According to this article from Bloomberg, Panama will be signing a tax exchange agreement with the U.S., but unlike the ones Panama signed with more than a dozen other countries, this one is probably not just a double taxation treaty. My bet is that this treaty will allow the U.S. to go on fishing expeditions in order to find out if their citizens are hiding income offshore. The U.S. states it is requiring the tax treaty in order for them to "consider" a free trade agreement with Panama. Panamanian officials state that the FTA is important to Panama for additional foreign investment and loans to build the infrastructure projects. Several large multinational companies have weighed in as well stating that the FTA will allow them to be more competitive in providing services for the canal expansion.
Panama has about 100 banks and it is widely believed that the success of these banks can be attributed to Panama's bank secrecy laws which allow the banks to only devulge information on a client in the event they are charged with a crime that breaks Panama law. This would cover drug dealers and money laundering, but not tax evasion in another country. Although the banks may have in the past been used to conceal ill-gotten gains and profits free of taxes, over the last few years this has changed. There is more money being brought in by multinational corporations and new domestic businesses. There will always be lots of money from other Latin American countries simply because most other countries in the Americas are not denominated in U.S. dollars and many have left leaning leadership that tend to expropriate assets of its citizens. Many believe the U.S. is headed in that same direction.
How will this affect Panama? Will foreign capital flee and banks close. Of course it all depends on just what is in the agreement, but I rather doubt it will cause much capital flight as this agreement will only directly affect U.S. citizens. For large investors and corporations this is not such a big deal and could bring them a much needed benefit. Panama's biggest challenge is an extremely weak of rule of law and the FTA forces Panama to comply with certain legal standards when dealing with U.S. companies which will certainly be implemented across the board and benefit other nationalities in the country. There is no doubt that a strong rule of law will benefit Panama tremendously by attracting additional foreign investment.
Those it will adversly affect the most are the relatively small investor who wants to generate income offshore and not have to pay taxes on it, and folks who have paid taxes and just want to get their money away from the potential clutches of the U.S. government. Some might say the small investor should pay taxes on their foreign source income as it is the law of that land, but the U.S. is one of only a handful of countries that require one to do so, which in my opinion, makes you a slave to your place of birth and I have a moral aversion to that. Of course you can still give up U.S. citizenship, but for someone who is not dealing in multimillion's of dollars, this route is not practical.
For most retiree or the individual who just wants to protect thier capital it is more a matter of the hassle and expense of compliance and the fact that their savings is no longer hidden and could be confiscated in the future by a government deeply in debt.
The agreement will also affect Panamanians with dual U.S. nationality. By U.S. law they are U.S. citizens and must file tax returns and pay taxes in the U.S.. Certainly there will be double taxation allowances in the treaty, but few dual citizen Panamanians realize that they need to be filing returns in the U.S..
What other options are there? In these crazy economic times where the Fed is printing dollars to buy its bonds that no one else wants, I don't think it's a good idea to hold dollars or any large quantity of fiat currency. I would buy commodities, precious metals or real estate. These things will still have value when the dollar is inflated and many are not yet subject to U.S. reporting requirements. Keep only the cash needed for daily living in a Panama bank account. To give the U.S. government access to your savings or investments is foolhardy IMO. They are strapped for cash and it will only get worse due to the actions they are taking to try and keep things going as they are.
From Bloomberg:
Panama and the U.S. will sign an agreement to exchange tax information this month, as the Central American nation seeks to clear the way for lawmakers in Washington to approve a free-trade pact.
The tax accord has been concluded and will be signed by Treasury Secretary Timothy F. Geithner on Nov. 30, Roberto Henriquez, Panama’s minister of trade and industry, said today. With that pact secured, the U.S. Congress should approve the stalled trade deal, he said.
“The Panama deal is ready, it’s easy and it’s good for both countries,” Henriquez said in an interview at Bloomberg’s office in Washington. By passing the accord, “the U.S. will send the signal that it is serious about integration.”
Lawmakers such as Senator Carl Levin, a Michigan Democrat, have said Panama would need to sign a tax-exchange deal before they would consider the trade agreement, which was completed in 2007 and has been ratified by Panama’s legislature. President Barack Obama hasn’t submitted the trade agreement to Congress for approval.
The Organization for Economic Cooperation and Development placed Panama on a list of nations that must share tax data or face sanctions as Group of 20 nations crack down on banking secrecy. Tax-information exchange agreements, which let officials request details about citizens’ bank accounts in another nation, are needed to ensure that taxpayers have no place to hide their income and assets, according to a report by the organization on Nov. 10.
‘Serious Deficiencies’
A review published in September by the international organization found Panama had “potentially serious deficiencies” in making banks and companies reveal tax information. Panama is seeking to change its laws to meet the group’s requirements, Finance Vice Minister Frank De Lima told reporters in Panama City last month.
Panama has already reached 13 separate taxation accords with other nations, Henriquez said today. By signing those deals and the one with the U.S., “we’re going to get the certification of the world” that Panama’s banks are trustworthy, he said.
Sandra Salstrom, a spokeswoman for the U.S. Treasury Department, had no immediate comment.
U.S. manufactures such as Peoria, Illinois-based Caterpillar Inc. say the trade agreement will boost exports and provide an inroad for American companies to supply machinery for the $5.25 billion expansion of the Panama Canal.
Panamanian President Ricardo Martinelli has pledged to spend $20 billion during the next four years to build ports, expand its main airports and lure international companies to the Central American nation.
‘Easiest Deal’
Panama, whose economy is anchored by the Panama Canal, has primarily a service-based economy and is one of the few nations that run a trade deficit with the U.S. American companies shipped $4.3 billion in goods and agriculture products to Panama last year and imported $302 million. By comparison, the U.S. exports more to China in three weeks than it does to Panama in a year.
Obama has concentrated on winning congressional approval of a trade deal with South Korea. His efforts to rework that deal to resolve complaints about beef and automobiles failed at a summit in Seoul last week.
“If they are looking for the easiest” deal, “Panama is ready,” Henriquez said.
To contact the reporters on this story: Mark Drajem in Washington at [email protected]; Eric Sabo in Panama City at [email protected].
To contact the editor responsible for this story: Larry Liebert at [email protected]
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