(English) Reflections on a Tax Treaty with U.S.

By Eduardo Morgan Jr.

The express interest of the United States in requesting from Panama an agreement to exchange tax information is to gain access to its taxpayers’ investments in Panama, which, as per its tax system, are subject to U.S. taxes. For its part, Panama has no interest in a tax treaty limited to the exchange of information because our tax system does not tax the income of our taxpayers abroad. For this reason, and with very good sense, our government decided that Panama would only sign tax treaties to avoid double taxation in which the information exchange component would be offset by the assurance to foreign investors that the taxes they pay in Panama would be recognized in their countries, thereby promoting foreign investment.

For Panama, any tax treaty with the U.S., if not handled wisely, can have negative consequences for its economy. A Tax Information Exchange Agreement (TIEA) based on the U.S. model, which would be identical or very similar to the one submitted to us in 2001, would destroy our banking center, for, as is to be expected, our Latin American clients would move their accounts to Miami’s banking center, where not only are they subject to no taxes, but they are also assured total anonymity. Even as an invaded country in the early Endara Administration, Panama refused to sign such a treaty. This means we cannot sign the U.S.-model TIEA now, but instead must negotiate, if the U.S. insists, a tax treaty that protects our banking center and our position as a service economy country.

Industrialized countries apply their income taxes universally, but the vast majority of them do so only on the foreign income of their residents. The U.S. system, though, is sui generis, applying not only to its residents but to all its taxpayers. In comparison, a British citizen who does not reside in the UK does not pay taxes on his or her income abroad. A U.S. national, however, even if he or she resides abroad, must declare and pay taxes on his or her income. Moreover, this obligation is borne not only by U.S. nationals, but by everyone considered a taxpayer under U.S. law.

This means that a Panamanian residing in Panama, generating income only in Panama but with U.S. citizenship, must declare his or her Panamanian income and pay U.S. taxes, including the inheritance tax, which no longer exists in Panama. Moreover, Panama would be required, under the TIEA, to provide the U.S. information it request on any Panamanian. Keep in mind that due to the almost century-old relationship between our countries, many Panamanians also have U.S. citizenship, so these cases would be frequent. The same can be said of those Panamanians that during the crisis temporarily migrated to the U.S. and became residents, and as such, are also subject to taxes in that country. This condition also affects many of the Latin American clients of our banking center in the same dual citizenship/residency situation. With this treaty, despite having no other connection with the U.S. than a fiscal link, they would be subject to Panama being forced to disclose information about their investments here, and have no option but to move them to other financial centers without a TIEA with the U.S., such as Singapore or Hong Kong.

For this reason, Panama, as a sovereign country, should in these negotiations limit the tax information to be sent to the United States to that corresponding to U.S. nationals effectively residing in the U.S. This way, we would not have to provide information on our nationals, nor on the Latin American clients of our banking center, which would please the United States as it seeks to prevent its nationals from evading taxes. Failure to establish these limitations would violate Article 17 of Panama’s Constitution, which requires our government to defend all Panamanian wherever they may be, as well as all foreigners under our jurisdiction.