Panama and the OECD on International Tax Cooperation:
Presenting the case of a Real Economy
by
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.
Indeed, the 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 provider. 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.
Thank you.
