Panama, one of the fastest growing economies in Central and Latin America and the Caribbean, is emerging as a premier regional destination for offshore investors. It offers a tax-friendly environment, comprehensive privacy rules, and a well-developed banking sector.

Last year, Panama’s economy grew by over 6%, fuelled by strong growth in the services sector which accounts for over 75% of GDP. The services sector includes the operations of the Panama Canal, banking, the Colón Free Trade Zone, insurance, container ports, the flagship registry, and tourism. Increased activity in railways and cellular telephony; growth in export-oriented services; and a construction boom stimulated by tax incentives also contributed to the strength of the economy, which is forecast to grow at a similar pace in 2007.

The pick up in economic growth follows a relatively slower 2000-03 period resulting from an overall global slowdown, a slump in the Colón Free Zone, lower agricultural exports, and the withdrawal of US military forces at the end of 1999.

The Colón Free Trade Zone, the largest free trade zone in the Western Hemisphere, accounted for 92% of Panama's exports and 65% of its imports last year, according to analysis conducted by the Colón zone management and estimates of Panama's trade by the United Nations Economic Commission for Latin America and the Caribbean (ECLAC). Companies operating in the Colón Free Trade Zone are exempt from all import duties on machinery, materials, and equipment and from sales tax, capital-gains tax (on assets held for at least two years) and local taxes.

Panama’s main exports are bananas, shrimp, sugar, coffee and clothing while its imports include capital goods, food, consumer goods and chemicals. Last December, Panama independently negotiated a free trade agreement with the United States, currently its largest trading partner, which when implemented, will help increase trade.

Strong economic growth has been accompanied by relatively low inflation, which reached 2.6% last year but has averaged about 1.4% annually for the past three decades. This is primarily due to the fact that its local currency, the Balboa, is pegged at parity to the US dollar.

The Panamanian financial system is dominated by its banking sector, which is the largest in the Central American region. A revised banking law and the establishment of a Superintendent of Banks in 1998 helped to modernize the regulatory and supervisory framework for banking. Incidentally, the country does not have a Central Bank.

According to the IMF, Panama’s current framework for a sound banking system includes a strong regulatory framework, effective supervisory oversight, supervision of cross-border banking, and transparency. However, the framework does not include a public sector financial safety net, which could include liquidity support facilities, deposit insurance, or both. Consequently, emphasis is placed on efficient and well-capitalized banks, and provision for ample liquidity to meet unanticipated needs. The authorities have emphasized crisis prevention, which is reflected in a strong regulatory framework and an efficient process when bank liquidation or other bank exit is needed.

In contrast to the banking sector, the regulatory frameworks for the capital markets and insurance sectors remain underdeveloped. The country’s securities law and regulations are generally effective, but resources for securities markets oversight are somewhat weak.

Since the military invasion of Panama in 1998, it has had regular elections and peaceful transitions, resulting in a relatively stable political system compared to its history of political turmoil and American domination.

Although Panama is now becoming a popular destination for off-shore investors, it is one of the first countries in the world to incorporate IBC laws way back in first quarter of the 20th century. In the 1990s, it enacted laws governing offshore banking and investments, as well as retirement programs for foreigners.

The country has been used as an "offshore" jurisdiction since 1916, when it enacted a territorial system of taxation. This means that any income derived from sources outside of Panama may be received in Panama free of any taxes, making interest and dividends from sources outside of Panama non-taxable.

In 1994, Panama passed one of the most comprehensive laws for the promotion of tourism investment in Latin America and the Caribbean. Since the law was enacted, dozens of the world’s largest hotel chains have takes advantage to establish operations, including the Marriott, the Radisson, Holiday Inn, the Sheraton, and the Intercontinental. Investors with as little as $50,000 can also take advantage of the tax and financial incentives available through the tourism investment laws.

In 1997, the government also created incentives for property developers interested in specific areas such as Panama City’s Casco Viejo. Among these incentives are: any income made from the sale or rental of property is exempt from income tax for 10 years; investors can deduct 100% of the costs of renovation from their income tax; materials imported to complete renovations are duty-free; property taxes are waived for 30 years; and transfer taxes are not payable on properties valued at $50,000 or more.

Panama also has tax incentives to promote foreign investment in tourism, reforestation, insurance, manufacturing, mining, construction, and agriculture. Investors can couple their investments with the potential for Panamanian citizenship and permanent-residence programs.

One of the most attractive features of Panama is its privacy laws, which are among the strictest in the world. It is one of a handful of countries that still allows the use of numbered accounts. The country has refused to change its traditional no tax policies, in spite of requests by the OECD to impose taxes on foreign investors. In addition, Panama does not have double taxation agreements with other countries and ignored demands by the U.S. to sign a Tax Information Exchange Agreement (TIEA). On the other hand, countries such as the Bahamas, Bermuda, the BVI, the Cayman Islands, the Isle of Man, the Channel Islands and Guernsey have signed TIEAs.

The smallest country in Spanish-speaking Latin America in terms of population, Panama is ranked the 47th freest economy in the world and 10th out of 29 countries in the Americas by the Index of Economic Freedom constructed by the Heritage Foundation and the Wall Street Journal (see accompanying article).

With increasing pressures from developed countries, including Canada to restrict the tax advantages of offshore investing, Panama is certainly in a class of its own in the Western Hemisphere in terms of the advantages it offers.

Index of Economic Freedom

Source: Index of Economic Freedom, Heritage Foundation and The Wall Street Journal

Dwarka Lakhan is the Editor of CRA Magazine. He is the President & CEO of the Caprion Group of Companies which provides integrated consulting services to the financial services industry. Phone 905-850-7715 Email dlakhan@caprion.ca Web www.caprion.ca