Panama and the OECD on International Tax Cooperation:
Presenting the case of a Real Economy
H.E., Jose Miguel Aleman
Minister of Foreign Relations of The Republic of Panama
For the International Bar Association Conference
Durban, South Africa, 20-25 October, 2002
Ladies and Gentlemen,
Thank your for the opportunity to address this distinguished audience on a topic of the outmost
significance for my country. As a developing nation struggling to become a competitive service provider in this globalized World, Panama puts special interest in the promotion of free trade of services.
The OECD Initiative on Transparency and Effective Exchange of Tax Information to fight what its membership considers to be harmful tax practices and regimes has inflicted an irreparable harm to the name and prestige
of Panama which my government is committed to restore by participating in the said Initiative under conditions, of course, which respect the dignity of Panama as a Sovereign State and not as some "purposely created"
instrument of tax evasion.
The Republic of Panama is a real sovereign state. The OECD reports on this topic have mixed sovereign states, members of the community of nations, with jurisdictions yet to
become real participants of international diplomacy.
Located in Central America, and a small country with only 75,517 square kilometers and 2.8 million inhabitants, Panama is nonetheless a member of the United
Nations and an independent sovereign state since 1903.
Indeed article 1 of our Constitution sets this clearly: "The Panamanian nation is organized in a Sovereign and Independent State, whose denomination is
Republic of Panama. Its government is unitary, republican, democratic and representative".
Therefore, Panama must not be called a "jurisdiction" by other peers of the World Community, nor be addressed as equivalent to dependent territories of its peers. This is simply, a violation of basic principles of international law.
As a sovereign nation, Panama is also a real economy. A developing one which struggles to improve the social, political and economic conditions of its nationals.
Ironically though, according to
OECD standards, Panama's US$3,500.00 per capita income does not make my country elegible for economic assistance.
However, my government must deal with the reality of poverty affecting around 37.3% of our population, particularly acute among peasants and indigenous people. Nor we can ignore that unemployment rates still range between 13% and 15%.
These are realities which demonstrate, beyond any isolated statistical data, that Panama is a developing nation which has a long way to go if it wants to improve the standards of living of its nationals.
For better of for worst, Panama's economic development is conditioned by significant factors. These are: the nonexistence of natural resources, the smallness of its territory, the existence of the interoceanic
waterway, and the use of the U.S. currency as means of monetary transactions since 1903.
As a consequence, the Panamanian economy has oriented itself towards the services sector.
Panama has developed a competitive advantage which has allowed it to grow and improve economic standards locally –a legitimate aspiration for any sovereign state- thanks to this industry.
services sector amounts to over 75% of GNP and has contributed to make of Panama one of the most trade and open economies in the World, -a goal pursued by the OECD-.
As a real international services center
then, Panama has become a provider for the world economy.
Through almost 100 years of republican history, the Panamanian economy has consolidated itself as international services provider thru the
establishment of a banking system, a regime for insurance companies, the existence of the largest duty free zone in the western hemisphere, a stock market, corporate legal principles which were born out of those in
the United States such as the Law of Corporations, a trust and a leasing system, a shipping registry which is the largest and most advance in the World, or the existence of legal principles for the promotion and
protection of private investment, intellectual and industrial property.
Panama is, for those and other reasons, a real international provider which collects a significant amount of income from the different
duties and taxes collected from those activities which in no case are by any means fictitious or unregulated, as the OECD reports have repeatedly reported.
Contrary to other, so called tax havens, the
international services industry in Panama has developed over many decades, as the natural result of Panama's role in international trade and not as a tool for tax evasion.
Let's talk now about taxation.
Panama has, as I have already stated, a real tax system. A system which is an instrument for fiscal and budgetary policies and not for tax evasion. That must be very clear.
As any other nation in the
world, the tax system is one of the pillars of the government's budget, becoming indeed, an important tool for the economic development of the country.
In Panama we apply the tax system in 2 layers: national
and municipal. At any layer, the law demands that no tax be levied if it is not legally enacted.
The weight of taxes on the national economy is so significant that around 80% of the government's income is
derived of four taxes: on income, import duties, added value and specific consumer taxes on cigarettes, alcohol and oil.
Of these four, income taxation represents around 40% of all government income, levied upon the net taxable income made in Panama of natural persons, corporations, foundations, or trusts. Income tax ranges from 4% to 30%, with corporations and trusts subject to the highest rate.
As any developing country in the region or anywhere else in the World, Panama's tax system includes some tax incentive regimes. This is no secret.
Their objective is legitimate: to attract local and foreign investment to particular sectors of the economy. These regimes were not set out to facilitate tax evasion in other countries as the OECD reports pretend to say. Ironically, and contrary to common belief, tax evasion is punished with imprisonment by Panamanian legislation, something the OECD Secretariat does not believe.
In applying tax law, Panama follows the principle of territoriality.
This is an internationally recognized principle of taxation which is followed by other countries in the region which are not labeled as "tax havens".
As you all probably know, industrialized OECD members follow
a more ambitious tax principle.
The domicile principle. This principle implies the extraterritorial application of the sovereignty of states outside its borders in order to tax all transactions of their nationals and residents anywhere in the World.
It is also known that the objective behind this principle is a fiscal one, to reach further out by justifying the tax authority's jurisdiction over juridical persons incorporated in other Sovereign States
and not conducting any taxable activity within their boundaries, on the sole and simplistic argument of the nationality of a percentage of the shareholders of the said juridical person.
The so called controlled foreign companies are thus taxed whether they conduct businesses in those jurisdictions or not. This principle is, of course, supported by the OECD in its reports on harmful tax practices.
Panama applies the principle of territoriality to residents and non-residents alike, thus, it is wrong to state that Panama has a preferential tax treatment for all income generated abroad. In applying
the territoriality principle, Panama understands, and respects, the sovereign right of other nations to tax incomes of its nationals when they are generated from transactions conducted in those foreign nations.
This could very simply support Panama's argument that its tax system does not promote tax evasion.
To the contrary, Panama facilitates international business transactions which will be later taxed by other
countries –generally industrialized- which, ironically, intend to extend their tax authority beyond its borders to the detriment of Panama and other developing countries.
This, in my opinion, is not tax cooperation, nor fair tax competition.
As we can see then, industrialized economies, members of the OECD, are concerned that free movement of goods and capitals, particularly
towards developing countries with tax incentives and other advantageous operational costs, could affect their capacity to collect taxes from those capitals. This is ironic, but it is a fact.
In 1996, the G7
group of nations expressed concern about tax schemes in developing countries to attract financial activities.
This, they argued, was a "harmful tax practice". A competition, I would say, only harmful to industrialized economies with very expensive social agendas.
In 1998, the OECD issued its first report
against this, alleged, "harmful tax competition", followed by 2 progress reports in 2000 and 2001. Reports which, by the way, have not been adopted by Luxemburg and Switzerland yet.
The OECD as you all
know comprises the 29 largest economies of the world with an aim to achieve the largest economic and labor expansion possible to improve the standard of living of their nationals.
Promotion of economic expansion and world trade follow this objective.
Now, what does the OECD call a "harmful tax practices"?.
To support the existence of these practices, the OECD 1998 report identifies "tax havens" and " harmful preferential tax regimes". For the OECD, a tax haven would be a jurisdiction lacking income tax or where its existence is used for non-residents to avoid the payment of taxes in their place of residence. A Harmful preferential tax regime, on the other hand, would be one where a jurisdiction derives significant income from the application of special regimes to non-residents or is isolated from the local economy with lack of transparency.
In my opinion, all these definitions are vague and quite inaccurate as any jurisdiction may become a tax haven in relation to another if they are used with the intent to defraud any tax system.
Indeed, under this scenario then, any tax concession or incentive may constitute a harmful preferential tax practice, even all those granted by OECD countries to protect their economic sectors and industries.
I celebrate the hard and pragmatic criticism these OECD reports received from members –such as Luxemburg and Switzerland- and non-members because they were most un-sensitive towards the realities of developing
nations. The reports recognized there are many economic, social and political factors involved; however, these factors were never the objective of the reports.
So, how does the OECD unilaterally decided that
a country's tax practices were harmful? To them be reminded.
A jurisdiction would be classified as harmful is, for example, the taxes are inexistent or nominal. If the jurisdiction is promoted or perceived by non-residents as a means to evade payment of taxes. If there is lack of transparency. If there is no possibility to exchange information or if the jurisdiction in question allows the constitution of entities controlled by non-residents with minimum or non local presence.
Against these harmful members of the world community, the OECD proposed, among other initiatives, the implementation of laws to tax foreign entities
controlled by residents of OECD members. No granting of tax deductions for incomes derived from transactions taking place in these countries. Application of tax information exchange agreements. Publication of tax rulings. Elimination of all kinds of restrictions to access bank information. Avoidance of tax agreements which may become preferential tax regimes. No subscription of double taxation avoidance treaties with these jurisdictions. Assistance in the collection of taxes, or the establishment of a list of harmful tax havens and preferential tax regimes.
The 2000 progress report fulfilled this last initiative by identifying 35 jurisdictions as tax havens including sovereign states such as Panama.
This progress report, and the 2001 one, indicated the OECD
members could apply "coordinated defensive measures" against these harmful jurisdictions.
A difficult and most of the time frustrating process of dialogue and negotiations between the OECD Secretariat and all
those jurisdictions, achieved the commitment of most of them to a multilateral initiative to cooperate on 2 basic principles: Transparency and Effective Exchange of Information.
To this day, there are only 6 non-committed jurisdictions: Andorra, Marshall Islands, Liberia, Liechtenstein, Monaco, Vanuatu and Nauru.
Panama committed to this Initiative in April of this year.
Two were the main reasons.
First, the future economic development of Panama depends, among other things, upon the promotion, projection and defense of its international prestige as a first level service center. Being declare a "non-cooperative and non-committed jurisdiction subject to coordinated defensive measures from OECD members" is, certainly not a title any country could be proud of or comfortable with. Secondly, the cooperation offered would be under strict parameters of respect to the sovereignty of states, public international law and, above all, the principle of equity and non discrimination contained in the notion of the "Level Playing field".
The conditions set out by Panama included that the OECD would treat all countries and jurisdictions participating in the Initiative, members and non-members, equitably. In addition, Panama's commitment
would not affect its tax autonomy and would prevent its inclusion in any new list of uncooperative tax havens.
Panama would also be invited to participate on equal footing in any fora called to discuss the design of internationally accepted standards and would not be forced to collect taxes on behalf of anyone.
Finally, Panama asked that those jurisdictions which would not commit to the Initiative or would not comply with its objectives, whether OECD members or not, would be subject of coordinated defensive measures.
As long as these conditions are met, Panama is willing to cooperate on both fronts of the Initiative: Exchange of Information and Transparency. As a committed jurisdiction, Panama has accepted to
implement a series of actions in these two fronts such as the implementation of legal mechanisms to provide information on criminal matters by the 1st of January of 2004 and on civil matters by 1st January 2006, or
mechanisms to ensure that information on benefitial ownership of companies, partnerships and other legal entities.
Of course, there are economic interest groups in Panama which oppose Panama's participation
arguing that our international service center would stand at a disadvantage vis a vis others.
I understand these concerns which are, in principle, legitimate if Panama were to act unilaterally. There lies the benefit of participating in a multilateral initiative such as the one launched by the OECD. Panama has made it extremely clear that it will not implement any action unless the same is enacted by all participants in the Initiative, particularly those industrialized economies which directly compete with Panama in the supply of international financial services.
Despite Panama's confidence on the multilateralism of this initiative, Panama has had to face the reality of a real harm in the form of bilateral listings which prove, in our eyes, the illegality of these
unilateral measures under international law.
Inspired on the OECD list and the proposed retaliatory measures, there are a few countries which have enacted their own unilateral lists of tax havens and tax and
administrative limitations to prevent the existence of trade in services between their residents and these nations and jurisdictions.
At present, Panama's international trade is seriously affected by the
measures applied by Mexico, Argentina, Venezuela, Brazil, Spain and Italy. Peru has recently removed all measures against Panama.
In all these countries tax laws, Panama is identified as a tax haven.
Some of the effects of the various tax and administrative measures applied against the services provided by Panama are the inability of banks domiciled in Panama to provide financing to residents; the application of
higher taxes, duties or administrative requirements for investments made by Panamanian corporations; the inability of residents to deduct as expenses for purposes of income or corporate tax, any payment for services
provided by Panamanian nationals or customs restrictions to services and goods arriving from Panama.
These measures, as you can well imagine, affect day after day the competitiveness of Panama as a service
This is a situation which our government is handling with concern. As a sovereign nation, Panama has rights which protect it from these type of unilateral and arbitrary actions by other nations. As a service provider and a member of the World Trade Organization, Panama is giving serious thought and analysis to this situation from the perspective of WTO law.
We have doubts about the compatibility of some of these measures with GATS for example, a matter for an entire complete presentation and one which my government is seriously exploring.
It is clear to
me and my country that the industrialized economies, exporters of capital and place of residence to most of the transnational corporations and investors, feel threaten and fiscally harmed by the same free trade
policies they promote.
Panama is a nation politically organized around a democratic system which tries to grow into a first class international service center, believing its role in international trade is of
a service provider and not of a harmful tax regime.
There is no doubt in my mind that Panama's tax system is consistent with internationally recognized legal principles of taxation in existence in other
nations not unfairly classified as tax havens. Let me reiterate that our tax system was not enacted to facilitate tax evasion but to consolidate Panama's economy as a service provider for international trade.
This is the same trade which made the OECD members wealthier nations and the same one which is contributing to develop and strengthen other economies around the world.
Indeed, the trade in services
has had a tremendous impact on leading developing economies which inspired by this OECD initiative against –so called- "harmful tax practices" have also restricted Panama's ability to export its services.
I am talking about countries such as Brazil in the Western Hemisphere or India in Asia.
It is known that the OECD is not happy with the development of other service oriented industries in developing
economies such as call centers, shipping registries, or export processing zones or "maquiladoras".
There have been reports, out of OECD committees, indicating these successful activities in emerging
and developing economies in the Americas or Asia are viewed also as unfair competition for the OECD industries. This kind of attitude, I must say, should be of significant concern to any developing economy,
particularly those which have made tremendous advancements in the areas of telecommunications, technological services, assembling, packing and distribution services, etc.
It seems that as long as any of
these activities become direct competition for OECD economies -thus affecting their level of tax derived income-, OECD members will try to limit the expansion of these activities in the developing world.
Such political trend should not continue, particularly nowadays where all markets, -industrialized and developing ones alike-, are in recession.
It is time for the OECD members to accept competition, in all forms, particularly when it comes from the developing world. It is time for the leaders of the OECD to recognize the benefits developing economies derive from exploiting services more so if these services are provided to markets with a significant purchasing capacity.
In this regard, let me recall the most valuable thoughts expressed just recently by the Prime Minister of Canada, Jean Cretién, when he raised a word of caution to other industrialized economies of the World
about the negative effects of their restrictive economic policies towards the developing world.
The G8, and its enlarged club of the industrialized world, should not continue with the kind of "monologue" we are
receiving in trade and economic fora. The differences in wealth distribution must be reduced if growth and economic stability are to become pillars of stability and peace.
I am convinced that free market
policies promoted around the world can contribute to it as long as they accommodate the needs of developing nations for more openness in industrialized markets without compromising their own markets to the
aggressive and subsidized products of these powerful nations.
The new multilateral trade, fiscal, financial and developmental policies of this era must be "socially oriented".
They must ensure that industrialized economies contribute in a much larger stake to larger markets for goods and services from the developing world.
As long as the trade and productive capabilities of
the developing world are encouraged, these nations will be better suited to face new challenges in environmental and labor issues, for example.
These nations will also be better suited to defend democracy and western values, aspects which are a key factor if we all are to strengthen peace and security around the World.
In concluding, let me go back
to the central aspects of my presentation as these are aspects of multilateral economic relations which well deserve and entire presentation in and of itself.
Panama will cooperate with the OECD in matters of
transparency and exchange of tax information because it wishes to preserve its image, competitiveness and integration in the global world.
Panama does not want to be labeled anymore. However, this cooperation will be based upon the principle of level playing field. Any and all measures proposed by the OECD must be implemented by, both, members and non-members of the OECD.
I do not want to finish without repeating some of my first words, as I think it is important to remind ourselves and the world that Panama is a real sovereign nation, a real developing economy with a real
tax system. Panama is not, I repeat, is not a tax haven. It is an international service center wishing to compete on equal footing with others around the world.