Panama loses its tax haven status for 24 hours

Is Panama a tax haven? At the moment, we could still can consider it as such … But for how long? We have already got used to Governments just changing laws overnight.” We saw it in Cyprus, where during a bank holiday in a hurry the Government passed a law to skim deposits at the country’s two largest banks in order to bail them out from its disastrous financial situation. The latest “Government outrage,” however, happened in Panama.

On December 30th, 2013, the whole offshore industry of this well-known tax haven got shacked up by the So-called Law 120, which was published in the Official Gazette of the country without any prior notice, just before the New Year’s Eve. The new law, more or less abolished the existing territorial taxation system which had existed in Panama since decades. Individuals and companies domiciled in Panama would from this day forwards be taxed on their worldwide profits and not only for income from local source. In other words, the new law would mean the end of Panama as a tax haven and also for the whole offshore industry of the country that employs around 30,000 people. The announcement caused such an outcry within the financial community throughout the country, that it was no surprise to read on the Presidency’s website the next day:

” The Director of the National Revenue Authority, Luis Cucalón accepted having been wrong by proposing to the Members of the National Assembly, the inclusion of Articles 2 and 3 of the law 120 of 2013, concerning the territoriality of the foreign income earned by Panamanian natural and legal persons .”  “Although incorrect things were said about the scope of this law, I must admit that I was wrong in thinking that Panama was ready for this step,” he said.

And indeed, as most experts predicted, on January 2cnd, 2014, the Panamanian Government Council passed a resolution repealing sections 2 and 3 of Act 120, which provided for the payment of taxes on income earned outside Panama. With this, everything was back to normal.

However, this episode has seriously eroded the image of Panama and the seriousness of its Government. Firstly, because a measure of such significance, that changes the whole tax structure of a country, cannot just be passed overnight, without discussion, through a backdoor on the Eve of a main bank holiday. Such an approach not only denotes improvisation, but also a total lack of respect for the professionals working in the financial and corporate services industry, as well as for the thousands of investors who hold the ownership of companies or bank accounts in Panama. It also provides important clues about the intentions of the Panamanian Government in the future, in respect to its status as a tax haven. It is expected that Panama will follow the footsteps of other jurisdictions such as Gibraltar or Andorra and seek to abolish the offshore sector and territorial tax system, becoming a conventional low-tax country. The Government of President Martinelli has shown a clear commitment and intention to promote other income streams for Panama, dropping the offshore sector, may it be little by little (as supposed until now) or once and for all. The question is: will Panama be able to offset all the income, deposits and jobs generated thanks to its current status as an offshore jurisdiction? May a loss of confidence in the country trigger a massive flight of capital that even could compromise the traditionally high solvency ratio of its financial system? The latter is hard to guess, but what seems clear is that Panama will no longer be perceived as a stable and safe place in the eyes of the international investment community, who does not like surprises or instabilities. Thus, the decline of Panama as a tax haven seems inevitable…

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