Panama is hot. Not only the climate but the economy is being bolstered on several fronts.The Canal is being widened, a metro system is being built and construction continues unabatedly. They are even building two off shore islands. Panama is looking very attractive to bank’s looking to service their clients without feeling like they are under a microscope, as Panama’s compliance regulations are solid, but not heavy-handed. What about the “tax haven” stigma?

Panama is not a “tax haven” country. It’s tax structure is territorial in that only income earned in Panama by residents is taxable in Panama. The OECD countries, and others, choose to disapprove of this arrangement on the unspoken grounds that this gives Panama a tax advantage over the G20 by drawing banking assets from foreigners to this venue where the interest is not taxable putting the OECD countries at a disadvantage.

For Panama to shed the stigma of being (wrongly) considered a tax haven and come closer to a trade promotion agreement with the US, it must reach agreements with the most aggrieved countries in terms of double taxation agreements that permit Panamanian taxes, if any, to be taken as a credit in other jurisdictions. Panama has no such agreements today. It is also necessary to protect especially those Panamanian business sectors that have special tax status or tax exemption on profits such as the Colon Free Trade Zone and other special duty free processing zones. Panama wishes to make clear that because special entities have special tax status, this does not make Panama a tax haven. One of the factors working against Panama’s beneficial tax rate structure is a subjective one: the EU countries in particular press for an increase in income tax rates to equalize or level a perceived disparity between Panama’s rates and EU rates to make the so-called tax havens less attractive to their nationals for tax avoidance purposes.

According to the OECD, countries are divided among those that have substantially implemented the internationally agreed tax standards (white list countries), those countries that have committed but have not yet substantially implemented and “other financial centers” (grey list countries), and those that have made no progress in implementing the internationally agreed tax standards (black list countries).

Panama’s economy grew by 2.4% in 2009 and it is expected to keep growing with the service sector comprising 80% of the growth. This includes the Panama Canal, banking, and the Colon Free Trade Zone. Panama is a good place to do business and lots of banks have it on their radar screen…so we will be keeping an eye it as well.