Panama In Crisis
In a move over the past few days, which has received little attention from the world media because of the holidays,the President of Panama has unilaterally (and possibly unconstitutionally) reversed the country's long-standing status as a tax haven. The fact that the status is reversed-and companies registered in Panama must pay tax on all assets generating profit overseas,is not an issue in itself. (Indeed the U.S. government,more specifically,the firm,has for many decades,utilized the services of Panamanian banks and other registered organizations for the conduct of business outside the territorial jurisdiction of the United States. This situation has been changing over the past decade to 15 years and Panama no longer provides such services on behalf of U.S. government agencies.) What appears to be the issue is not the fact that Panama,as from 31st December 2013,is no longer a tax haven,but the unconstitutional way in which President Martinelli,has,without legislative approval,introduced these changes to the Panama taxation code. (From what I understand,the legislators were away for the Christmas festive holiday when the President,already accused as dictatorial in style of governance,without accountability nor consultation,changed the tax status.) Does this matter to anyone but the rich and super rich? The issue appears to be the fact that there will be a flight of capital out of Panama-which could potentially either destabilize the country or make it vulnerable to heading down the path to becoming a failed state-and the geostrategic implications of this for the entire region-especially for neighboring Colombia,Nicaragua and the highly unstable Guatemala,Honduras and potentially, the British Commonwealth Territory of Belize (an unintended consequence of instability and territorial disputes with neighboring countries which could also, potentially,as fallout consequence,be also on the verges of economic collapse.) So there is the potential for a dominoes effect throughout the entire region if the Panamanian economy topples overnight. The only winners in this case will be the drug barons and cartels-who will extend their influence into a flailing Panamanian economy and ultimately create the same crises Colombia has been dealing with for several decades.Genesis of The Crisis
For some time Panama has been experiencing a huge hidden financial deficit. The Panamanian press on the other hand have portrayed Panama as a central American 'Tiger' economy. To a great extent Panama has been a miracle growth economy and the gap between wealth and poverty has lessened over the past two decades. This is also, in part,however,the same fallacy which bedeviled the Irish 'Celtic' Tiger economy-fueled as it was by excessive borrowing based on unrealistic property and financial services-related inflated-led growth and not on 'real' (capital goods) export-led growth. In the case of the Panamanian economy a similar credit boom has inflated the economy-which is now on the verge of collapse. The President has been accused of all kinds of illegal and criminal activities-by his political enemies of course. This over-simplifies a very complicated situation-which the President's appointed financial advisors in part created through fiscal mismanagement but which is more in part due to the bad hand he was dealt when he assumed Office. (Remind you of someone you know in Washington?)
Standing By Friends In Times of Crises
Panama has been a stalworth ally of the U.S. through many crises and has acted as an honest broker in other difficult circumstances. The economy is potentially on the brink of collapse. What I am about to say is entirely speculative. I believe that President Martinelli was briefed during the course of the year 2013 by close advisers that the country would run into default sometime in 2014 if drastic steps were not taken to address the huge gap between taxation income and Government expenditure. With a hostile and bellicose legislature the President was left with few options. He could either be called a dictator (which,as soon as the world gets wind of this he most certainly will be) or his re-election prospects could go down the toilet with the economy. In short, I believe he was snookered. It's true that the Government of Panama is overspending-but so was the U.S. as were most European governments-especially France-which is also on the verge of economic collapse-and has just introduced a 75% rate of taxation on high net worth individuals in an attempt to stave off bankruptcy of the French economy. (There is a joke in Europe that if the Germans (German capital-heavy industry) ever stop working,the Euro and the EU will collapse overnight!) The only countries in Europe which are financially stable are Great Britain,Germany, Switzerland,Austria,Liechtenstein,Andorra,Monaco,Sweden and Norway and of those, the one to which most of the world (Christian and non-Christian) is flocking to invest for reasons of political religious and social stability and a business-friendly proactive environment (similar to Panama in terms of Government incentives to foreign investors) is Great Britain. In the Americas, investors worldwide are likewise flocking to the United States-not because of the recession but because of political stability and the cost of entry investment is at a historically ridiculously low level not seen since the 1929 depression.
Panamanian economic growth,has,unlike the Republic of Ireland,been private sector-growth-led, together with investment from the Government. Foreign sector investment however has not been enough in the present world financial crises to sustain it's GDP level-which was surpassing most other countries in the region by between 4.8%-7.00% over the past decade-with a considerable narrowing of the debt to GDP ratio. In addition to this,for some time,Panama has not been viewed as the taxation haven it used to be-so revenues for company registration,administration and returns (which have been some of the highest in the world) have also been steadily drying up.
The Rocky Road Ahead
Panama is still one of the safest (from a personal safety viewpoint) countries in Central America.
From an investment viewpoint I have never heard any negative comments only positive ones with regard to the ease of doing business without fear of organized crime rackets-which exists in many Central American countries (similar to those operating in Moscow,Russia.) I cannot say the same of Guatemala,Mexico and Colombia where you are, in addition, most certainly unsafe walking the capitol city at night-and I am talking about the so-called 'safe' areas.) From a business viewpoint,it has had a reputation for being proactively business-friendly. When government resumes after the Christmas break (shortly) there will be uproar (if not pandemonium) in Panama City and legislators en masse will be demanding President Martinelli's resignation. Before you join the frenzied mainstream media-driven chorus,get all the facts you can.
Panama is in crisis but you know what, I can think of few parts of the world at present which are not.
If I can rework a phrase I've heard in another context,it's not the crisis which counts,it's the way you handle it.
Patrick Emek
January 2014
Crisis? What Crisis?
Latest Update (as at 6th January 2013):
Cabinet Approves Bill To Revoke Law 120 of 2013
''The Cabinet Council revokes law establishing taxable income outside Panamanian territory:Panama Administration will continue local-source taxation. The Panama Administration accepted its mistake in trying to impose worldwide taxation instead of the local-source taxation system in place under Article 694 of the Tax Code of 1957.''
''The Panama Cabinet approved a bill to revoke Law 120 of 2013 which had eliminated tax benefits to Panama companies and individuals performing transactions which take affect outside of the country.''
[in an Extraordinary Cabinet Session (held on 2nd January 2014) article 694 of the Tax Code is completely reestablished stating that: “it is object of this tax the taxable income produced, in any way, inside the territory of the Republic of Panama, regardless of the place received”] [The project will be presented on Monday, January 6th when the National Assembly retakes their regular period of sessions.]
''The President Ricardo Martinelli blamed current Revenue Authority (ANIP) administrator Luis Cucalon for the passage of Law 120 of 2013, while Vice-Minister Luis E. Camacho assumed responsibility and current Minister of Economy Frank De Lima (author of restrictions to bearer shares on behalf of the OECD) said more consultations were necessary. The fact remains that several dozen legislators of the government Cambio Democratico party approved the law in its 3rd reading and failed to predict the onslaught of public opinion opposing this change to the Tax Code. ''
http://mypanamalawyer.blogspot.co.uk/2014/01/panama-administration-will-continue.html
http://mypanamalawyer.blogspot.co.uk/2014/01/panama-cabinet-votes-to-revoke-law-120.htmlEarlier references (as at 31st December 2013-1st January2014):
PDF]
http://www.gacetaoficial.gob.pa/pdfTemp/27443_A/44901.pdf
http://www.presidencia.gob.pa/5183-Articulos-2-y-3-de-Ley-120-seran-derogados
(English translation available at the Presidential Website)
Disrupting Drug Trafficking Networks – Progress in 2013 by: Michael Swanson
http://www.treasury.gov/connect/blog/Pages/Disrupting--Drug-Trafficking-Networks-.aspx