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Ask most people
around the world their thoughts on Panama and you would
probably be met with the same one word reply: canal.
However, after a small amount of further investigation
you would find that this country at the gateway of Central
and South America certainly isn't as one dimensional
as that. Aided by more stable, pro-business governments
using the invaluable canal as a catalyst, Panama's friendly
tax and regulation system has helped to established
the country as one of the most modern and respectable
business and financial centres outside the established
'onshore' countries, and ranks as probably the most
important trading and business hub in the region.
Around
400 miles long and between 30 and 115 miles wide, Panama
appears on the map as a narrow isthmus running from
east to west, forming an important land bridge between
continental South America and North America, dividing
the North Atlantic and Pacific Oceans. Its strategic
advantages in terms of trade have been recognised as
far back as the first Spanish colonisers, prompting
them to establish their first permanent settlement in
the New World at Panama City in 1513.
Panama
remained a Spanish colony for approximately three hundred
years to 1821 before it was annexed by Colombia. This
state of affairs endured until 1903 when the US helped
win the modern day country its independence in return
for a slice of land that would eventually see the Americans
building and operating the famous canal, completed by
the Army Corp in 1914.
However,
over the last two decades, the United States has gradually
scaled back both its military presence and political
influence in Panama, and a second treaty signed by the
former President Torrijos (father of the recently elected
President) and US President Carter in 1977 set in train
a twenty year transition period that has seen the administration
and running of the canal pass back to the Panamanians.
Obviously,
it is hard to understate the importance of the canal
in terms of its advantages both for world trade and
as an asset for Panama (even though the canal itself
is technically neutral territory). Around 12% of the
United State's seaborne trade in tonnage terms passes
through the canal every year, which in total sees 13,000
ship movements annually carrying 192 million tons of
cargo. And by navigating the 40 mile waterway, a cargo
vessel bound from Japan to the eastern seaboard of the
United States can reduce its journey by some 3,000 miles.
Shipping
then, has grown to be one of the most important industries
in Panama, which has the world's largest registered
merchant fleet, and a recent investment programme has
seen billions of dollars used in the building of four
more container ports and the widening of the canal to
accommodate more 'Panamax' ships.
However,
another legacy from the country's interdependence with
the United States that has played an equally vital part
in Panama's recent economic successes has been its peg
to the dollar at par. Since there is no government-controlled
central bank printing notes, Panama has had very little
problem with inflation, unprecedented in the region,
and with the dollar the effective currency in all but
name (the balboa is the 'official' currency), investor
confidence has not been the issue that perhaps it has
in other nascent business centres.
Recent
governments have sought to take full advantage of this
legacy by offering significant tax breaks for firms
setting up in a growing number of 'free trade zones'
occupying sites formerly used as bases by the US military.
The
largest of these is the Colon Free Trade Zone, situated
at the northern end of the canal in close proximity
to the major ports on the Caribbean coast, which offers
firms exemption from tax on all import and export movements.
In
addition, companies benefit from reduced rates of income
tax on earnings derived from re-exports, tax credits
available for the employment of domestic labour and
an absence of other bureaucratic requirements such as
licensing and guarantees. This generous tax regime has
attracted around 1,750 merchants generating exports
and re-exports estimated to be worth $11 billion per
year.
Seeking
to capitalise on the success of the Colon Free Trade
Zone, the Panamanian government in 2003 announced plans
in partnership with the World Bank's International Finance
Corporation to transform the American military's Howard
airforce base into a special economic zone equipped
with high-tech logistical and telecommunications facilities
with similar tax advantages for firms locating there.
It is hoped that the project will attract some $600
million in investment and create 20,000 jobs over the
next two decades. A 'Technopark' has also been established
at the former US Army base at Fort Clayton on the Pacific
coast which has attracted the likes of Microsoft, Oracle
and Cisco.
Panama
has placed a great deal of emphasis on building up a
modern, hi-tech telecommunications infrastructure, with
firms having ready access to high-bandwidth fibre-optic
networks marking the country out as Central America's
e-commerce hub. Its promoters are also keen to point
out that unlike other countries in the region, Panama
is less prone to natural disasters such as hurricanes
and earthquakes, minimising the risks of frequent and
prolonged down time.
For
firms carrying on business outside of the special zones,
general taxation is imposed on a territorial basis,
meaning that taxes only apply to income or earnings
derived from business undertaken within the country's
borders. The existence of a sales or administration
office in Panama, or the re-invoicing of external transactions
at a profit, does not of itself give rise to taxation
if the underlying transactions take place outside Panama,
so dividends paid out of such earnings are free of taxation.
Thanks
to new financial regulation, Panama is also developing
itself into an important centre for banking. In February
1999 the government introduced a comprehensive banking
law significantly tightening controls and regulations,
and bringing the country's regulatory standards into
line with those seen in the long established financial
centres of Europe and America.
The
banking legislation introduced a new licensing system
for the industry and stricter compliance procedures,
whilst subsequent laws and decrees have established
modern anti-money laundering, fraud and terrorist financing
rules. These initiatives helped to secure Panama's omission
from the FATF (Financial Action Task Force on anti money
laundering) 'blacklist' of non-cooperative jurisdictions
in 2001, and have transformed the nation into one of
the world's most reputable international banking centres,
home to around 80 (in mid-2005).
For
those thinking of living, working or setting up a business
in Panama, there is no distinction made between foreigners
and nationals under Panamanian law. Personal income
tax applies to Panama-sourced income and after personal
allowances is levied on a sliding scale up to a maximum
of 27% on income over PAB 200,000 a year. Other taxes
include social security contributions, with the employer
paying 10.75% of salaries and wages plus a 1.5% educational
tax, whilst the employee pays 7.25% plus 1.25%.
Real
Estate tax is levied on a sliding scale based on an
official valuation. The annual tax is imposed as follows:
- 1.75%
from $30,000 (lowered to $20,000 in 2005) to $50,000;
plus
- 1.95%
from $50,000 to $75,000; and
- 2.10%
on values above $75,000
Valuations
under the 'cadastral' system were updated in 2005, and
as from 2006 the tax is based on the new values at the
following rates:
- 0.70%
on any value exceeding US$30,000 up to US$50,000;
- 0.90%
on any value exceeding US$50,000 up to US$75,000;
and
- 1.00
% on any value in excess of US$75,000.
Corporate
income tax is levied at a rate of 30% on a sliding scale
up to PAB 100,000, rising to 42% on income over PAB
500,000, for companies that are registered with the
Official Registry of National Industry or that have
government contracts. Taxable income is calculated on
all Panama-sourced earnings less allowable deductions
and there is a withholding tax of 10% on dividends paid
out of taxed income. If less than 40% of taxed income
is distributed, then Undistributed Profits Tax of 10%
becomes payable on the undistributed balance; this therefore
amounts to a maximum of 4% tax. In effect this is an
advance withholding tax, and it is creditable against
the 10% tax on later distributions of the taxed profit.
Residency
rules meanwhile are fairly simple and unbureaucratic.
Whilst there are no statutory residency rules as such,
an individual is considered resident if he is present
in Panama for more than 180 days in any one tax year
and residence has to be officially recognised by the
Government.
The
labour and employment market on the other hand, is more
closely controlled by the authorities and the law sets
maximum percentages for the employment of foreigners
in a business according to its sector. Usually the figure
is 5% although foreign companies are allowed to fill
senior positions with expatriates, up to a maximum of
12% of the staff. However, the Ministry Of Labour, which
is responsible for issuing work permits, may be flexible
on this issue and is open to negotiation for the setting
of higher limits in certain instances.
This
relatively light system of tax and business regulation,
a stable dollarised economy and a benign political system
makes Panama an attractive proposition for any aspiring
expat currently plotting his or her escape from the
high tax countries of North America or Europe. Those
seeking sunnier climes to retire to will also be happy
to hear that Panama's Pensionado Visa Program offers
a variety of tax breaks and discounts on such things
as car imports, furniture, mortgages, utility and medical
bills.
However,
perhaps just as important is that residents can enjoy
a good quality of life in Panama with its tropical climate,
miles of sandy beaches and picturesque mountain scenery.
As the country is still a relatively undiscovered destination,
real estate remains relatively inexpensive with potential
for appreciation. Panama also has first class infrastructure
in terms of communications ensuring that international
phone call will always connect, and internet access
is reliable.
And
if that doesn't convince you, the cost of living in
Panama City is around half of that of the United States... |
INVESTORSOFFSHORE.COM
