Eduardo Morgan Jr.

By Eduardo Morgan Jr.

June 2008

The world’s richest countries, organized in the OECD (Organization for Economic Cooperation and Development), have launched an insidious campaign against what they call “Harmful Tax Competition”, a campaign against so-called TAX  HAVENS.

But we must ask ourselves, is Panama a Tax Haven in accordance with the parameters established by the OECD itself in order to identify countries as such?     

The detailed analysis of what is termed a “Tax Haven”, leads us to the unequivocal conclusion that the legal system prevailing in Panama does not meet any of the conditions for this category. Let’s see:

The OECD study identifies four conditions for a country to acquire Tax Haven status, which are transcribed below:

“KEY FACTORS FOR THE IDENTIFICATION OF TAX HAVENS FOR THE PURPOSE OF THIS REPORT.

a) No taxes or only nominal ones

The absence of taxes or the presence of only nominal ones on relevant income is the starting point for classifying a jurisdiction as tax haven.

R/  The Republic of Panama does not only have a well defined and managed Income Tax, but its tax rates are at a level similar to those of many first-world countries, such as the United States. For this reason, it is clear that the first tax haven condition is not applicable to Panama.

b) Lack of effective exchange of information

Typically, tax havens enact laws or administrative practices under which businesses and individuals can benefit from their strict rules guaranteeing secrecy and other forms of protection from scrutiny by tax authorities, thus impeding the effective exchange of information on taxpayers who benefit from low taxes in that jurisdiction.

R/ Government officials and Panamanian tax authorities have access to the books and accounts of taxpayers in tax and criminal investigations. We also have Mutual Legal Assistance Treaties in force with several countries in drug trafficking cases and double penalty crimes, and our courts cooperate with requests for evidence by foreign courts and government officials, whether assistance is requested as a result of a bilateral or multilateral legal assistance agreement or, in their absence, the application of international standards of cooperation and reciprocity, which echoes our Judicial Code.  Therefore, this second condition does not apply to Panama either.

c)  Lack of transparency

A lack of transparency in the implementation of legislative, legal, or administrative provisions is another factor in identifying tax havens.

R/ This third point of the study is not applicable to Panama either. The OECD defines a transparent tax system as one that:

“First, must clearly establish its application conditions to taxpayers so that these conditions can be invoked before the authorities; 

Second, must make available its details, including any possible application of it on a particular taxpayer, to the tax authorities of other countries concerned. Tax systems that do not meet these conditions are likely to increase harmful tax competition, since non-transparent systems will provide their beneficiaries with the opportunity to negotiate with tax authorities, which may result in unequal treatment for taxpayers under similar circumstances. [i]

As shown, the OECD’s definition of transparency fits our legal tax system like a glove. In Panama, tax authorities have no power to negotiate tax regimes with taxpayers and both tax laws and their practical application are made entirely public, for they must be published in the Official Gazette in order to be effective, and they equally bind all taxpayers under the same circumstances.

d) No substantial activity

The lack of requirements for an activity to be substantial is important because it might suggest that this jurisdiction may be trying to attract investment or transactions motivated solely by tax interests”. [ii]

R/     This last point about an activity being substantial or real is not applicable to Panama. Fiscal incentive laws have been enacted for economic areas that the country wishes to develop, such as tourism, reforestation, or export industries, which, by their very nature, require substantial investments. Moreover, incentives are provided to the activity irrespective of the capital source, i.e., the law does not distinguish between domestic or foreign investments.[iii]

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5 Id. p. 28-29. Note: The OECD extensively shows of the characteristics of a tax system without transparency, which is transcribed below. To our delight, the tax regime in Panama does not have any of them. OECD says:

 A lack of transparency may arise due to:

Administrative rules (i.e. substantive and procedural regulations) that provide an advantage, allowing a particular sector to operate under a lower tax environment than other sectors. As an example of a favorable administrative rule, tax authorities can reach an agreement with a taxpayer or may agree to issue a prior regulation when requested. However, in cases where such administrative rules comply with applicable laws and do not contradict or modify them, they may be considered a legitimate and necessary implementation of administrative authority. To ensure equal treatment, the rule criterion must be well known or published by the authority issuing said rule, making it available to all taxpayers without discrimination.

Special administrative practices may be contrary to normal procedures based on current laws. This can promote corruption and discriminatory treatment, especially if such practices are not published. Such practices can also make it difficult for other countries to apply their tax laws. In this way, a regime in which the tax rate and base are not negotiable, but in which management practices and their application do not comply with the law or not do stipulate the grounds for its application, can be considered potentially harmful.

If, in general, the local tax climate is such that the laws are not applied as they should be, it could harm an otherwise legitimate system. Thus, even though in general the local tax climate does not harm an otherwise legitimate system, this may be a factor to be considered along with others. A specific example of this problem is one in which tax authorities adopt a deliberately lax audit policy as an implicit incentive for those taxpayers who do not comply with tax laws. This behavior can provide these taxpayers a competitive advantage”.

[ii] Harmful Tax Competition. Box I, p. 23.

[iii] It is not true that Panamanian corporations, or those from other jurisdictions considered tax havens, are used for the sole purpose of tax fraud, or for illegal businesses or sponsoring scams. These corporations play an important, legal role in today’s world, and are becoming more than necessary, essential for international business. For example, consider the financing that a Japanese company provides a U.S. company for, say, $ 500 million to invest in exploiting an oil field in Russia. For this kind of operation, the Japanese provide the funds through a Panamanian corporation, which, in addition, receives in trust the shares of a corporation in the Bahamas, which has, in turn been established by the American company for the execution the oil project in Russia. These shares in trust, will be pledged, in turn, to a bank based in Singapore, which will be the custodian of the shares and the promissory notes representing the obligation, and which will receive the payments made by the company that operates in Russia. If this business is done directly between the Japanese, American and Russian companies, the whole operation would surely run into all sorts of problems, including double taxation and stamp duties on promissory notes, etc. It is precisely to facilitate the operation and avoid the overlapping tax laws of the three countries involved that the use of such offshore corporations is necessary. There is no interest in tax fraud, and each company will no doubt pay its government the corresponding tax share.

 The Panamanian corporation is used for this type of operation, and as the holder of (securities of) investments persons or companies in foreign countries (an Saudi in England, for example), because of the territoriality of our tax system. It was once the most widely used, along with the English non-resident corporation (now obsolete), but at present that title belongs to Caribbean jurisdictions, created by law only for international business, and corporations of certain U.S. states. The argument that the territorial tax system and the law of corporations (which, as is widely known, was inspired by the law of the State of Delaware) make Panama a Tax Haven is invalid.   [iii]