Panama Investor Blog

Howard, a "tax haven"?

With all the negative connotations associated with the term "tax haven" , the Colon free zone operators are labeling Howard's proposed benefits as providing just such a place. As if the Colon Free Zone has not taken advantage of that regime for many years. In order for the Howard mega project to be viable, they must receive significant tax breaks, especially in this economic climate. But the existing free zone does not want any competition, and saving a drive to Colon, would certainly give them the edge IMO.

From La Prensa Tuesday: A measure that would grant significant tax breaks to businesses operating within the former Howard Air Force Base is currently being debate in the National Assembly's Committee on Commerce.

The bill, which has received preliminary approval from the committee, grants various tax breaks to businesses locating in Howard, including exemptions for automobiles, machinery and raw materials. The bill, which has received preliminary approval from the committee, grants various tax breaks to businesses locating in Howard, including exemptions for automobiles, machinery and raw materials.

The bill has been viewed with a critical eye by business owners in the Colón Free Zone, who think that it may give businesses in Howard an unfair edge if it is approved. The bill has been viewed with a critical eye by business owners in the Colon Free Zone, who think that it may give businesses an unfair edge in Howard if it is approved.

Digna Donado, directors of the Association of Users of the Colón Free Zone, noted that the committee seems to be “in a rush” to pass the bill, which has been drafted without any input from various stakeholders. Digna Donado, directors of the Association of Users of the Colon Free Zone, noted that the committee seems to be "in a rush" to pass the bill, which has been drafted without any input from various stakeholders. Donado said the bill appears to make Howard a “tax haven.” Donado said the bill appears to make Howard a "tax haven".

“This bill should be reviewed with greater transparency,” Donado said. "This bill should be reviewed with greater transparency," Donado said.

Panama FTA is more about Fair trade than Free trade

When it comes to the Panama Free Trade Agreement, President Obama is being torn between helping certain companies acquire additional overseas business and keeping labor unions and politicians against tax havens happy.

The Caterpillar company has been working for years at positioning itself to take advantage of the heavy equipment business to be generated by the canal expansion project. Caterpillar equipment is made in the USA and with general construction there at a standstill, the company has been dependent on foreign sales for most of its business over 2008. Things are not looking any brighter for 2009-2010 except for a stimulus program called the Panama Canal Expansion. This is a major opportunity for Cat to help it's balance sheet for this year and next and they don't want to miss it. They are putting on the full court press by lobbying hard to get theFTA passed. Everyday this week there are articles saying it will or won't happen.

But in the end, one has to wonder, why does it matter so  much that they have the FTA. Can't they just sell and ship heavy equipment without it? Are import duties so high on this equipment that it would add to much to the price?

The fact is that the duties on this equipment are low or non existent and they certainly could build and ship from the U.S. and be competitive, but the real reasons Caterpillar wants the FTA has more to do with corruption than import duties. The fact is, any U.S. company wanting to do business in Panama right now is on a level playing field as long as they are willing to bribe there way to get the contracts they want. Of course, it is illegal for a U.S. firm to engage in such shenanigans, but other countries are not bound by such high moral standards and would be happy if the FTA were not in place. This gives foreign companies a distinct upper hand in gaining contracts in Panama.

The FTA has provisions in it that protects American companies from other foreign companies and governments using corrupt practices in order to gain contracts. These provisions call for complete transparency in the bidding process and allows a U.S. company to file charges in Panama that could bring all kinds of nasty things to light and hold up construction on the project until settled.

Like Obama, I too am torn on the FTA. I would like to see the provisions regarding corruption put in place to help eliminate the ability of the Panamanian politicians to rake it in, but I am against the strong arm tactics of the largest money laundering and tax haven in the world telling Panama it needs more transparency so the IRS can go fishing in ourfertile waters.

How do Property Taxes and Insurance affect your standard of living?

This article caught my eye because it quotes my blog from several years ago about the advantages of low property taxes and insurance in Panama. These advantages still hold true today.

excerpts from Local RE:

In Panama I have had people see home prices as an 'incredable bargain' or 'too pricey' based on where they are from. Some have even said, "I can buy a place in Florida for that!" Well, yes maybe you can but have you considered the true cost of ownership and how that affects your lifestyle?

In his Blog, developer Sam Taliaferro writes, "This weekend I had a visitor from Florida who shared with me that his insurance on his home in Boca Raton is over $7000 a year. On top of that the taxes have been increasing each year to where it is over $8000 for an under 2000 square foot home. When you compare Panama (And Valle Escondido specifically) where the insurance on a 2500 square foot home is about $450 and the property taxes are zero for the next 20 years, you can see why Panama has become so popular. You can actually live very comfortably here in a master planned community with great amenities just on the $1200 a month you save on these two expenses." (Sam Taliferro is an American expat many consider the pioneer who put Panama on the map with his first class development, Valle Escondido in the mountain town of Boquete.)

What would an extra $1,200 a month mean to your standard of lving?

Cheap Quality Health Care, Low, Low Insurance Rates, NO Property Taxes on new construction PLUS Fresh Produce, Groceries; Entertainment and Dining Out at about Half the cost of comparable American fare and you can see why Panama has become the number one retirement spot for the baby boomers!

U.S. leader says Panama needs more labor unions

From this article in the CQ Politics, we find that a key player in the U.S./ Panama trade deal wants Panama to open up to more trade unions, allowing those groups to organize with fewer than 40 persons. Here is an example of the lack of understanding the labor problems in a country like Panama. The problems with Panama labor is not that they cannot unionize. It is the laws that prevent good workers from advancing and allow disgruntled and lazy workers to take advantage of the system to their benefit. Low productivity, low wages and less oportunity is the result. What is really needed is a complete overhaul of the labor laws.

Excerpts:

With Congress wary of trade liberalization and job losses mounting across the globe, Levin insisted that the United States “will continue to lead in the era of international economics and globalization. This is not the time to turn inward, and we will not.”

But the Michigan Democrat, an ally of organized labor, warned that “trade is not an end in and of itself.” He called for a new trade policy that incorporates labor and environmental standards as “values.”

The Panama agreement, finalized by the Bush administration in late 2006, just after the mid-term elections that saw Democrats retake control of both the House and the Senate, enjoys strong support in the business community and would have minimal impact on U.S. manufacturers.

But Levin, who traveled to Panama during the last Congress, said that the Central American nation still has not met sufficient labor standards, noting, for example, that if a business in Panama has fewer than 40 employees, its workers are not allowed to organize unions.

Unemployment bring changes to laws in Costa Rica

Labor laws in Latin Countries are notoriously in favor of the worker, but in tough economic times, these laws can hurt the employee. For example it is illegal to cut a workers hours, even if your business is  having a tough time, both in Panama and in Costa Rica. Your only option is to fire the employee and hire someone else with a contract for less hours to begin with. With unemployment taking it's toll on our neighbor to the west, they are enacting a law that allows more flexibility for the employer in order to save jobs. Panama may want to implement such an option before things become acute.

Excerpt from Costa Rica pages: If there was any doubt before, recently released information reporting 15,000 lost jobs in Costa Rica during the month of December 2008 seems to prove that the world economic crisis has indeed hit this Central American nation. The report was released by the Costa Rican Union of Private Business Chambers and Associations (Uccaep), while the Labor Ministry said that 5,000 Costa Ricans presented themselves in January of this year to ask about their severance pay. The ministry said an average of 250 recently unemployed Costa Ricans arrived daily.

In an attempt to combat further negative effects of the crisis, Uccaep said it will be presenting a bill to congress in the next couple of days called the “Law of Employment Protection in Moments of Crisis”.

The law would present temporary amendments to the Employment Code to allow business owners to take the necessary precautions to avoid firing their personnel. Such precautions would include reducing work hours by one third, and offering an advance on vacation time. Both of these would allow the company to slightly decrease individual salaries, and therefore employ more people at the same price. Companies would also be able to lower executive salaries.

A sad state of affairs

This informative article from La Prensa focuses on a recent study of Panama Society by the United Nations and summed up in their latest National Human Development Report. When a nation ignores laws and only those who can pay get justice, the people naturally become conditioned to believe that corruption is the only way to get ahead. Here are some sobering statistics.

According to the study, 54.6 percent of Panamanians make decisions based on personal interest rather than on principles and mores, often disregarding what is commonly recognized as correct behavior.

Panamanians claim that corruption seems to have seeped into every corner of society, with government institutions, political parties and police thought to be the most crooked; some 69 percent admitted that they were convinced that breaking the rules makes it easier to achieve one’s goals.

85.8 percent of those polled saying they no longer trusted their fellow citizens, and 78 percent saying they had little interest in seeking collective solutions to societal issues.

What this says that the Panamanian people have given up hope. They have given up and over to accepting the way things are. They are so conditioned to it that they accept corruption as the norm instead of the aberration.

If you are going to live or do business in Panama, you need to understand this mindset. Is it no wonder that people are lackadaisical in their work and educational levels are so poor? What good does it do to play by the rules when the deck is stacked against you from the outset. This is a country of laws run by the lawless.

Report on corruption in Latin America

One subject I write about frequently is the affects of corruption on the business climate in Panama. Several months ago we participated in a study by the American Chamber of Commerce in Latin America regarding the affects of corruption on our businesses. Questions about our experience with corruption and our assessments of its damage along with other queries were put forth.

The Latin Business Chronicles has written a summary of the report. Here are some of the findings. "When asked what they believe is the key issue affecting the future of democracy in their country, 31 percent ranked corruption as the “most important.” In terms of reducing corruption, 48 percent of respondents ranked transparency and accountability in public institutions as the most important step that needs to be taken, while 31 percent cited fighting corruption as the most important next-generation reform for the region.

The survey was conducted in August and September among 813 respondents from 22 countries in Latin America ">So how significant a problem is corruption in Latin America for companies doing business there? Nearly half – 48 percent – say it’s significant."In fact, more than a third – 34.5 percent – of those surveyed don’t think a company, individual, or government official will be punished for making or receiving illicit payments related to obtaining business.">Only 18.3 percent ">think anti-corruption laws are effective in the country where they work, versus 8.17 percent that believe the opposite.

More than half – 55 percent - believe that dealing with corruption risk is a top priority of their companies, while an even larger number– 66 percent - believe that the importance of preventing ">corruption has increased for their companies over the last five years.">When asked to rank perceptions of corruption in 12 countries, respondents say Bolivia, Venezuela an Ecuador are the most corrupt, while the United States, Chile an Costa Rica are the least corrupt. Mexico ranked right behind Ecuador and ahead of Argentina, while Brazil ranked among the least-corrupt countries, the survey shows. Fully 71.8 percent of respondents say corruption is a significant obstacle in Venezuela versus 3 percent in Chile.

Minimum wage laws largely ignored

According to a recent economic report, 187,000 people working in Panama are not being paid a "fair wage". But what is fair? According to authorities, two-thirds of the workers in the interior of the country have incomes that are as little as 50 percent of the country's minimum wage, which is about $300 monthly. Certainly when you read these numbers you would wonder how people can survive on such low wages, but other things need to be taken into consideration. Most of the workers in the interior are related to agriculture. Family members typically work on the farm and draw a low wage in order to get on the social security roles. They are fed and housed and shown on payrolls as a part time worker. Indians are usually migrant workers who are typically provided with housing. In many cases, such as picking coffee, they are paid by the amount picked rather than their time. Those who have yearly employment receive more permanent housing and benefit of long term work. I agree that the wages are low and I am not trying to make excuses for the land owners, but when you see that the increased cost for labor is directly placed onto the cost of the food produced, it is a catch 22. Everyone has to eat and the increase cost mandated by the government becomes a vicious cycle, especially when you consider the nearly 50% burden of government "benefits". Everyone ends up paying more including the worker.

The fact is that regulating wages does not work because demand dictates prices. Our resort and construction workers make well above minimum wage as demand for skills in these areas is higher than can be met. In order to keep good employees we must pay more and provide benefits. Panama's labor laws work against the tourism industry by forcing employers to pay 2 1/2 times regular wages during holidays. When most of your business is done during the holidays it makes it much more difficult to make ends meet.

The answer to all this is better education and apprenticeship programs to teach people skills that  demand a higher wage. As more people have those skills they will move from the lower income ranks and a deficit in those workers will increase wages without the need for government mandates.

The following story is about the difficulty the government is having enforcing theminimum wage law.

Read the story here at La Prensa

Environmental agency statistics

Construction projects of any kind in the country require an environmental impact study. Depending on the class of project, these studies can be approved in as little time as a month or considerably longer if  large and complicated. In this brief report from LA Prensa we see some statistical data on the numbers and average time it takes.

EIA requests increase

So far in 2008, the Autoridad Nacional del Ambiente (Anam) has received 814 applications for environmental impact studies (EIA), and has approved 598 of them, according to statistics from the agency.

The largest number of EIAs that have been received so far, a total of 644 of the applications, are for construction projects in Panama City.

According to Anam, the average time to approve an environmental impact study varies depending on the category. The approval time for category I projects, which are the ones with the least amount of impact, averages 20 days. For a category III application, which is for larger projects, the average time is 60 days.

According to statistics, from 2004 to this year the average time for approving an EIA has dropped dramatically, even though the number of applications has increased.

In 2007, there were 955 applications, the largest number in the past four years. This year, the agency is on track to equal or eclipse that amount.

Top Legal Risks for American Expatriates in Panama

This is a short but well written article from Marketwatch.com that points out the dangers of legal actions in Panama for expats. My own experience with three of the top five legal dangers has proven this to be true.

Excerpt: "There is often very little recourse for American expatriates in the Panamanian justice system, as it is highly susceptible to bribery and political interference," said Richard Lehman, a prominent U.S. attorney who's spent the last two years trying a high-profile expatriate legal case in Panama. "There's also a very low threshold for filing aggressive legal actions against foreigners, such as arresting persons in advance of a hearing and trial, or attaching preventive injunctions to an individual's entire personal assets.  This makes Americans extremely vulnerable in every civil case, regardless of its legitimacy."

            
According to Lehman, the top five legal risks facing expatriates in Panama are:        

           

            1.  "Calumnia Y Injuria" -- The country's infamous defamation law is open to liberal interpretation and widely misused.        

           

            2. "Preventive Injunctions" -- Attorneys can easily file injunctions to freeze personal assets with little due process.        

           

            3.  "Ex Parte Proceedings" -- It is allowed for one party in a trial or civil suit to meet with judges and prosecutors without the presence of the opposing party and without notifying them in advance.        

           

            4.  "Preventive Detention" -- Authorities can detain persons for long periods of time without due process.        

           

            5.  "Corruption" -- Bribery, extortion and political interference are widespread.