PANAMA: WORLD CLASS TAX HAVEN
PART 4 of 9 - Excerpted from 'Tax Havens of the World' - by
Walter H. & D.B. Diamond.
Investment and Capital Incentives
To lure United States operations into the Republic, Panama also offers extensive tax and other investment
incentives. Under the Investment Incentives Act of 1970, industries located in Panama that produce
manufactured goods for the domestic market may be granted income tax exemption on the excess of 20% of
profits reinvested in fixed assets for expansion of plant capacity or production of new products. These
above qualifying companies also may take 12.5% of annual depreciation of the value of equipment minus
residual values, or at a fixed percentage of the declining balance. A company qualifying as above also may
deduct from income tax an amount equal to 10% of salaries of non-administrative personnel and 50% of the
cost of utilities for industries located in eight designated areas of the interior of Panama.
A revised Incentives Act passed in 1986 also grants industries located in Panama and producing
manufactured goods for the domestic market a five-year 100% exemption from import duties and similar
fees on imports of machinery, equipment and parts to be used directly for the production process.
Partial exemption also may be granted on import duties and similar fees on imports of machinery,
equipment and parts to be used directly for the production process. Partial exemption also may be
granted on import duties and fees on raw materials and semi-processed products including containers
and packages, as well as lubricants and fuels not available locally in sufficient quality or quantity
or at competitive prices. Under Law No. 3 of 1986, enterprises located in any of the 12 designated
districts in the interior of the country and which produce goods for domestic consumption are exempt
from income tax for the first five years and pay 50% of the tax for the next three years on income
from local sales. The exemption is 100% on income from buildings and land owned.
Manufacturing companies in Panama's Colon Free Zone that produce for export may be granted 100%
tax exemption from income, export, sales and capital taxes for five years and are subject to the reduced
rates of 2.5% to 8.5% on export income earned in the Zone after the tax holiday expires. An enterprise
that exports a portion of its production receives the same benefits as a firm exporting its total
production on a pro rata basis. A foreign company operating in Panama that is liable to taxes on its
Panamanian income in the country of its parent corporation may opt to pay the income tax liability to
Panama and qualify for a preferential loan equal to the amount repayable in five years at half the going
rate of interest.
Moreover, manufacturing companies that produce for export may be granted for the duration of the
contract 100% exemption from import duties and similar charges on imports of machinery, equipment and
parts, raw materials, semi-processed products, and other materials including containers and packages,
fuels and lubricants. All of the above exemptions are for periods of up to 15 years, with the exception
of those in eight priority development areas, which are granted 20 years exemption. Under Decree No. 5
of January 19, 1979, companies engaged in assembly operations are exempted from income tax if a specific
amount of Panamanian labor is employed. Companies established under Decree No. 5 of January 19, 1979 to
engage in assembly operations are liable to 3% of the exempt taxes on imported machinery and equipment.
During the term of the contract the company is entitled to a 10% exemption of import duties on the import
of machinery, equipment, spare parts, raw material, oil and lubricants used in the assembly operations.
Under the legislation passed in 1986, it is no longer necessary for investors to sign a "Contract with
the Nation" approved by the Ministry of Commerce and Industry. Instead, investors register in the National
Industry Official Registry maintained by the Ministry paying a 10 balboa ($10) registration fee, valid for
ten to fifteen years depending upon the district in which ventures are planned and an annual 50 balboa (
$50) fee. In addition, an industrial company that receives a five-year income tax holiday is entitled to
the exemption from the profits tax on exports, customs duties exemptions on machinery, equipment and spare
parts, and special reduced depreciation rates.
In addition to substantial investment of Panamanian private capital, Hong Kong, Taiwanese, South
Korean, and Japanese businesses are exploring Panama as a location for the development of light industries,
tourism, and marine activity.
Relief for Shipping Operations
Since the end of World War II, Panama had become a haven for American ship owners seeking relief from
the high taxes and wage rates which prevail in the United States and other countries of the world. Panama
has one of the largest number of vessels registered of any country in the world and has progressed from
second on the list to first in total tonnage. Shipping activities account for 20% of Panama's gross
national product. Inasmuch as shipper's earnings are derived in great measure from outside of Panama,
they are not subject to Panamanian taxes. In addition, since Panama grants the equivalent exemption to
United States flagships, earnings derived from the operations of foreign corporations' ships registered
in Panama are exempt from United States tax. New registrations under Panama's ship registry have been
helped by the substantial improvement in the safety record of the fleet. Virtually all categories of
casualties show improvement including incidence of collisions, fires explosions and those caused by
mechanical problems. More than one-third of Panamanian ships are now inspected annually. In 1994 Panama
introduced the certification procedures used by Lloyd's Register and by 1998 all tankers, bulk ships,
passenger liners, 500 gross ton cargo ships and gas carriers will have to rate approval under the scheme.
Other cargo ships and drilling units over 500 gross tons have until 2002 to meet the new standards.
To be certified, shipping firms will have to create and continuously implement plans that safeguard the
environment, ensure general safety and develop safe shipping training programs for ship workers and
onshore employees.
In a many-faceted endeavor to build a better reputation for its registry, the Government has raised
the number of ports where inspection is available from 270 to 350, and is checking registration
applications more carefully while conceding that it may remain difficult to trace "ghost" owners.
Fraud and bribery are being eliminated in the issuance of officers' certificates and new examinations
are being devised for officers who are allowed to sail without a certificate on some ships of less than
200 gross tons. Some ship owners had been attracted by Panama's willingness to allow ship owners to use
the Panamanian registry but fly the flags of other nations for a period of up to two years. By chartering
a vessel to a company maintaining an office in a different country, the ship owner can take advantage of
the latter country's import maintaining an office in a different country, the ship owner can take
advantage of the latter country's import and export incentive programs when they are available only to
national-flag shipping. The Panamanian registry lists over 12,000 ships with a combined tonnage of 70
million gross tons, which places Panama first and second worldwide, respectively, in these categories.
Total tonnage of merchant ships of more than 1,000 tons exceeds 30 million tons. The registry has more
than 3,000 Japanese ships. However, a few of them have shifted to the Marshall Islands registry which in
1990 started offering freedom from income, asset and withholding taxes to foreign maritime entities.
The Pacific archipelago with many Japanese-speaking residents is being marketed as a ship registration
site for Pacific Rim ship owners, particularly Japanese, who heretofore have favored the Panamanian
registry. Panamanian vessels carry 16% of world trade.
Ship Registration Fees
Registration of vessels, which may be done by Panamanian attorneys or management servicing companies,
is subject to a tax computed on the basis of $1 per net ton up to a tonnage of 100,000 tons with a minimum
of $250. For tonnage exceeding 100,000, the charge is $0.50 per net ton while the rate is $0.20 per net
ton for tonnage exceeding 500,000 tons. If several vessels belonging to the same owners or the same group
of companies are registered at the same time, the tonnage of the various vessels may be added together and
the sliding scale of rates applied. The annual tax is $0.10 per net ton and other fixed charges are
approximately $700. The fee for the registration of the bill of sale, computed on the basis of $0.20 per
net ton, plus a 20% surcharge, is based on the above rates. There also is an annual service charge,
in lieu of consular service charges, payable by all vessels, ranging from $750 to $2,300, and an
inspection fee costing from $300 to $800, plus small certificate fees of from $5 to $80. Consular services
are available in most major ports around the world. Offices are able to temporarily register ship
ownership under the Panamanian Ship Registry within 24 hours, giving owners six months to present all the
documents in Panama. Under this system, mortgage holders may also establish their claims on ships through
worldwide Panamanian consul offices. Shipping income derived by Panamanian flagships are subject to a 6%
withholding tax while representative offices must withhold 5% of expenses of public companies.
Discounts and Incentives
In an effort to lure ship owners to the Panama registry, especially from Liberia, the Panamanian
Government has adopted a set of incentives of reduced fees and discounts. All ships registering in
Panama may prorate the tonnage tax rather than pay the full 12-month fee at the outset. Discounts are
available to ship owners registering more than one ship a special incentive are being offered on a
case-by-case basis to owners of large fleets. Provisional registration is permitted for vessels of
foreign registry or under construction. A two-year bareboat charter registration also is available for
foreign vessels if a Consent Certificate is obtained under a reciprocity agreement now in effect with
Mexico, the Philippines, Nigeria, Turkey, Kuwait, Brazil, Peru and several European countries.
In view of the Colon Free Zone's tradition as a great shipping center, the importance of another
exclusion to current United States taxation under the foreign based company income rules cannot be
underestimated as a boost to Panamanian shipping at one time. Under the Revenue Act of 1962, foreign based
company income did not include income derived from, or in connection with, the use, hiring, or leasing
for use of any vessel (or aircraft) in foreign commerce, or the performance of services directly related
to the use of any such vessel or aircraft. However, this was revised under the Tax Reform Act of 1986,
which eliminated the inclusion of reinvested shipping income as qualifying for exemption under Subpart F
income. Previously, other shipping income had been disqualified from the exclusion.
In September 1992 the Government created a National Council for the Development of the Maritime Sector
whose function is to facilitate the advancement of the industry in Panama.
