Panama's Foreign Minister Attacks The OECD

'For better or for worse, Panama's economic development is conditioned by significant factors. These are: the nonexistence of natural resources, the smallness of its territory, the existence of the interoceanic waterway, and the use of the U.S. currency as means of monetary transactions since 1903.

'As a consequence, the Panamanian economy has oriented itself towards the services sector. Panama has developed a competitive advantage which has allowed it to grow and improve economic standards locally – a legitimate aspiration for any sovereign state - thanks to this industry. Indeed, the services sector amounts to over 75% of GNP and has contributed to make of Panama one of the most trade and open economies in the World, - a goal pursued by the OECD.

'The Panamanian economy has consolidated itself as an international services provider thru the establishment of a banking system, a regime for insurance companies, the existence of the largest duty free zone in the western hemisphere, a stock market, corporate legal principles which were born out of those in the United States such as the Law of Corporations, a trust and a leasing system, a shipping registry which is the largest and most advanced in the World, and the existence of legal principles for the promotion and protection of private investment, intellectual and industrial property.

'Panama is, for those and other reasons, a real international provider which collects a significant amount of income from the different duties and taxes collected from those activities which in no case are by any means fictitious or unregulated, as the OECD reports have repeatedly reported.

'As any developing country in the region or anywhere else in the world, Panama's tax system includes some tax incentive regimes. This is no secret. Their objective is legitimate: to attract local and foreign investment to particular sectors of the economy. These regimes were not set out to facilitate tax evasion in other countries as the OECD reports pretend to say. Ironically, and contrary to common belief, tax evasion is punished with imprisonment by Panamanian legislation, something the OECD Secretariat does not believe.

'In applying tax law, Panama follows the principle of territoriality. This is an internationally recognized principle of taxation which is followed by other countries in the region which are not labeled as "tax havens". As you all probably know, industrialized OECD members follow a more ambitious tax principle. The domicile principle. This principle implies the extraterritorial application of the sovereignty of states outside its borders in order to tax all transactions of their nationals and residents anywhere in the World.

'Panama applies the principle of territoriality to residents and non-residents alike, thus, it is wrong to state that Panama has a preferential tax treatment for all income generated abroad. In applying the territoriality principle, Panama understands, and respects, the sovereign right of other nations to tax incomes of its nationals when they are generated from transactions conducted in those foreign nations. This could very simply support Panama's argument that its tax system does not promote tax evasion.

'In 1996, the G7 group of nations expressed concern about tax schemes in developing countries to attract financial activities. This, they argued, was a "harmful tax practice". A competition, I would say, only harmful to industrialized economies with very expensive social agendas.'

Mr Aleman went on to explain the conditions under which Panama had agreed to make a 'comittment' to the OECD after inclusion on its list of 'harmful' jurisdictions.

'The conditions set out by Panama included that the OECD would treat all countries and jurisdictions participating in the Initiative, members and non-members, equitably. In addition, Panama's commitment would not affect its tax autonomy and would prevent its inclusion in any new list of uncooperative tax havens. Panama would also be invited to participate on equal footing in any fora called to discuss the design of internationally accepted standards and would not be forced to collect taxes on behalf of anyone.

'Finally, Panama asked that those jurisdictions which would not commit to the Initiative or would not comply with its objectives, whether OECD members or not, would be subject of coordinated defensive measures.

'As long as these conditions are met, Panama is willing to cooperate on both fronts of the Initiative: Exchange of Information and Transparency. As a committed jurisdiction, Panama has accepted to implement a series of actions in these two fronts such as the implementation of legal mechanisms to provide information on criminal matters by the 1st of January of 2004 and on civil matters by 1st January 2006, or mechanisms to ensure that information on benefitial ownership of companies, partnerships and other legal entities.'

Mr Aleman complained that as a result of the OECD's initiative, many countries had applied discriminatory sanctions against Panama.

'At present, Panama's international trade is seriously affected by the measures applied by Mexico, Argentina, Venezuela, Brazil, Spain and Italy. Peru has recently removed all measures against Panama.

'In all these countries tax laws, Panama is identified as a tax haven. Some of the effects of the various tax and administrative measures applied against the services provided by Panama are the inability of banks domiciled in Panama to provide financing to residents; the application of higher taxes, duties or administrative requirements for investments made by Panamanian corporations; the inability of residents to deduct as expenses for purposes of income or corporate tax, any payment for services provided by Panamanian nationals or customs restrictions to services and goods arriving from Panama.

'These measures, as you can well imagine, affect day after day the competitiveness of Panama as a service provider. This is a situation which our government is handling with concern. As a sovereign nation, Panama has rights which protect it from these type of unilateral and arbitrary actions by other nations. As a service provider and a member of the World Trade Organization, Panama is giving serious thought and analysis to this situation from the perspective of WTO law.

'It is clear to me and my country that the industrialized economies, exporters of capital and place of residence to most of the transnational corporations and investors, feel threaten and fiscally harmed by the same free trade policies they promote.

'Panama is a nation politically organized around a democratic system which tries to grow into a first class international service center, believing its role in international trade is of a service provider and not of a harmful tax regime.

'There is no doubt in my mind that Panama's tax system is consistent with internationally recognized legal principles of taxation in existence in other nations not unfairly classified as tax havens. Let me reiterate that our tax system was not enacted to facilitate tax evasion but to consolidate Panama's economy as a service provider for international trade.'

Mr Aleman concluded:

'Panama will cooperate with the OECD in matters of transparency and exchange of tax information because it wishes to preserve its image, competitiveness and integration in the global world. Panama does not want to be labeled anymore. However, this cooperation will be based upon the principle of level playing field. Any and all measures proposed by the OECD must be implemented by, both, members and non-members of the OECD.

'I do not want to finish without repeating some of my first words, as I think it is important to remind ourselves and the world that Panama is a real sovereign nation, a real developing economy with a real tax system. Panama is not, I repeat, is not a tax haven. It is an international service center wishing to compete on equal footing with others around the world.'