direct Income to the Private Sector and Notaries
Vessels(ship mortgages and registration: lawyers, translators, notaries)	$5,429,000
Corporations and Private Interest Foundations(income per portfolio and new incorporations, lawyers and notaries)	$23,400,00
Total	$28,829,000

 

TOTAL INCOME TO BOTH SECTORSTotal currency from abroadAnnual contribution
Direct income for the State	125,044,849
Direct income for the private sector and notaries	28,829,000
Total	$153,873,849

What do these figures represent to our economy? First, let’s take into account that these revenues come from abroad; they constitute export services, an annual contribution from the world to Panama for which no payment is required. If we were to assess this in terms of the profitability of the Fiduciary Fund annualized for the period ended on September 30, 2004 at 4.57%, this represents to our country the equivalent of a principal of THREE BILLION THREE HUNDRED SIXTY SEVEN MILLION FORTY TWO THOUSAND SIX HUNDRED AND FORTY EIGHT DOLLARS ($3,367,042,648).Only the Canal has higher value.

C. Foreign Investment

Very often we hear government personalities, acquaintances and respected economists tell us that it is essential for our economic growth to export goods and to attract foreign investment.

Foreign investment is defined as the capital that foreigners invest in our country, producing tangible benefits to our economy. It is hard to believe but it is a fact, that the Open Register and Corporations System, left to us by the first generations of Panamanians who had to create them, saved us from starving in that historic ghetto; the actions of these visionary men in 1919 and 1927 respectively, have only produced benefits for the country, but have never been appreciated for their true value. They have become like the air, essential to our lives but we have never bothered to study them or take care of them. We have had these benefits before the FTAs, the United Nations, IMO, the IFIs, export subsidies, preferential rates and country risk investment grade. And they have been there, year after year, generating significant income taxes and creating thousands of jobs in the Government, notaries, and law firms, and world-over consular representation. Let us then analyze the performance of the Ship Register and Corporations as foreign investment.

1. Value of Vessel as Foreign Investment

The first time a vessel is registered it produces on average of $13,100.00 for the national economy in actual and effective income. In 2004, 1,193 vessels were registered.

Ship Register Costs
Panama Maritime Authority Registration Fees and Annual Taxes	$10,000
Resident Agent obtainment of patents, radio licenses and certifications	$1,500
Lawyer in charge of recording the mortgage over the vessel	$1,000
Notary for issuance of ownership deed and mortgage deed	$150
Treasury for notary tax on ownership deed and for mortgage deed	$150
Translators of property deed and mortgage	$300
TOTAL	$13,100
In 2004, 1193 vessels were registered. It represents an income, of $15,628,300 to the economy

For year 2004, this represented an average income of $15,628,300.00,  all from foreign sources. To produce a similar income by using the same yielding rate of the Fiduciary Fund indicated above, that is 4.57%, it would be equivalent to a foreign investment valued at $341,975,930. It should be noted that this is the income from NEW REGISTERS ONLY; the Treasury continues to receive significant annual revenues from the existing portfolio  which represents additional important revenues to the economy.

2. Value of a Corporation and a Private Interest Foundation as Foreign Investment

Every corporation and private interest foundation when first constituted pays an average of $700.

Contribution per Corporation or Private Interest Foundation Constituted As foreign investment
Government Annual taxPublic Registry, Tax Stamps, Notary Paper	250.00100.00
Lawyers and Notaries Drafting of Public Deed	350.00
TOTAL	$700.00

By using the same process, the results for 28,990 corporations and foundations registered in 2004, are revenues for $20,293,000 equivalent to $444,048,140 in foreign investment. As already said in respect to vessels, this is foreign investment for new corporations and foundations only; the Treasury continues to receive annual revenues from the existing portfolio, which produces other significant income for the economy.

V. TERRITORIALITY OF TAX

All revenues shown in the tables above, which benefit the government and the economy as a whole as well, are based on a fundamental principle: THE TERRITORIALITY OF THE INCOME TAX, basic element and cornerstone of the whole system. Without it, or if it is endangered, we would end like the Arco Chato: it would crumble down. The territoriality of the income is the common denominator of two other large international service centers, Singapore and Hong Kong, and our Financial Center depends on it. This is why all administrations, without exception, have defended the system, which is deemed an integral part of our national security. Panama has always been careful not to allow the violation of this principle, which is what would happen were we to accept entering into tax information exchange agreements. As an example of my statement, we can list the numerous mutual legal assistance treaties signed where we have always refused to consider tax evasion a crime. We are all aware of the pressure by the Organization for Economic Cooperation and Development (OECD) and the USA to have us agree to the exchange of tax information; the previous administration, with the help of the Bar Association and the International Lawyers and Maritime Associations, also rejected these impositions. The defense, at all costs of our territorial system renewed the trust of our users in our corporate register, which has seen a growth of 47% in new incorporations since 2004, despite an increase in the annual tax of 67% (from $150 to $250). The reason: that by the rejection of these treaties we implicitly reaffirm the principle of tax territoriality.

VI. TAX REFORM

The recently approved tax reform endangers the principle of territoriality. It is our belief that this part of the reform must have been recommended and drafted by foreign advisors, who ignore our history, as well as the substance and essence of the Panamanian economy. Unfortunately, and it is regrettable, this part of the reform was not consulted with the International Lawyers Association, the Panamanian Maritime Law Association, or the National Bar Association. These expert associations have no less than 400 lawyers who specialize on the subject, but not one of them was consulted. They did not even have the courtesy of consulting the National Bar Association as it was to be expected, since it is through lawyers that the multimillion foreign investments mentioned above are processed. It is extremely grave that legislation was passed on the deletion of corporations in the Public Registry, without even taking into account the legal stability that our country has always offered to users of our flag and our corporations.

As for the contents of the Tax Reform, the Minister of Economy and Finances has taken it upon himself to prove in his publications how absurd it is, inasmuch as it affects the territoriality principle of the income tax and plants the seed to again isolate us from the world that our leaders conquered, and helped us to survive while the dream of recovering the Panama Canal became a reality.

The table[11] below shows how the amendment to the Territoriality Principle is expected to produce an additional $10 million.

COLLECTION WITH THE REFORMS

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In US$ millions

Concept	Amount
Minimum Alternate Income Tax 1.4%	140
Minimum Alternate Income Tax 1.0%	100
Services provided overseas	2
Annual tax on corporations	8-10
Representation expenses	11-12
Amendment to the territoriality principle and deductible limits	10
Colon Free Zone	30

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Source: Ministry of Economy and Finances (MEF)

This means that to collect an additional $10 million, the MEF risked an actual annual collection of over $153 million, that is, without consideration of the loss of thousands of jobs that will be lost in the government, law firms, and in the International Financial Center.

The President of the Republic is well aware of these facts.  We feel certain that he will do whatever it takes to amend this costly mistake. As the saying goes: EVERY DARK CLOUD HAS A SILVER LINING, and the timely correction of this mistake will be the ratification of the territoriality principle by Martin Torrijos’ administration that will help us to stand firm on our service vocation, and will encourage the international community to trust Panama.

VII. THE CANAL

I do not want to end this presentation without a comment on the Canal. Today, we stand proud of the success achieved by a 100% Panamanian administration of the Canal, which is more efficient and safe than it was before it was reverted to us. Its contributions to our economy and to the National Treasury are more than spectacular. This fact leaves a bittersweet aftertaste when we realize how much it would have represented for us during all the years the Canal was not in our hands, had we received a fair deal. This is why we should always remember, with gratitude and pride, the generations that made it possible for the Canal to become ours. We should permanently honor the martyrs that gave their young lives to awaken the conscience of the entire world about the unfairness to which we were subjected, and to let us never forget those who wrote the last chapter in the struggle of so many generations to place our flag at the top of Cerro Ancon, symbol of our nationality. There awaits the furtive spirit of that Panamanian who escaped the ghetto and dreamed of conquering the sea and then the world, to make Panama a small but great country. Let us not destroy the dream that became a reality.

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[1] Background Document relating to the Panama Canal. Congressional Research Service, Library of Congress (1977); p. 440

[2] Ibid.: p. 440-441

[3] Official Gazette 2808 of December 24, 1917.

[4] This law was replaced with Law 8 of 1925. Official Gazette 4562 of January 23, 1925.

[5] Carslile, Rodney P. “Sovereignty for Sale”. Naval Institute Press, Annapolis, Maryland (1981): p. 6.

[6] Ibid: p. 10

[7] Ibid: p. 59

[8] Official Gazette 5067 of March 16, 1927.

[9] Durling, Ricardo: “The Corporation in Panama”. LIL Printers, First Edition. Panama (1986). The bill was drafted by Eusebio A. Morales and presented for approval of the National Assembly by legislators Harmodio Arias, Domingo H. Turner, Eduardo Chiari and Rosendo Jurado.

[10] IMO @ www.imo.org

[11] La Prensa. Sunday, January 30, 2005, pag. 47A.