Why has Panama not managed to escape the EU’s tax haven blacklist?

RIO DE JANEIRO, BRAZIL – The Economic and Financial Affairs Council of the European Union (Ecofin) decided at its meeting on October 5 to keep the Republic of Panama on the list of third countries it considers “non-cooperative on tax matters.”

The EU bases its decision on the fact that Panama has still not been classified as “highly compliant” by the Organization for Economic Cooperation and Development’s (OECD) Global Forum on Transparency and Exchange of Information for Tax Purposes for the exchange of information upon request.

Read also: Check out our coverage on Panama

The EU bases its classification of countries on the Global Forum’s assessments. However, the latest review measuring the level of compliance of the Panamanian tax system with the international standard for tax transparency was published in November 2019 and covers 2015 to 2018.

This gap has resulted in Panama being classified as “partially compliant” and thus unable to demonstrate its progress in sharing tax information. “Panama has a harmful foreign source income exemption regime and has not yet resolved this issue,” the EU Council concluded in its latest review on October 5.

In an interview with La Estrella Panama published on February 20, 2020, the director of the OECD’s Center for Tax Policy and Administration, Pascal Saint Amans, acknowledged that the EU list was “somewhat mechanical” and that is classified as “non-compliant” by the global forum meant that one was “automatically” included in that list.

At the time, Saint Amans said that the “changes” Panama has achieved to conform to international standards for tax transparency are “remarkable.” However, recent progress since the Global Forum assessment has not been captured by the EU because of how the list is compiled.

The EU released the updated list of tax havens two days after the so-called “Pandora Papers” (on tax avoidance practices), a journalistic investigation coordinated by the International Consortium of Investigative Journalism (ICIJ), came to light.

However, in June 2021, as part of its Code of Conduct, the EU notified Panama that it considered the territorial tax system “harmful” based on five criteria: low level of taxation, delimitation, substance, internationally recognized principles, and transparency.

FIGHT AGAINST ILLEGALITY

Economist and university lecturer Ramón Rodríguez explained that the fight against money laundering and tax evasion became increasingly important after the events of September 11, 2001, and the 2008 financial crisis, which had its epicenter in the United States.

He pointed out that the major economies, particularly in Europe and the United States, have negative or very slow economic growth, with high budget deficits, an unfavorable trade balance, and high unemployment.

They also have very high tax rates, which leads many residents to decide to move their resources out of the country and use offshore companies.

Panama, for its part, applies the concept of “territorial income,” meaning that it only taxes taxpayers whose income is earned within its jurisdiction.

In other words: If a company is incorporated in Panama and carries out productive activities, it must declare its income to the General Directorate of Tax Administration (DGI) and have a tax identification number (RUC). However, if a company does not carry out productive activities, it only has to pay a minimum fee.

“So we have to expect that the major economies will continue to put pressure to see where they are located, where they invest their resources, and they will ask for reports from the countries where these companies are located through the normal channels or through these types of actions that have been carried out with the request for information,” he said.

He pointed out that Panama has signed agreements and bilateral exchanges with many countries and has adapted its legislation, but that as a result of the investigation into “Pandora Papers,” some companies have emerged that could be linked to illegal activities.

“We have to have a big debate about the cost-benefit ratio and whether we want to continue this kind of (offshore) activity that, I repeat, doesn’t bring much benefit but causes enormous damage to the [country’s] image,” he said.

Rodriguez stressed that “we all know that in Panama and nowhere else in the world is it a crime to create companies, trusts, foundations, and investment funds. Panama’s corporate law dates back to 1927, and as a sovereign state, our country basically applies the concept of territorial income.”

“There are other countries in Europe and the United States that apply the concept of worldwide income or universal income, which means that they tax taxpayers according to their residence and not according to where the source of income is located. These countries track their clients or residents worldwide. Tax evasion is considered a serious crime or offense,” he affirmed.

IMPACT

Rodríguez considered that “Panama is a tax haven, but a regulated country. The judicial authorities and the Financial Analysis Unit.”

He pointed out that Panama has passed laws to combat money laundering and terrorist financing and has made the best decisions to improve the flow of information. “I think it’s a matter of thinking about the demands of these international organizations compared to the level of sovereignty we had as a country, because we have the freedom to determine the tax system, but the truth is that we are paying the piper here,” he said.

He stressed that bank correspondents could be affected by these lists. “Banks need correspondents outside the country to conduct transactions, and under these circumstances, it becomes difficult for a local bank to have international correspondents, and this will affect us tremendously.

This makes it more expensive to do business with correspondent banks and indirectly affects the population because it makes procedures and credit more expensive, making it more difficult to revive the economy.

For his part, economist and university professor Raúl Moreira stressed that “the decision to keep Panama on this discriminatory list ignores all of Panama’s efforts in the fight against money laundering.”

Moreira argued that “the attempt to impose on Panama a tax system that bypasses the reality of the country’s tax collection capacity undermines our sovereign right to establish the tax system that best suits our interests in the context of transparency and the fight against impunity for tax crimes.” “It would be a continuation of the attacks on our international image to make us give in to their demands, which have already led to a loss of jobs and service exports in our international balance of payments,” he said.

NOT OFF THE HOOK

However, it wouldn’t be the first time Panama has been on the EU’s “black” list of tax havens. In 2018, it was there but managed to get off the list. In February 2020, the country was added to the list again, as it was deemed that it had not yet “complied with the tax reforms to which it had committed.” To date (reviews in October 2020 and October 2021), the country has not been able to leave the list, although the government claims to have implemented all the measures recommended by the OECD.

The task of improving the country’s image in the eyes of the world is not easy. On August 30, 2021, the then-technical secretary of the National Anti-Money Laundering Commission of the Ministry of Economy and Finance, Dani Kuzniecky, said that removing Panama from the European Union and Financial Action Task Force (Gafi) lists was “a complex challenge” because “we are a little behind.” There are criteria and items in the action plan that have not been met and new regulations and changes in the world that need to be brought up to date.