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Panama Stays the Course as Offshore Conditions Shift |
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Offshore banking and business has changed considerably in the past couple of years, as many jurisdictions become subject to scrutiny for illegal activities, and others sign treaties with other countries for the free exchange of formerly confidential information. Under rapidly changing conditions, and the promise of more change to come, Panama stands stalwart as a stronghold for offshore companies and accounts.
Swiss Stoicism Falters: IRS to Obtain Confidential Client InformationThe Swiss parliament’s approval last month of a deal between UBS, one of the country’s biggest banks, and the United States’ Internal Revenue Service., that would see thousands of confidential account holders’ records handed over to the American authorities, has substantially rocked the offshore community. Switzerland in particular has seen billions of dollars withdrawn from accounts that were once considered the very hallmark of confidentiality, while other previously impregnable fortresses of banking secrecy have yielded to international demands for the exchange of information in pursuit of tax evaders.
Shock Waves Ripple Across ShoresThe consequences have been widespread, and many offshore destinations that just a couple of years ago were considered inviolable are now seeing panicked clients casting about for a safe place to house their accounts. The Principality of Lichtenstein, once as high-profile as Switzerland for its iron-clad secrecy laws, is estimated to have lost a third of its offshore assets in the past two years, similarly with San Marino; while other popular offshore destinations such as Monaco and the Channel Islands have lost 10 and 16% of their holdings, respectively.
Fears Confidential Data May Become Subject to Fishing ExpeditionsThere are many reasons to desire confidentiality in one’s financial holdings and transactions, and piercing of the armor under the guise of foreign tax enforcement has shaken many’s confidence that access to such information will be completely restricted to its ostensible uses.
The broad language of the OECD parameters for requesting financial information from offshore banks does not do much to boost this confidence: requests can be made that are considered “foreseeably relevant” to the enforcement of the domestic laws of a treaty partner.
While these agreements claim to preclude fishing expeditions, there are justifiable concerns that these will be inevitable. Furthermore, the enforcement of the domestic laws of another country may not always be congruent with or relevant to the petitioned country’s interests.
Panama Staunch on Privacy ProtectionPanama in particular has resisted attempts by other countries to obtain information protected by its strict banking secrecy laws, especially with regards to civil matters, yielding only where it concerned rooting out financial activities related to money laundering and drug trafficking.
There is, however, no means of fully avoiding the pressure of the international community, and no offshore jurisdiction will be able to completely ignore the requests of other countries for aid in combating the financial aspects of money laundering, drug trafficking and tax evasion. No country is an island in today’s global economy; the complex flow of goods and services gives leverage to use against those who would not accede to the demands of the majority.
That said, there are varying degrees of cooperation, and it’s a good idea to examine what recent changes have been implemented in understanding which offshore jurisdictions retain the necessary degree of privacy to safely house accounts and do business.
Other Offshores Sign Tax Treaties and Tax Information Exchange AgreementsThe most significant aperture in banking secrecy laws across offshore jurisdictions is the advent of recent bilateral tax treaties and Tax Information Exchange Agreements, or TIEAs. Many previously important offshore jurisdictions have now signed agreements with other countries to share information on request for the purposes of taxation, developed by the OECD to promote the ‘effective exchange of information’, either on request or automatically.
Once again, that the information is ‘foreseeably relevant’ to the administration or enforcement of domestic tax laws is sufficient for the request; this broad language has convinced many account holders of the potential for abuse in obtaining and using confidential information.
Some of the countries that hold TIEAs include many notable offshore jurisdictions: - Cayman Islands with: the US, Canada, France, Germany, Australia and others
- British Virgin Islands with: the United States, U.K., France, Australia and others
- Liechtenstein with: the U.S., U.K., France, Germany, Belgium and others
- San Marino with: the U.K., France, Australia, Netherlands and others
- The Bahamas with: the U.S., U.K., Canada, China, Australia, Belgium and others
- Anguilla with: the U.K., Australia, Germany, Ireland, Netherlands and others
- Belize with: the U.K., Australia, Netherlands and Belgium
- Dominica with: the U.K., Australia, Belgium, Netherlands, Sweden and others
This means that despite their previous stature as safe offshore jurisdictions in which to conduct business, these countries are now openly sharing confidential information with their treaty partners.
Panama Has No Tax Information Exchange TreatiesPanama, however, has not signed any tax information exchange agreements with any countries in the world. Authorities have consistently reiterated the fundamental importance of Panama’s banking secrecy laws, and the laws governing other instruments such as Panama corporations and foundations, cornerstones of Panama’s offshore attraction.
Small Concessions: Double Tax Avoidance TreatiesNevertheless, pressure from the OECD countries has led Panama to make some small concessions, and rather than compromise their strict banking secrecy rules, Panama’s finance minister has opted instead to sign what are known as “double tax avoidance treaties” with several countries. Thus far Panama has signed these double tax treaties with Spain and Mexico, and is varying stages of talks with Qatar, Barbados, Japan, Singapore, Italy, France and Belgium.
These treaties are designed to prevent any instances of double taxation on foreign-earned revenues that might be subject to be tax in the country of operation as well as the earner’s country of residence/citizenship. Panama has never until now required such treaties since taxes on foreign-earned income are not taxable in Panama; however by signing 12 of these treaties, Panama will meet the requirements of the international community without sacrificing the strictness of its banking secrecy laws.
Cooperating with Compromising ConfidentialityOnce again, these double tax avoidance treaties meet the minimum requirements laid out by the OECD for cooperation – relieving Panama from the threat of economic sanctions –but do not compromise Panama’s strict banking secrecy laws, nor the effectiveness of its offshore instruments for a multitude of legitimate purposes.
In part 2 of this article (Panama's Offshore Virtues - A Diverse Portfolio), we will examine just what Panama does have on offer for offshore business, and why it remains the strongest jurisdiction of its kind today.
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