PANAMA: WORLD CLASS TAX HAVEN
PART 6 of 9 - Excerpted from 'Tax Havens of the World' - by
Walter H. & D.B. Diamond.
Political and Economic Stability
With the Noriega problem solved, the Government of Panama once
again welcomes foreign investment and holding companies. In the
past, it has gone out of its way to assist overseas investors.
Foreign businessmen receive the same treatment as Panamanians.
A series of major Constitutional reforms became effective in August
1992, designed to strengthen the democratic process. These included
abolition of the Armed Forces, one of the most significant changes
in Panama's political history.
First Woman President
In 1999 voters broke precedent and elected a woman President,
Mireya Moscoso, widow of a well-known political figure, Arnaulto
Arias, who had also been elected President but was deposed by
the military before he could take the oath of office. President
Moscoso's term in office expires in 2004, and after that she cannot
succeed herself according to current Panamanian law. One international
problem to be faced is a series of border attacks by Colombian
guerillas, who heretofore have been curbed by the United States
Army. Troubles have already started as Colombian citizens, frightened
by warfare between guerrillas and paramilitary forces, have fled
out of their country into the Panamanian province of Darién.
The border has been described by a Darién bishop as "the
most dangerous, conflicted and vulnerable" in Latin America.
Fearful of reviving Noriega days, the present Government does
not want to reintroduce an Army and is not eager for help from
foreign forces. After withdrawal of the Army when the Canal handover
occurred on December 31, 1999, Panama is basically protected only
by a police force, having disbanded its army. However, if necessary,
Washington reserves the right to return to Panama to protect the
Canal. Domestic tranquility is threatened by triads, criminal
gangs said to be active in drug and weapons smuggling in conjunction
with the Russian Mafia and Cuban intelligence.
Despite the previous turbulent conditions, the economy in this
country of 2,400,000 persons has remained far stronger than most
observers had predicted. Tourism continues to recover, with more
than 400,000 visitors in annually generating $3000 million of
income. Inflation is only 2%, the lowest in all of Latin America.
Hoping to attract foreign investment, the Government is putting
customs duty cuts into effect on a group of more than 100 products
required by the bread baking and construction industries. Complaints
from domestic cement manufacturers are being met with the reminder
that the tariff cuts were part of a well-publicized growth plan.
Official sources say that the reductions exceed the levels for
lowered duties Panama negotiated with the World Trade Organization.
Other Panamanian measures envision expanded trade in the Canal's
new era. In its continuing campaign to enter commercial alliances
with the rest of the Western Hemisphere, Chile has negotiated
a free-trade pact with Panama while Panama and Mexico have issued
a joint statement promising a free trade accord between them shortly.
An agreement with Taiwan also is aimed at promoting trade. Under
its terms, Panamanian companies will receive management consulting
services from Taiwan. A leading Taiwanese steamship company is
constructing a $200 million port terminal in Panama.
In spite of the once strained political climate, an average of
114 new companies have been registering daily in Panama. Gross
national product is growing by 3% annually while new employment
remains at 5%. The unemployment rate has dropped from 31% to 14%
and per capita income at $2,075 is still one of the highest in
Latin America. Tourism earnings now surpass banking profits, rising
to $550 million. In an effort to attract foreign investors in
tourism, the Government has outlined a $700 million development
plan for investment over the next five years to improve resort
facilities on the Atlantic and Pacific coasts. Total trade passing
through the Colon Free Zone now exceeds that reached during the
Noriega regime; traffic has recovered and now exceeds $17 billion.
The Colon Free Zone, which accounts for 5% of gross domestic product,
enjoys steady growth while Panama Canal traffic, representing
10% of GDP, is climbing at 2%. To make up for the reduced expansion
in Canal traffic, tolls have been increased by 9%. The agricultural,
fishing, and livestock sectors are experiencing problems, including
banana quotas by the European Community, a weakening of coffee
prices, a cut in the United States sugar quota, and ecological
problems in the shrimp industry.
Exports have risen steadily since 1988, reaching 700 million
balboas ($700 million) while imports have skyrocketed to 2.7 billion
balboas ($2 billion), registering a trade deficit of approximately
2 billion balboas ($2 billion) annually. Imports arrive chiefly
from the United States, Japan and Taiwan, while two-thirds of
re-exports go to the Caribbean and Latin America, especially the
Netherlands Antilles, Colombia, Ecuador and Venezuela. Transit
through the Panama Canal has declined by 14% since completion
of an oil pipeline connecting Puerto Armuelles on the Pacific
Coast near the Costa Rican border with Chiriqui Grande on the
Atlantic Side.
Geography, Communications and Transportation
Situated on the isthmus between North and South America, the
Republic of Panama covers 29,700 square miles, including the Colon
Free Zone at the Atlantic entrance to the Panama Canal. Transportation
facilities are excellent, with sea, air and land routes easily
available. Panama City and Colon Free Zone are connected by the
Trans-Isthmian Highway. The Inter-American Highway bisects Panama
while busy Tocumen International Airport 15 miles from the capital,
Panama City, is linked with nearly two dozen airlines. Modern
port facilities are available throughout the country, with Cristobal
and Balboa, at opposite ends of the 51-mile Panama Canal, long-established
as shipping centers. Drydock facilities in Panama are regarded
as one of the best in Latin America.
Panama Canal Handover
When the United States surrendered joint ownership of the Panama
Canal on the last day of the 20th century, control of the strategic
waterway shifted to the independent 11-member Panama Canal Authority.
Whereas previously the Canal operated on a non-profit basis, the
Authority hopes to attract more foreign investors to 525 square
miles of land adjacent to the Canal, valued at $4 billion, by
privatizing and offering 20-year concessions extendable to 40
years. Spanish and Hong Kong investors are already active in the
area. Container port projects at Balboa and Cristobal awarded
to Hutchison Port Holdings of Hong Kong led United States opponents
of the handover to warn that Chinese activity in Panama would
endanger the United States; however, the prevailing opinion is
that fears are unwarranted, especially since the container terminals
have nothing to do with Canal operations. Responding to skeptics
who have questioned whether the Canal will be efficiently run
and not overwhelmed by politics, Fernando Manfredo, who negotiated
the 1977 treaty ceding the Canal to Panama, has stated: "The
Canal is and will continue to be the main link of Latin America
to the rest of the world and the world's premier shipping lane."
The future of the Canal had become a volatile issue in Panama,
with political opponents of former President Ernesto Pérez
Balladeres charging that he packed the Canal Authority with relations,
business associates, and members of his Democratic Revolutionary
Party. Outrage over Belladares' actions caused voters to reject
a Constitutional amendment allowing him to succeed himself.
The Canal Authority faces the daunting job of replacing jobs
and income earned from the American bases and transforming former
United States facilities in the ex-American Canal Zone into industrial
parks, housing, a university, hotels, sports facilities, casinos,
and shopping centers. At the Canal's mid-point, a former military
radar tower has been converted into a unique hotel topped by a
dome containing an eco-lodge, while nearby a $25 million rainforest
resort is being developed. A 50-mile water passageway, the canal
has been earning $545 million a year in tolls.
Improving the Canal
Although 92% of world shipping can still fit into the canal,
about 18% of ships under construction are too large to maneuver
through because they exceed 105 feet in width or have a draft
of greater than 39.5 feet. The Government therefore is sponsoring
a $1 billion program to broaden and otherwise improve the Canal
in the hope of increasing traffic by 20%. Projects include: widening
of the Gaillard cut (to be completed in 2002); introducing new
locomotives; replacing ancient electric motors with hydraulic
systems to open the gates; and enlarging the water supply five-fold
by creating three new reservoirs to the west of the Canal. The
latter improvement could lead the way to a third and wider lane
of locks in the Miraflores area. The Government has already turned
Albrook Field into a civil aviation airport and will develop Howard
Air Force Base into either a regional transportation hub or an
aircraft maintenance center. A research center, the City of Knowledge,
is planned for Fort Clayton.
Canal Administration
To avoid corruption, patronage, and diversion of Canal revenues
to cover Government spending, the Panama Canal Authority is independently
administered, with its own labor laws, procurement procedures
and fiscal controls. An advisory board formed to safeguard the
Canal's future includes several shipping line presidents, as well
as representative of the Port of New York and New Jersey, International
Maritime Organization, Industrial Labor Organization and United
States-Panama Business Council.
Because of their strategic location as a gateway to the Atlantic
and Pacific Oceans, Panama and its Colon Free Zone have become
a unique center of combined sea-air transportation. Lower transportation
costs frequently are available by combining air shipment of individual
orders direct from warehouse shelves after normal ocean delivery.
For example, air shipment is feasible in a matter of hours since
the airport at Tocumen is highly accessible. An improved road
system covering more than 5,000 miles facilitates shipments across
the isthmus.
Low-cost air freight services recently have become a major advantage
for companies using the zone as a sales trading base. For example,
foreign firms operating in the zone ship a larger volume of goods
by air than by sea. As a result of the increasing volume of cargo
originating in the zone, the outgoing carriers have reduced tariffs
through application of standard commodity classifications and
rates. Combined with economical importation by steamer, the delivery
cost at final destination makes the sea-air combination an attractive
method of serving customers throughout Latin America, in Africa
and in the Far East.
Panama is linked with Latin America and the rest of the world
by one of the best telephone and telegraph systems in the Western
Hemisphere and is hooked into the satellite system. Postal services
are excellent.
