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Why Panama?
A small country located in the southernmost part of Central America, Panama (75,420 sq. km) has
capitalized on its pivotal and privileged geographic location between two continents, North and South
America and the Atlantic and Pacific Oceans. By exploiting its location, Panama has developed an
unrivalled transportation and communication network that includes the famous Panama Canal, the
two busiest ports in Latin America and the world's second largest free trade zone. The local economy
is primarily composed of a highly competitive services industry (contributing to over 75% of the GDP)
developed around its world renowned financial sector, as well as by transportation and commerce
activities generated by the Panama Canal traffic and the Colon Free Zone.
Matías Mora Simoes is a
Senior Managing Director of
the FTI Consulting Forensic and
Litigation Consulting practice
and is based in Panama City.
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For numerous years, Panama’s economy has been one of the fastest growing
economies in the Latin American region. This can be attributed to its location at the
heart of the rapidly growing Latin American market, which makes it a natural base for
world business operations. Worth mentioning facts are that Panama is the country with
the second highest level of technology in Latin America and the country with the
greatest air connectivity in the region with roughly 70 routes in 31 countries. All of this
has made Panama an exciting and fast-growing hub for trade, finance, business,
shopping and tourism.
With an average annual growth rate of 8.5 percent, Panama’s per capita GDP has
more than doubled over the past decade, sitting at $35.642 billion USD and $11,037
per capita. This impressive growth performance has been driven by a steady rise in
public and private investment in a stable economic and political environment. The
International Monetary Fund’s (“IMF”) latest assessment of the Panamanian economy
indicates that the country’s economy will continue to grow strongly, buoyed by the
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WHY PANAMA?
Panama Canal expansion and large public infrastructure projects like
the third bridge over the Canal and the second line of the Panama
Metro. Economic stability and growth has been favored by the
country’s fully dollarized economy, which in turn has also helped
keep inflation very low, averaging a growth of only 1.4 percent in the
past 30 years. Panama performed relatively well during the global
financial crisis of the late 2000’s, including a growth of 4 percent in
2009, when many other countries in the region suffered a
contraction. The Panamanian economy accelerated in the following
years, reaching double-digit growth rates in 2010 and 2011.
This impressive growth performance has been driven
by a steady rise in public and private investment in a
stable economic and political environment. The
International Monetary Fund’s (“IMF”) latest
assessment of the Panamanian economy indicates
that the country’s economy will continue to grow
strongly, buoyed by the Panama Canal expansion
and large public infrastructure projects.
Foreign direct investment (FDI) in Panama has averaged a stunning
9 percent of GDP a year since 2008, helping raise overall investment
levels to 30 percent of GDP, nearly double the average in Latin
America. After the world economic slowdown observed in 2009, FDI
started to rise again in 2010, maintaining their annual dynamic
growth and reaching almost 4 Billion USD in 2013 and the historic
figure of almost 4.7 Billion USD in 2014. Large investments in the
mining and energy sectors, along with continuing investments in the
Colon Free Zone, logistics, financial, maritime, construction and
transportation fields have been the main contributors to the
impressive figures observed during the most recent years. Over the
past eight years, the main foreign contributors to the Panamanian
economy have come from more than 200 companies from Colombia
and Venezuela, which after the United States are the countries with
the largest FDI in the country.
Panama’s strong financial system is regulated by a firm legal
framework which complies with international and local banking laws.
Financial intermediation accounts for almost 10 percent of the
country’s GDP, which means that Panama’s International Banking
Center (“IBC”) is one of the economy’s biggest contributors. Created
in 1970 with the First Banking Law, the Panama IBC is the largest in
Latin America and it owes its success to the application of
international banking standards and the facilitation of free flow of
capital. The IBC offers investors over 100 Banks from approximately
35 countries from around the world, of which there are 7 North
American banks, 14 European banks, 6 banks from Asia and the
Middle East and 2 from the Caribbean.
Panama’s economy boasts of high cash reserves, maintaining
liquidity levels close to 60 percent in the Banking System, and its
banks are traditionally very conservative, two reasons for why they
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were not hit by the credit derivatives market. Even in 2007, when the
world was facing an economic crisis, the Panamanian banking
system remained strong and there were no effects of this crisis on
their operations. The soundness and resilience of the IBC, which can
be compared to that of first world countries such as the U.S., is
demonstrated by the constant growth of domestic and foreign assets
since its creation, as well as by the impressive fact that it was not
hampered by the Asian Crisis of the late 90’s, the Dot Com crisis of
the early 2000’s, the Subprime Crisis of 2007-09 and neither by the
most recent European Crisis. The trust of the international
community in Panama’s economy is evidenced by the fact that a
large portion of total deposits in banks in the Panamanian territory
come from foreign investors. For instance, on the year 2013, close to
40 percent of total assets deposited in banks located in the IBC
came from foreigners (a little under the $40 Billion USD mark). This
statistic could easily be higher, as all Panamanian corporations are
considered domestic, even if the Ultimate Beneficiary is Foreign.
Additional to this, at least 60 percent of the clients of brokerage
houses in Panama are foreigners.
Panama has a long standing legal framework of corporate law. The
incorporation of Panamanian legal vehicles is a relatively easy and
inexpensive process, which is used for many reasons such as tax and
estate planning purposes. Bearer Shares are still permitted in
Panama, but with the passing of a new law that will come to effect at
the end of 2015, bearer shares will have to be in custody of
authorized institutions in order for them to properly identify the
Ultimate Beneficiary of all Panamanian companies. This information
will still be strictly confidential.
After a review by the IMF, Panama was added to a list of countries
with deficiencies in their strategies regarding AML/CFT. Since then,
the Panamanian Government and Private sector have been working
together to correct this situation and restructure the AML/CFT
regime. One of the most important advances in this issue was the
recent passing of a new AML/CFT law, which among others, includes
non-financial entities to the list of supervised entities, enhances KYC
and other monitoring obligations and provides regulators with access
to client information of regulated entities.
Even after the recent changes made to meet
international requirements by the FATF, local
Panamanian laws do not consider Tax Fraud as a
criminal activity under its Criminal Code, but fines
can range from 5 to 10 times the amount defrauded.
It is important to emphasize that Bank Secrecy in Panama is still in
force, and that any client information can only be shared with
Securities Market regulators as part of international investigations in
related matters. The aforementioned information cannot be
triangulated or disclosed to any other parties and cannot be used for
any other purpose apart from investigations regarding money
laundering, terrorist funding and proliferation of weapons of mass
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WHY PANAMA?
destruction. This addition was established in order to comply with a
Multilateral Memorandum of Understanding (“MMoU”) of the
International Organization of Securities Commissions (“IOSCO”), in
which out of 129 member countries, at the moment 105 are
signees.
Due to its Territorial Tax Regime, which differs from the Universal
Regimes in the U.S. and E.U., taxes in Panama are to be paid only on
earnings perceived in Panamanian territory. Local or foreign
securities acquired through the Panamanian Stock Exchange and
fixed-term deposits are tax exempt. Even after the recent changes
made to meet international requirements by the FATF, local
Panamanian laws do not consider Tax Fraud as a criminal activity
under its Criminal Code, but fines can range from 5 to 10 times the
amount defrauded. More importantly, Tax Fraud is not considered as
an underlying offense for Money Laundering, even after the recent
AML laws passed by the Panamanian Government.
For many years Panama has been a well-conceived and
developed "offshore center" for conducting business and
developing investment plans in a hassle-free manner.
The concept of an international offshore center implies an
economic and juridical structure designed to promote
commercial, financial and service activities in an expedient
and simple manner. This structure, put together by the
Panamanian government to promote foreign investment, not
only considers special tax legislation, but other legislation as
well, including incentives and facilities to attract foreign
investment in a large number of activities of interest and
lenient migration laws for investors.
Since 2010, Panama holds various Double Taxation Avoidance
Agreements (“DTAA’s”), as well as Tax Information Exchange
Agreements (“TIEA’s”) with the US. Due to the following
characteristics, these treaties were designed to protect investors in
Panama:
• Information may only be shared with prior request (never in an
automatic fashion).
• Speculative information requests are not admissible (A.K.A.
“fishing Expeditions”).
• The requesting party must demonstrate that it has exhausted its
internal resources for the obtention of said information.
• Shared information maintains its confidentiality and cannot be
triangulated.
In October 2013, Panama ratified its latest DTAA’s. The following
countries are included in the list of countries who share this
agreement with Panama at the moment: Barbados, South Korea,
UAE, Spain, France, Netherlands, Ireland, Israel, Luxembourg,
Mexico, Portugal, Qatar, UK, Czech Republic, and Singapore. On the
same year, Panama also ratified its TIEA´s with the following group
of countries: Canada, United States of America, Finland, Greenland,
Iceland, Faroe Islands, Norway and Sweden.
Matias Mora Simoes
Senior Managing Director
+507 297 3460
The views expressed herein are those of the author(s) and not necessarily the views
of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other
professionals.
[email protected]
About FTI Consulting
FTI Consulting, Inc. is a global business advisory firm dedicated to helping organizations protect and enhance enterprise value in an
increasingly complex legal, regulatory and economic environment. FTI Consulting professionals, who are located in all major business centers
throughout the world, work closely with clients to anticipate, illuminate and overcome complex business challenges in areas such as
investigations, litigation, mergers and acquisitions, regulatory issues, reputation management and restructuring.
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