PANAMA: WORLD CLASS TAX HAVEN
PART 9 of 9 - Excerpted from 'Tax Havens of the World' - by
Walter H. & D.B. Diamond.
Panama Government
A Spanish colony until 1821, when it broke away from Spain and
forged a political alliance with neighboring Colombia, in 1903
Panama ended its ties with Colombia and emerged as an independent
republic.
Public authority is vested in the legislative, executive and
judicial bodies. The legislature is a unicameral National Assembly
consisting of 67 Assemblymen elected by direct popular vote for
a period of four years. The executive branch is headed by the
President of the Republic, elected by direct popular vote for
a period of five years, together with two Vice-Presidents. The
Cabinet is appointed by the President. The 1983 amendment to the
1972 Constitution prohibits the President from succeeding himself
but he may be reelected after his successor has left office. Legislative
power is in the hands of the legislative assembly. The Supreme
Court, the court of last appeal, is composed of Justices who are
appointed by the Executive branch and must be approved by the
Legislative Assembly. Cases are also tried in Superior District
Courts and lower courts. For political purposes, Panama is broken
down into nine provinces and the territory of San Blas. Each province
is led by a governor and is divided into municipalities, each
with a mayor as its chief executive.
Labor Requirements
At least 90% of the workers in every commercial or industrial
enterprise must be Panamanians (or certain specified foreigners
such as those married to Panamanians or residents of Panama for
20 years or more), and these persons must receive 90% of the wages
and salaries. However, there are a number of exemptions and the
laws are not rigid with regard to bringing in administrators,
experts and technicians as required. The principal labor legislation
is the Labor Code, which establishes a maximum of eight hours
a day and a 48-hour work week for day work.
Collective bargaining is not mandatory and is not widely practiced.
Organized labor represents considerably less than 10% of the labor
force. There are no strong national union movements. Unemployment
has dropped to 14%. The minimum wage in Panama City and Colon
is less than $1.00 an hour, with a lower rate in other areas.
Employers are required to withhold from employees the social
security quota of 7.5% on salaries, wages and other compensation
plus 1.25% education tax, with no limit on the taxable amount,
and to contribute an additional 10.75% plus a 1.25% education
tax. Employers also may be charged from 0.56% to 5.6% of their
total wages and salaries for cost of compensation to cover occupational
accidents. Dismissed pay ranges from one week's salary to three
weeks' salary when length of the employees' service is from one
to two years. Severance payments graduate from one week's to seven
months' salary when the employee's length of service exceeds 20
years. The Social Security Law sets forth the areas and categories
of employment for which social security coverage is mandatory.
Foreigners may engage in a business with the exception of the
retail trade and certain professions and trades. Under the 1975
Tax Credit Certificate legislation to encourage nontraditional
exports, 20% of the amount of local value added to exports may
be used to offset all direct or indirect taxes. Companies in urban
areas must add a minimum local content of 20% and a minimum local
value of 20%. For rural areas, the limit is reduced to 10%.
Free Trade Zone
One of the most efficient and sophisticated trade zones in the
world, the Colon Free Zone is located on the Caribbean side of
the isthmus adjacent to the Panama Canal. The Colon Free Zone
has operated under special legislation as an autonomous institution
since 1948. It provides facilities in the heart of Latin America
where firms can warehouse, process, manufacture, repackage, display
and ship their merchandise or products. They pay duty on imports
only when items are shipped into the customs territory of the
Republic. There are no taxes on production machinery or materials,
no sales tax or tax on investments or on dividends, and there
is no capital gains tax if the company keeps the asset for at
least two years. Income that arises from sales to other countries
gets the benefit of a reduced tax: on profits up to $15,000 the
tax is 2.5%; $15,000 to $30,000 profit pays a tax of $375 and
4% on the amount above $15,000; $30,000 to $100,000 profit pay
$975 and 6% on the amount above $30,000; over $100,000 profit
pays a tax of $5,175 and 8.5% on the amounts above $100,000 only
when items are shipped into the customs territory of the Republic.
This enables them to serve the market of Panama, the Panama Canal
Zone and the entire Latin American market effectively from one
location.
Under Law 28 of October 22, 1995, tax credits available to exporters
in the Colon Free Zone are progressively reduced until they are
completely abolished by December 31, 2002. Benefits to taxpayers
subject to the Industrial Promotion Law and operating under the
Law may operate under the Tax Incentives Act but are subject to
general income tax rules.
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.
Relatively few of the more than 1,800 firms doing business in
the free zone build their own facilities. They find it more practical
to lease a building or space, or even to operate through independent
public warehouses, management service firms, and other specialized
organizations within the zone. Annual turnover in the free zone
is currently at the rate of $17 billion and employment exceeds
8,000 workers.
As a result of the Colon Free Zone's continually expanding warehouse
facilities for its tenants, foreign companies are able to reduce
excessive inventory building for foreign markets, a costly burden
in their overall profitability. For instance, by maintaining flexibility
of stocks, goods may be avoided while, simultaneously, shortage
of the same stock may be created due to unexpected demand by other
markets. For companies, which are not in a position to build their
own warehouses, the Colon Free Zone will arrange contracts of
reasonable duration and at low rentals to construct these facilities
to specifications of the lessee at reasonable fees. The present
178 acres of the zone, including 94 acres in Colon City and 84
acres on France Field, contain some public warehousing space but
are occupied principally by buildings leased to companies or land
on which firms have constructed their own buildings. Building
plans must be approved by the free zone technical department.
In view of the rapid expansion in turnover in the zone in recent
years, the total area has been extended to 268 acres.
Development of France Airfield
With passage of the Canal Treaty and the return to Panama of
the France Air Field, the Government acquired 148 additional acres.
It has constructed a bridge that eases truck access into France
Field. Leases usually are for 20 years with option for renewal.
Free zone warehousing includes such services as receiving and
checking merchandise, repacking, reshipping, documentation, freight
forwarding and the maintenance of inventory and accounting records.
A number of reputable management servicing companies, such as
the Panama International Trust Corporation (PANTRUSCO), provide
these facilities for foreigners who cannot or prefer not to provide
their own staffs. Several banks now operate in the France Field
as well as the original area. Captive finance companies may be
used for short-term financing of distributor and agent sales as
well as storage of goods in the zone.
Export Processing Zones
The success of the Colon Free Zone during the past four decades
inspired Panama to pass a law authorizing the establishment of
multi-sector export processing zones (EPZ's). Under Law No. 16,
passed in November 1990, these zones are restricted to production
or assembly of goods and services for export along with necessary
support activities. The National Assembly has created a supervisory
body, the National Commission of Export Processing Zones, under
the Commerce Ministry, to handle the establishment of the zones
and to regulate their activity. Under Law No. 25 of November 30,
1992 companies and individuals investing or operating in an EPZ
are entitled to an exemption from income tax and import duties
and sales taxes on imported machinery. Developers and promoters
also are exempt from real estate taxes on the sale of land in
an EPZ. In addition, interest and dividends from securities issued
by promoters in local or international capital markets are exempt
from tax in Panama. Investors may be foreign or Panamanian companies
and must obtain a license from the National Commission of Export
Processing Zones for the development of a specific zone. Companies
established in an EPZ are expected to export 100% of their production.
Special immigration and labor permits are available for investors
and employees in approved EPZs. Companies that become zone tenants
are exempt from some of the burdensome clauses of the Labor Code
and from import taxes on equipment, building ownership taxes,
and income tax for up to a 20-year period. Another benefit is
loss carry forward provisions for up to three years. Profits exceeding
20% of the taxable income reinvested in the expansion and development
of the export processing zones may continue to be exempt from
income tax after termination of the original ten-year tax holiday.
Private enterprises establishing industries in designated zone
areas are also granted exemption from real estate taxes on transfer
of land and sales taxes. When all production is re-exported, there
is a 100% indefinite exemption and a 20-year holiday from real
estate taxes if the zones are located outside the Provinces of
Panama and Colon.
Petroleum Free Zones
Under Decree No. 29 of July 14, 1992 Petroleum Free Zones were
created for foreign or domestic companies and individuals involved
in importing, refining, marketing or distributing petroleum or
derivative products. Investors are required to contract with the
Ministry of Commerce and deposit an amount equal to 1% of their
investment up to a maximum of $250,000. Investors also are expected
to employ Panamanians except for skilled technicians and managers
and maintain a minimum environmental liability insurance policy
for $1,000,000. Local products must be used if available at competitive
prices.
Qualified investors can engage in the following activities:
Lease or acquire property and construct port facilities, including
docks for loading and unloading petroleum shipments;
Build, install and operate refineries and pumping facilities,
construct storage tanks, pipe lines and other equipment for processing
petroleum or preventing fire or spillage; and
Import, store or handle petroleum for export or marketing and
distribution within Panama.
Petroleum imported into the Zone is exempt from import duty or
taxes and is exempt from sales tax if sold within the Zone: Enterprises
operating in a Zone are eligible for the incentives under Investment
Promotion Law 3 of 1986.
Documentation for Trading
Panama permits the invoicing of foreign trade documents in any
currency, including that of the importing and exporting country.
Importers are not required to make prior deposits in local banks
whose export proceeds do not have to be surrendered to authorized
banks or to the Central Bank. An importer must provide a commercial
invoice and a consular invoice issued in the country of origin
indicating the unit price, total FOB value and any freight and
insurance charges. An entrance form signed by the Commercial Movement
Department of the Free Zone must accompany the invoice and bill
of lading. In addition, an internal movement form is needed when
goods are transferred to another firm in the Zone and there is
an outgoing form for exports. Imports generally are not subject
to quota restrictions. A 7% surtax and a 5% VAT may be imposed.
Tax Treaties
Panama has a tax treaty with the United States avoiding double
taxation only on shipping income. And in April, 1991, Panama signed
an agreement for a "Treaty for the Mutual Assistance on Criminal
Matters" with the United States in order to provide for more
effective coordination between the two countries in dealing with
investigating, prosecuting, and suppressing serious crimes, and
with continuing effort to increase this effectiveness. Despite
powerful opposition from Panamanian bankers, who were concerned
the treaty would violate their secrecy status code, the National
Legislative Assembly of the Republic of Panama approved the execution
of the treaty in July 1991. This Mutual Assistance Treaty, similar
to those approved with other Caribbean Basin Initiative countries,
including Bahamas, British Virgin Islands and Cayman Islands,
relates to drug abuse, crime and fraud, or specifically such criminal
activities as illegal narcotics, theft, crime of violence, fraud,
or use of fraud, or violation of a law of one of the Contracting
States relating to currency or other financial transactions contributing
to the crime. The provisions in the treaty do not allow for any
exchange of information in matters relating to taxation.
In an effort to cooperate in the arrest of money launderers,
the Government also signed a Mutual Legal Assistance Agreement
with the United Kingdom and adopted a law tightening requirements
for companies' registered agents concerning gathering information
and their client references.
