Panama could well be affected by German anti-tax haven law

RIO DE JANEIRO, BRAZIL – International pressure to combat tax evasion is taking a new turn that could have a negative impact on the Panamanian economy. In addition to damaging the country’s reputation, the next step is to take specific measures to discourage companies from having relationships with countries classified as tax havens.

This is exactly what Germany is doing with the so-called Law to Combat Tax Havens, which was passed last June.

With this law, Germany introduces stricter tax measures for relations with countries on the European Union’s (EU) blacklist of non-cooperative countries in tax matters, including Panama.

Read also: Check out our coverage on Panama

At the time of the law’s approval, German Finance Minister Olaf Scholz said that the aim was to eliminate tax-havens. By adopting the law, Germany strengthened the fight against tax evasion by cutting off business relations with countries that do not comply with international tax standards.

The approved measures, whose implementation is scheduled to begin in January 2022, include the prohibition of deductions for expenses incurred in the listed countries, withholding taxes on payments from Germany whose recipients are tax residents of Panama, and stricter reporting requirements.

In addition, according to José Andrés Romero, tax partner at KPMG, the income of a Panamanian company controlled by a holding company based in Germany will be treated for tax purposes as if it were the shareholder’s own income in the European country.

These are measures that ultimately increase compliance requirements, make transactions between the two countries more expensive, and thus reduce the competitiveness of Panamanian exports to the European country and the attractiveness of establishing German companies in Panama.

Luis Ocando, Country Manager of EY Panama, explained to Prensa Panama that the law does not distinguish whether a company is established in the country under one of the special regimes offered by Panama, even if they have been previously analyzed by the Organization for Economic Cooperation and Development (OECD) and deemed harmless for tax purposes.

According to data from the National Institute of Statistics and Census, German foreign direct investment in Panama at the end of 2019 was US$767.2 million, with investments in the marketing, hospitality, hotel, automotive, and financial sectors Propanamá said.

The same agency said that the products exported from Panama to Germany in 2019 are fishmeal, palm oil, pineapple, coffee, cocoa beans, rum, and farmed shrimp.

The move is causing concern in the business community with ties to Germany.

Speaking to this newspaper, Alexis Fletcher, president of the German-Panamanian Chamber of Industry and Commerce, which brings together some 140 companies, said member companies are concerned about what the situation will look like when the measures take effect and whether “we could already take concrete measures to take Panama off the list and not have the law apply to us so directly” to avoid possible side effects such as unemployment or the cancellation of businesses.

Dani Kuzniecky, technical secretary of the National Anti-Money Laundering Commission, said to Prensa Panama that two problems arise in the context of attracting foreign investment: on the one hand, companies that are already established and may decide to leave, and on the other hand, companies that had intended to establish themselves but may not do so.

In this regard, Fletcher pointed out that no German company present in Panama has informed him of its intention to leave the country.

The counselor of the German Embassy in Panama, Jens Büntjen, explained that the German initiative stems from agreements within the EU and that the goal is for the listed countries to accelerate the reform of their laws to bring them in line with international standards, while the embassy and Germany as a country want to maintain economic relations with Panama.

The scheme is a consequence of the adoption of the EU list of non-cooperative territories in tax matters. In addition to listing the countries, the members of the European bloc are also asked to take individual measures.

Darma Romero, director of international finance and tax strategy at the Ministry of Economy and Finance (MEF), said that Germany, in its leading role, is taking the initiative to be the first to take concrete measures. When asked by Prensa Panama, she said that other countries had not taken similar measures at this time. But Germany may not be the only country doing so.

Panama is on the European list because it scored poorly in the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes. Therefore, the first thing to achieve as a country is to improve its rating with the Global Forum.

The government has already sent documentation on recent progress in this area and is waiting for the organization’s response to see if the country is in a position to request a new assessment.

If so, Panama could meet the requirement to be placed on the gray list, and the measures approved by Germany would not apply. However, the MEF representative said there was no set timeframe for receiving the Global Forum’s response, so she could not know if the review could be requested this year or if it would have to wait until next year.

He clarified that there is “a 100% direct relationship between the measures Germany applies to impede trade with Panama and the approval or non-approval of Bill 624,” an initiative that reforms various aspects of the money laundering and tax information exchange system.

The proposal was submitted to the National Assembly in April this year, after which a subcommittee within the Economic and Financial Committee was established to analyze it.

The project aims to facilitate access to accounting records of companies that do not operate in Panama, one of the shortcomings affecting the Global Forum’s assessment.

Kuzniecky said Panama needs to understand the seriousness of the situation and that it is ultimately a country’s decision because “to the extent that we don’t take care of it, we run the risk of becoming an isolated country.”