Panama’s Recently Revoked Taxation Law

Last week, while we were all recovering from Christmas and preparing for New Year’s, the guy in charge of the tax department in Panama got an idea. “I know how to bring in more tax revenue,” this guy seems to have said to himself one morning. “I’ll change the country’s approach to taxation!”

And in a move that qualifies as bold, brash, and absurd, this guy did just that. He attached two articles to an already-in-process bill that changed Panama’s tax system from jurisdictional to one that would tax the worldwide income of both corporations and individuals.

Because the original bill (the version without the tax riders) had already passed the first round of reviews and approvals by Panama’s legislative board…and because, by the time the tax riders were added, that legislative board was mostly incommunicado, at the beach, and enjoying the holidays…the adjusted bill, with the tax riders, made it into law.

The backlash was immediate and brutal. One colleague who helps people set up entities offshore copied me on a note to his staff stating that his firm was not to open another new Panama corporation for any client until the issue was clarified. If the situation were as bad as it seemed, and Panama did in fact intend now to tax on the basis of worldwide income, the country would be off that firm’s list of go-to jurisdictions altogether.

Another colleague began planning the relocation of his business. After years in Panama, he was prepared to bug out immediately.

In other words, this was a big deal. A game-changer move.

Fortunately, people with some sense got involved to begin working to set things right, and the process to repeal the two offending articles was begun almost immediately after the law had been passed.

However, the damage had been done, and it will take time for Panama to recover from this embarrassment. The scar left by this world-class show of poor judgment will be long-lasting. Those with Panamanian structures, residency, and businesses in place likely now will stay put. But they will plan exit strategies to have ready just in case another Panamanian government official loses his mind. And those shopping for where to set up offshore structures or entities will think twice before establishing themselves in Panama.

He was thinking he’d make a name for himself. He reminds me of the FBI agent in American Hustle, who, similarly, had big ambitions, big ideas, and no clue what he was doing.

Panama is the top investment, business, and offshore hub for the region and increasingly recognized as one of the top investment, business, and offshore hubs in the world. Call centers, logistical offices, and administrative headquarters of big international companies based in this country employ many thousands of Panamanians. Dozens of law offices exist solely for the purpose of setting up corporations for foreigners. Those law firms also employ Panamanians. Retirees inject large amounts of money into the local economy, buying goods, services, and real estate. Most if not all of that goes away, overnight, if this country shifts its approach to taxation.

But all of this was lost on this Tax Chief guy. Some are speculating that the debacle was a test, an attempt by the Panamanian government to see if they could get away with a change like this. Others think that the OECD was behind this; their anti-tax haven position is well known.

Conspiracy theories aside, this was a dumb move. Sure, the country needs loads of money in the short-term to help fund all the ongoing infrastructure projects, from the Panama City metro to the new international airport and from the expansion of Tocumen, to all the major roadwork, both in the capital and countrywide…not to mention the US$1.2 billion Canal expansion cost overrun currently in dispute. Fair enough. This country is spending money like…well, like it’s got a really big and continual supply of it.

And it does, thanks to the Panama Canal…and the big and growing financial services industry that is so well established here. This industry has been bruised, thanks to the recent error in judgment, but it will recover.

As one source in a position of power in this country told me last week, “If there is anything positive out of this experience it is that the President and the Tax Department Chief are now very clear on the fact that no one wants this for Panama. If there was any doubt that Panama would keep its tax territoriality, the massive response from all different sides of the economy have sent a very loud and strong message to this government and to governments to come.”

Lief Simon