A developer friend of mine recently said to me, "Sam, you build with one hand and tear down with the other". As I have been struggling with just how to deal with the recent miss-guided actions by the government of Panama, those words came back to me. As my readers know, I am an investor, promoter and resident of Panama. My wife and three boys are Panamanian citizens. The future of this little country is very important to me, not just because we make a living here, but because we have a life here. I love the country and its people and have seen first hand the positive affect of this kind of foreign direct investment.
Many credit me with having started the residential tourism boom here in Panama by building and promoting Valle Escondido before anyone was interested in property here. Over the last six years we have worked hard along with many others, to bring Panama to the minds of North Americans as a place to retire or have a second home. But just as things really start to get rolling, the Panamanian government steps in and appears to do its best to stop it. They will give many logical reasons for their actions, and of course they don't really want to stop it, but the truth of their actions comes down to money. They are not satisfied with the economic prosperity we developers and buyers have brought them. They want more and they foolishly believe that Panama is so wonderful and North Americans so rich (and foolish) that we will sacrifice our hard earned money and efforts and give it to them.
Why am I so negative? Because recent actions by the government through various laws and presidential decrees have convinced me that I am doing my readers a disservice if I don't tell it like I see it. There are hundreds of developers and thousands of buyers who try to make decisions based on reliable information they can find on the Internet and I am one of the sources they turn to. I am presenting the following article, written by Paul McBride, in the hopes that the developers and buyers make their voices heard loud and clear to their contacts in Panama that the actions of their government will cost them dearly. Foreign developers and foreign buyers have other options. They do not have to invest or reside in Panama.
I have seen a number of ill-conceived laws and decrees put out by this government over the years and several of them quickly rescinded when there was enough backlash and pressure applied. We have set up meetings with several Ministers next week in order to let our voices be heard. If, after reading Paradise Lost, you want your voice heard, go this website http://www.panamarealestateinvestors.com/primare/ and take 2 minutes, answer a few questions and leave your comments. We will present them to the Ministers at these meetings. If enough of you make your opinions heard, I believe the government will react in a positive fashion.
Paradise Lost
Taxes, visas and privacy
Paul McBride
CEO Prima Panama
Come to Panama! That’s the mantra we’ve heard voiced again and again over the past four or five years from a country wanting to cash in on the wave of baby boomers and others looking for their own personal paradise.
Come to Panama! Where the cost of living is affordable, taxes are low and where you’ll be welcomed with open arms from a friendly and helpful government.
Come to Panama! Where your privacy is assured and where you’re protected against the prying eyes of Big Brother.
Come to Panama! Paradise awaits you.
But all is not as it seems here in Paradise. And it makes me sad.
WHAT TAXES (Or, I thought I was exempt from property taxes in Panama)?
Unless the property you bought will be completed by August 31st, 2007, the 20-year property tax exemption that was instrumental in putting Panama on the real estate map is no longer in effect. However, reading the brochures, magazines and marketing material on the web, you would think that this important tax relief measure is still in place. To be clear, a tax exemption still applies, but it is much less than the 20 years that many people still believe exists. For example, a $250,000 home that is completed after August 31st still qualifies for a 5-year property tax exemption. But what happens after then? Well, the applicable yearly property tax rate on a $250,000 home under current Panamanian property tax laws is $4,512.50. What about that new luxury apartment in Punta Pacifica that was a steal at $450,000. What’s the property tax on that after five years? How does an annual tax bill of $8,712.50 sound to you? That dream of tax-free living in Panama may, in fact, be just that… a dream.
And if that wasn’t enough to get your attention, there’s another property tax issue lurking in the dark that could affect property buyers - the revaluation of land. Land has never been exempt from property tax in Panama. However, there’s an exception for land valued under $30,000. Until now, the value of the land was usually recorded at the public registry at less than the $30,000 threshold so no property taxes were due. The improvements on the land are also taxable but, until this year, if the land was valued at less than $30,000, there’s was no property tax levied on the land or the improvements if your property qualified for the twenty-year tax exemption.
But recent changes in the law could affect your tax-exempt status. The tax authorities have recently issued a new policy that allows property owners to revalue their land on the tax rolls until the end of 2007. If an owner does this, the property tax will be reduced to 1% of the new value (down from the current 2.1%).
But there’s an even greater incentive for property developers to revalue their land. Panama has a capital gains tax rate of 30%. Let’s say a developer currently has individual lots on his land valued below the $30,000 threshold to maintain the property tax exemption. Now, he can revalue that land at a much higher level. Why would he do this? Simple. By recording the land at a higher value he increases the basis (or his cost) of the land for tax purposes.
Here’s an example. Let’s say the developer is selling a $250,000 home on a lot in his project. He can now revalue the land at say, $100,000 and the home at $150,000. Now, let’s say it actually costs him $75,000 to build the home. His basis (or cost) for tax purposes is $175,000 (the value of the land plus the cost of building the home). His 30% capital gains tax is calculated on the difference between his cost ($175,000) and the sale price ($250,000). In this example, the profit is $75,000 and the capital gains tax is $22,500. If he didn’t revalue the land to keep it below the $30,000 threshold, the tax would be much higher. His basis (or cost) is $105,000 ($30,000 for the land and $75,000 to build the home) and his profit (for tax purposes) increases to $145,000. His capital gains tax is $43,500 or an increase of $21,000.
Why should you care? Because the higher valuation on the land means you have to pay property tax from the very first year you own the property, even if you qualify for the 20-year tax exemption. Since the land is now valued at $100,000 and the first $30,000 is exempt, your 1% property tax bill comes to $700 a year. This revaluation just cost you $14,000 over the next 20 years!
I know this may sound confusing since the tax code is pretty complicated. But here’s the bottom line - if you plan to buy a home or property in Panama before the end of 2007, you should check with the developer or seller and find out the valuation of the land on the tax rolls. If your land (or lot) is valued over $30,000, you’re going to receive what could be a hefty a tax bill.
VISAS- YOUR MONEY CAN STAY, BUT YOU GOTTA GO
While the residential real estate market in the U.S. continues to slow, the one ray of light has been the growth of the vacation and second home market. Here in Panama, the vacation and second home market is booming too, particularly in the beach areas and mountain communities. What better way to invest your money (or perhaps that IRA nest egg) than in buying a beachside condo or mountain retreat? Panama is the perfect place to buy a second home. What would you really rather do - spend those cold, northern winters with your toes in the sand and golfing in the cool mountain valleys or de-icing the car windows and putting on snow chains?
In the good old days, if you were from the U.S., Canada or Europe, a simple $5 tourist card and passport would give you a 90-day pass to paradise. And, if you really liked it here, you could have easily extended your tourist visa for another 90 days. That was more than enough time for all those snowbirds to escape the cold, dark winter months. Investing in that new condo would have meant no hassle enjoyment of your part time ticket to paradise!
Well that was the good old days when it was easy. On 25 May 2007, new tourist visa regulations came into effect that now limits your stay to 30 days. Sure, you can apply for a 60 day extension by going to the immigrations office. How hard can that be? Just go down to the office, stand in line, deal with an underpaid, under appreciated government clerk (think New York City Department of Motor Vehicles and by the way. how’s your Spanish?), give them your passport for two days and hope the immigrations office extends your visa another 60 days. Another option if you want to stay longer, is to just pack up the Bermuda shorts and flip flops and head out of the country for at least 72 hours so you can return to enjoy that $250,000 condo you just bought (and thought you would be spending the winter in).
To add confusion and uncertainty to the problem, the Panamanian immigrations department has been going out of its way to say that they plan to review each and every 60-day extension request. What does that mean? Well, here’s what the United States Embassy is saying about the situation:
“As of May 25, 2007, tourists are allowed to stay in Panama for 30 days. If they want to stay longer, an extension for up to 60 days (for a total of 90 days in country) from the Panamanian Migration Office is required. Please note that the approval of the extension falls under the Panamanian Immigration Office’s discretion”.
Clearly, the US Embassy is emphasizing that the extension of the visa is discretionary and not automatic. Something you might want to think about before plunking down a deposit on that pricy winter escape.
WELL, AT LEAST I HAVE MY PRIVACY
So, what exactly is going on here? Why in the world would the government make it harder, not easier, for people to buy homes in Panama? Perhaps we can get some insight by looking at what some of the officials at the immigrations department are actually saying.
According to a recent interview by Sub-Director of Immigration Lic. Garcia Tobar, "tourists are those people who come here to visit for a short time, not to live here as a perpetual tourist. Those days are over”. OK, so vacation home owners are not considered tourists. He went on to say “…we are going to require people to register and to normalize their immigration status under one of these (immigrations) programs”. Apparently, it’s “normal” for a vacation home owner in Panama to apply for residency in the country where they buy property and want to spend just 3 or 4 months per year.
Well, what exactly are these “programs” that Lic. Garcia refers to? Panama has a variety of visa programs for foreigners wishing residency status. The two most popular, and applicable to vacation and second home buyers, are the “pensionado” visa and the “person of means” visa.
To qualify for the “pensionado” visa you must be able to demonstrate a minimum monthly income of $500 from a qualified private or government retirement plan. Add $100 for each dependent with you.
What, you’re not near retirement age so you don’t have a pension? Well, there’s always the “person of means” visa. If you have an extra $200,000 sitting around that you’re willing to put in a time deposit in the National Bank of Panama for five years, this might work for you. Or, you can purchase a home or condo for $200,000 and qualify for the visa. Perfect you might say, since this is almost exactly the amount you were thinking about paying for your new condo. Oh, but there’s a catch. To qualify for this visa, the home purchase must be in your personal name. What happened to that promise of privacy that Panama has been promoting for so many years? It goes right out the door when you register the title (and the price) of your new condo in your own name in the public registry to qualify for this visa. Not only will this be disclosed to the Panamanian tax authorities, but also anyone (from anywhere) can tie your name to your personal property. So much for protecting your assets.
Could there possibly be any connections between the new restrictions on the tourist visa and the disclosures required in the “person of means” visa? Could it be that the Panamanian government is trying to identify the foreigners buying all this property in Panama instead of the nameless corporations being bought and sold in taxless transactions?
DEVELOPERS, YOU’RE NOT OFF THE HOOK EITHER
Panama, a land of untapped opportunity. With hard work, determination, vision, some money and a little luck, an enterprising person could really make something happen in Panama. Small developers, tired of all the regulations, hassle, taxes and fees associated with building in the United States, were drawn to Panama as a place to create a vision and build a project that reflected their dreams and stand as a legacy to their achievements. With luck, they might even make a little money. Sure, things don’t run the same way in Panama as they do in the US, but that’s OK. At least there aren’t the hassles, the planning boards to deal with, the countless permits and the endless delays.
And then came Law 6. If you’re a developer and you’re not familiar with this law, you need to be. If you’re a buyer or investor, you should know that the effects of Law 6 will increase the price you pay for property. On the surface, Law 6 was drafted as a reaction to the uncontrolled development in Panama City. Most people, if they’ve heard of the law, assume it just prohibits the sale or promotion of a project without preliminary approval from the Ministry of Housing. While it’s true that Law 6 accomplishes this, it does much, much more.
The law provides for the creation of national and municipal planning boards. Boards that are empowered to review and approve the master plans for developments in their districts. On the surface this sounds logical. However, once you get outside of Panama City, there are very few people with the expertise to adequately review the planning documents, yet they have the power to approve or disapprove a project. These planning boards are the fiscal responsibility of the local municipalities, but they don’t receive any money from the national government. So where are they going to get the money to fund these new planning boards? The answer is simple, from the developers. And if the developers have to pay more, these cost increases will be passed on directly to the homebuyers.
As bad as all this is, the most disturbing aspects of the law are the very broad powers the local municipalities have to levy fees and service charges, do appraisals, expropriate property and demand developers to turn over their roads, common areas and public spaces to the local government. Although these powers may not be enforced, they are authorized under the law and certainly will be used to leverage payments and kickbacks from the applicant. There are no oversight provisions or protections for the developers contained in this law and the opportunity for corruption is undisputable.
After reading Law 6, it will be hard for any foreign developer to consider investing in Panama. The risks are simply too big.
IN CONCLUSION
Why I am writing all this? My business is real estate and my company, Prima Panama, has spent a lot of time, money and effort promoting Panama around the world. It’s in our interest to help make the real estate industry in Panama a success. When we began, Panama offered so much promise. Taxes were low, regulations were minimal, investment was encouraged, privacy was protected and people were welcomed to the country. Today, every one of these benefits is under attack. The whole real estate phenomenon we are witnessing in Panama is happening precisely because of the promise of these benefits. And it can end just as quickly as these benefits disappear. Buyers have choices and when the compelling reasons to invest here are gone, buyers will look elsewhere.
In the Internet age, information travels at the speed of light and events happening in one part of the world are instantly transmitted across the globe. I’m not the only one to notice these events unfolding and it won’t be long before the whole world knows that the Panama that’s being promoted as a welcoming, low tax country that protects the privacy of the individual, no longer exists. The reaction won’t be loud. Rather it will be silent as the buyers, tourists and investors simply stop coming.
But the dangers we face in the real estate industry can be corrected. The government can revise its immigration policy, roll back the poorly written Law 6, facilitate the building permit process, reinstate the tax incentives and create a positive environment for developers, buyers and its citizens. It must also attack corruption and establish a fair, equitable and consistent rule of law.
Sadly, a friend of mine living here recently told me, “I don’t feel welcomed any more”. This is not an isolated feeling and will resonate more and more as people feel the benefits that brought them to Panama no longer exist. When this happens, paradise will truly be lost.
Be sure to go this website http://www.panamarealestateinvestors.com/primare/ and let your voice be heard!
