1 REFORMING A TAX HAVEN OR CHANGING THE RULES OF THE GAME? A CASE STUDY OF THE U.S. PANAMA TAX INFORMATION EXCHANGE AGREEMENT By LINDSAY ELISE BARNES A THESIS PRESENTED TO THE GRADUATE SCHOOL OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF THE ARTS UNIVERSITY OF FLORIDA 2012
2 2012 Lindsay Elise Barnes
3 my daily life; and to my parents, for the intellectual curiosity they instilled in me, particularly my mom, whose global adventures encouraged me to pursue my own
4 ACKNOWLEDGMENTS I would like to thank my hu sband and my parents for their support and p atience throughout this process Their encouragement to succeed taught me to always expect more than I thought possible, because they knew I could make it possible. I would like to extend a counsel Helen Mendell Barnes, for being my on call editor and givin g me the perspective that I needed. I would like to thank the Panama Canal Museum Fund and the Center for Latin American Studies for their financial support and the opportunity to take full advantage of the breadth offered by an interdisciplinary program. I am grateful to Dr. McCoy, Professor McLendon and Dr. Naranjo for their willingness to participate on my committee and for their insight I am also incredibly fortunate to have found an excellent Chief Research Assistant in my husband, Yeison Arrieta Badi lla. Without his help in evaluating my field research (and at time s his opposing editorial perspective), the project may have turned out quite differently. Gracias t o Fernando Corona and Carlos Catilino my international team of research assistants witho ut whom I would not have been able to complete this project on time This has truly been a multinational endeavor I want to express m y immense g ratitude to all the participants for their willingness to share their perspectives about their beloved ( and ad opted) country. I especially want to thank Victoria Figge Cederkvist and her husband, Jesper Cederkvist, whose introductions made many of these interviews possible. It is very rare to meet such warm and welcoming people and I will continue to cherish this newfound friendship. Their hospitality and support were incredible Finally, I want to thank Dr. Raul Chanis for upon my arrival in Panama and for opening his clinic to my research needs Thank you all for your generosity.
5 TABLE OF CONT ENTS page ACKNOWLEDGMENTS ................................ ................................ ................................ .. 4 LIST OF FIGURES ................................ ................................ ................................ .......... 8 LIST OF ABBREVIATIONS ................................ ................................ ............................. 9 ABSTRACT ................................ ................................ ................................ ................... 11 CHAPTER 1 INTRODUCTION ................................ ................................ ................................ .... 13 Problem Statement ................................ ................................ ................................ 14 Significance ................................ ................................ ................................ ............ 14 An Overview of Global Financial Regulation & International Taxation .................... 15 Sovereignty, Tax Competi tion and Transparency: A Contemporary Debate .... 18 Subtle Differences: Avoidance & Evasion ................................ ........................ 20 Tax Enforcement & Compliance: OECD to Glo bal Initiative ............................. 21 Review of the Literature ................................ ................................ .......................... 2 3 The Purpose of Tax Treaties ................................ ................................ ............ 23 Information Exchange May Not Deter Tax Evasion ................................ .......... 26 A Bilateral Approach to a Multilateral Problem ................................ ................. 27 Why Sign a Tax Treaty? Co ercion or Negotiation ................................ ............ 28 The Significance of Implementing Tax Treaties ................................ ................ 31 Impact of Tax Treaties & TIEAs: Overlooking the Domestic P erspective ......... 33 Research Methods ................................ ................................ ................................ .. 34 Organization ................................ ................................ ................................ ........... 35 2 NT: A POLITICAL & ECONOMIC OVERVIEW .............. 39 A Political History of Panama: A Special Relationship with the U.S. ....................... 40 From Occupation and In tervention to Exit ................................ ........................ 42 Political Culture in Panama: The Commercial Elite ................................ .......... 44 Panamanian Economic Development: Positioned to Become Ban king Center ....... 46 Economics of the Canal ................................ ................................ .................... 47 Colon Free Zone ................................ ................................ .............................. 48 Dollarizat ion ................................ ................................ ................................ ...... 50 Emergence of the International Banking Sector ................................ ............... 51 Growth Amidst Crisis: Current Economic Overview ................................ ................ 52 Battling Corruption with Transparency: Democracy after Noriega .......................... 55 Summary ................................ ................................ ................................ ................ 57 3 PANAMA: TAX HAVE N OR REGULATED OFFSHORE FINANCIAL CENTER? ... 63 Offshore Financial Practices: Opacity or Efficiency? ................................ .............. 64
6 Overview of Panama Banking Laws & Financial Regulations ................................ 70 .................. 70 Panama Historically Resisted Full Disclos ure ................................ .................. 72 A Stigma Remains: Drug Trafficking & Money Laundering ............................... 76 Regulation on the Rise ................................ ................................ ..................... 77 Rule of Law: Enforcement is Problematic ................................ ......................... 79 Tax Havens & OFCs: Moral Aberration or Strategic Advantage? ........................... 81 The OE CD Initiative against Tax Evasion: Panama is a Tax Haven ................ 82 ................................ ............................... 85 Getting off the OECD Gray List: The Beginning of New Era ............................. 88 Naming & Shaming: The U.S. Panama FTA Connection ................................ 90 Summary ................................ ................................ ................................ ................ 90 4 ANALYSIS OF TIEA & IMPLICATIONS ................................ ................................ .. 92 Tax Treaties: TIEAs & DTTs ................................ ................................ ............. 93 OECD & UN Model Information Exchange Articles ................................ .......... 94 Responding to International Criticism: Panama Tax Treaty Strategy ............... 95 A Shift in Strategy ................................ ................................ ............................. 96 Controversial Negotiations: Political Acumen or Acquiescence? ...................... 99 Implementation ................................ ................................ ............................... 101 Analysis of the U.S. Pan ama Tax Information Exchange Agreement ................... 101 ........................ 101 Revising Domestic Laws to P ursue Tax Crimes ................................ ............. 104 The Process: Restricting Effectiveness and Other Legal Obstacles ............... 107 The Cost of Compliance: A Concern for the Financial Community ................. 110 Retroactivity: Is the TIEA Unconstitutional? ................................ .................... 111 Enforcement and Implementation ................................ ................................ ... 114 Objectives & Intentions: Conflicting National Interests ................................ ... 116 Interview Results: Opinions about the TIEA & its Effects ................................ ...... 119 Why Sign the TIEA? ................................ ................................ ....................... 120 Business versus Legal Perspective ................................ ................................ 121 OECD Campaign & U.S. Attacks on Tax Havens, Damaged National Pride .. 123 Tax Treaty Movement Perceived as Attack on Competitive Advantage ......... 123 Panama is NOT a Tax Haven ................................ ................................ ......... 124 Stigma Associated with Banking Center Persists ................................ ........... 125 Is the TIEA Lifting the Veil of Secrecy? ................................ .......................... 127 Benefits of the TIEA: A One Sided Bilateral Agreement ................................ 127 Double Standards ................................ ................................ ........................... 128 Dual Nationality ................................ ................................ .............................. 129 Strong Public Reaction Compared to Other Tax Treaties .............................. 131 ................................ ............ 132 New Legal Practices Force Cultural Norms to Shift ................................ ........ 132 Changing the Rules of the Game ................................ ................................ ... 133 General Observation s ................................ ................................ .................... 134 Summary ................................ ................................ ................................ .............. 135
7 5 CONCLUSION ................................ ................................ ................................ ...... 139 Research Findings ................................ ................................ ................................ 139 Political Pressure Successfully Results in Tax Treaties ................................ 139 Bilateral Treaties Should Not Encourage Double Standards .......................... 140 Tax Treaties as Tools to Promote Transparency ................................ ............ 141 Tax Treaties Address a Number of Issues Beyond Taxation .......................... 142 Different Laws Reflect Different Cultural Norms ................................ ............. 143 Financial Effects of the TIEA ................................ ................................ .......... 144 TIEAs Challenge Existing Laws and Force Reforms ................................ ...... 145 The Role of Sovereignty in Evolving International Tax Policy ......................... 145 Significance ................................ ................................ ................................ .......... 146 Issues for Further Study ................................ ................................ ........................ 148 APPENDIX A INTERVIEW GUIDE ................................ ................................ .............................. 149 B PARTICIPANT GUIDE ................................ ................................ .......................... 151 C TIMELINE OF KEY HISTORICAL & POLITICAL EVENTS ................................ ... 152 D THE U.S. PANAMA TAX INFORMATION EXCHANGE AGREEMENT ................ 153 E U.S. PANAMA TIEA JOINT DECLARATION ................................ ........................ 163 F PANAMA: TAX TREATIES & TIEAS NEGOTIATED AND IN FORCE .................. 166 LIST O F REFERENCES ................................ ................................ ............................. 167 BIOGRAPHICAL SKETCH ................................ ................................ .......................... 182
8 LIST OF FIGURES Figure page 1 1 Inc reasing Amount Global Asset and Liabilities Holdings in Offshore Financial Centers ................................ ................................ ................................ 37 1 2 Proliferation of TIEAs from 2004 to 2010 ................................ ............................ 37 1 3 TIEAS & Double Tax Conventions Signed between G20 Summits based on initiative to reduce tax evasio n and promote tax transparency ........................... 38 2 1 Panama Canal Revenue a s Percentage of GDP, 2008 2012 ............................. 60 2 2 Projected Fiscal Income from Panama Canal Expansion ................................ ... 60 2 3 Panama GDP Grow th, 2003 2013 ................................ ................................ ...... 61 2 4 Panama Net Foreign Direct Investment, 2003 2012 ................................ ........... 61 2 5 Economic Growth (Percentage) of Fina ncial Intermediation, 2007 2011 ............ 62 2 6 of Corruption Measured by Transparency International ................................ ...... 62
9 LIST OF ABBREVIATION S ACP Panama Canal Authority AML Anti Money Laundering BCCI Bank of Credit and Commerce International CIA Central Intelligence Agency CFZ Colon Free Zone DOJ Department of Justice DGI Directorate of Revenue (Direc cin General de Ingresos) DTT Double Tax Treaty ECLAC Economic Commission of Latin America and the Caribbean FATCA Foreign Account Tax Compliance Act FATF Financial Action Task Forc e FDI Foreign Direct Investment FinCEN Financial Crimes Enforcement Networ k FAU Financial Analysis Unit FIU Financial Intelligence Unit FTA Free Trade Agreement GAO Government Accountability Office GDP Gross Domestic Product GFI Global Financial Integrity HIRE Act Hiring Initiatives to Restore Employment Act IADB Inter American Development Bank IBFD International Bureau of Fiscal Documentation IMF International Monetary Fund IRS Internal Revenue Service
10 KYC Know Your Client LLC Limited Liability Company MLAT Mutual Legal Assistance Treaty OECD Organization of Economic Cooperatio n and Development OFC Offshore Financial Center SA Sociedades Annimas SEC Securities & Exchange Commission TI Transparency International TIEA Tax Information Exchange Agreement TJN Tax Justice Network TPA Trade Promotion Agreement UN United Nations
11 Abst ract of Thesis Presented to the Graduate School of the University of Florida in Partial Fulfillment of the Requirements for the Degree of Master of Arts REFORMING A TAX HAVEN OR CHANGING THE RULES OF THE GAME? A CASE STUDY OF THE U.S. PAN AMA TAX INFORMATION EXCHANGE AGREEMENT By Lindsay Elise Barnes August 2012 Chair: Terry L. McCoy Major: Latin American Studies Information exchange to promote tax transparency is being relied upon to repatriate lost tax income and regulate global finan ce This case study explores the U.S. Panama Tax Information Exchange Agreement (TIEA) which was signed in November 2010 My thesis addresses why Panama negotiated and implemented a TIEA with the U.S. which represents legally enforced bank secrecy. It explores the implementation process and associated challenges at the micro level from the Panamanian perspective. T his evaluation analyze s how such agreements promote information exchange between two jurisdictions with di fferent political cultures and economic objectives as well as conflicting tax codes designed to promote divergent national interests The interviews provide a Panamanian perspective of the TIEA to address its implications and significance for Panama. They offer insight into the challenge of changing accepted business practices in a n economy that employs legal norms contrary to the interests of larger economies. This case serves as an example of the ongoing changes in
12 international tax administration and enf orcement initiated by the O rganization for Economic Cooperation and Development (OECD) and large, developed economies. I have concluded that the U.S. Panama TIEA was implemented to achieve removal from the OECD Gray List obtain U.S. Congressional approva l of the Panama free trade a greement and to foreign invest ors by introducing greater legal certainty Similar to other tax treaties that have recently emerged, the TIEA imposed new legal standards on Panama to exact tax info rmation to deter tax evasion thereby strengthening the business environment
13 CHAPTER 1 INTRODUCTION On November 30, 2010, the United States and Panama signed the U.S. Panama Tax Information Exchange Agreement (Brand et al., 2010) Broadly defined, a tax information exchange agreement (TIEA) is a legal instrument that allows for the mutual exchange of tax related financial information between countries irrespective of domestic laws. This agreement grants authorization to Panamanian authorities to respond t o requests from U.S. authorities for information related to tax administration and criminal tax investigations. Panamanian authorities may also request tax related information from the U.S. The TIEA was a landmark for Panama, a country that ha d opposed suc h information sharing agreements by adhering to the strict bank secrecy laws embedded It was alleged that s uch secrecy allowed for the commission of crimes related to tax evasion, money laundering and other fraudulent inter national financial practices ; yet it also development as an international financial center (Arce, 2009) Increases in banking oversight and tax law enforcement precipitated vocal criticis m of offshore financial centers considered to be tax havens. International financial regulation has become a subject of debate as a result of the global financial crisis. Many countries particularly those with developed economies, have been trying to bala nce their budgets by reducing debt and increasing income to strengthen their national financial position (Batker et al., 2009) R epatriating revenue tax base has been looked to as one approach to ameliorate this situation. The U.S Panama TIEA was negotiated and implemented within this context This raises questions about whether such agreements are designed to promote transparency or
14 assist developed countries in broadening their tax base s This uncertainty regarding the intended purpose behind the U.S. TIEA may have important consequences for Panama. Problem Statement The recently implemented TIEA with the U.S. is significant for the Panamanian banking sector given its tradition of bank secrecy laws leg al norms and financial practices T his study will investigate what motivated Panama to enter into a TIEA with the U.S and examine the legislative implications for Panama. This evaluation will assess the value of such international tax agreemen ts in facilitating information exchange by analyzing the limitations and challenges I hypothesize that Panama entered into a TIEA with the U.S. to protect its economic interests and reaffirm its political relation ships with those nations that conduct significant business with Panama. Significance T ax treaty proliferation has attracted scholarly attention to its impact on the global business environment. This case study addresses a particular style of internationa l tax agreement that has been implemented by the U.S. with great frequency and increasingly by other countries While considerable research has analyzed financial infrastructure and its role as a tax haven, the impact of the TIEA and its divergen explored in depth. Drawing on the perspective of professionals operating in Panama will be informative concerning the effect on the local business environment and in d eveloping an understanding of this ag reement I ts debated role in promoting international financial regulation is significant given its position within a larger debate about international taxation in a globalized economy. Countries are confronting the challenge of how to
15 enforc e tax laws particularly on mobile capital, without making their tax codes inhospitable to business activities or violating the sovereignty of other nations How the U.S. Panama TIEA is enforced relationship w ith its foreign clientele who comprise a significant component of private sector activities Furthermore, t Panama FTA implies that additional obligations and standards are emerging for those countr ies that want to become influential legitimate players in the global economy An Overview of Global Financial Regulation & International Taxation O ffshore finance and global capital movements ha ve become increasingly complex with advancements in technolo gy and economic liberalization. The volume of transactions and global capital movements valued in U.S. dollars often exceeded $3.2 trillion daily according to 2010 figures (Jackson, 2010) Such vast movements have commanded the attention of policymakers worldwide Financial regulation has increased substantially since 9/11 with the implementation of the U SA PATRIOT Act, which allows for stringent regulatory measures and increased reporting requirements to stem the monetary suppl y availa ble for terrorist financing (Yates et al., 2011) Specifically, Section 311of the PATRIOT Act set a new precedent in regulation by allowing the U.S. launderi (U.S. Government Accountability Office, 2006 p. 3) In response, the Treasury may impose restrictions on U.S. financial institutions by prohibiting them from opening accounts or transacting with correspondent banks in foreign jurisdictions t hat may foster money laundering (U.S. Government Accountability Office, 2006) Some countries have begun to implement similar tactics in their financial dealings with those countries identified to be tax havens.
16 A new regulator y mandate has emerged in response to the global financial crisis Policymakers and government leaders, primarily in developed countries, have begun to label tax havens as countries that deliberately undermine the n ational welfare of high tax countries Pol itical pressure has intensified considerably since the global financial crisis in 2008. At a meeting of the G20 1 (Ernst & Young, 2010) At this meeting, government leaders of the G20 discussed the possibility of invoking sanctions against those countries considered to be uncooperative tax havens based on their reluctance to share information and their continued resistance to transparency initiatives (Gravelle, 2010) The Organization for Economic Development and Cooperation ( OECD ) 2 along with the leaders of the largest developed economies, has targeted the elimination of tax evasion as a key issue on its agenda. This is also e vident in the domestic political debate of G20 member countries such as the U.S., where legislation such as the Stop Tax Haven Abuse Act, the HIRE Act and FATCA 3 have emerged in recent years to reduce tax evasion (Gravelle, 2010) The repatriation of tax revenue has become a primary 1 The Group of Twenty, or G20, is a forum for international cooperation on the aspects of the international major advanced and emerging economies. The objectives of the G20 include policy coordination, the promotion of financial regulations and the creation of a new international financial architecture. See http://www.g20.org/en/g20/what is the g 20 2 The Organization for Economic Cooperation and Development (OECD) is a forum where the governments of 34 dev eloped countries work to promote economic growth, prosperity, and sustainable development. The OECD provides a setting where governments can compare policy experiences, seek solutions, identify good practice and coordinate domestic and international polici es. Core leadership is comprised of the U.S. and European Union member states. See U.S. Mission to the OECD: http://usoecd.usmission.gov/mission/overview.html 3 Each of these legislative i reporting requirements, for both corporations and individuals, pursuant to their tax obligations in the U.S. Although the Stop Tax Haven Act failed to pass Congress upon int roduction in 2009, the HIRE Act and FATCA have subsequently introduced new reporting requirements for revenue collection and tax law enforcement, placing a greater burden on international financial institutions dealing with U.S. clientele (Gravelle, 2010)
17 objective a goal that is predicated upon tax haven transparency ( Figure 1 1 ) These programs have resulted in a proliferation of tax treaties and tax information exchange agreements. These policy in struments are increasingly viewed by governments as tools to introduce transparency, uniformity and balance into inter national tax policy. International taxation has not evolved to accommodate changes in the global economy. Because tax laws are nationally based, their enforcement is restricted to territorial and national boundaries in most cases. The exception would be the United States and other countries that have adopted a global or worldwide tax system rather than a territorially based tax system. The U .S. taxes its citizens and corporations globally, regardless of their country of residence This is a key distinction because most countries that employ a worldwide tax system tax their residents and income globally based on their residency sta tus Because no international tax law s exist to cover all jurisdictions, inconsistencies and enforcement challenges arise. International finance and foreign investment promote the fluidity of mobile capital; however the taxation of this capital is difficu lt to determine once it departs its original domicile. Questions arise as to which tax laws govern this capital, if any, and whether the society which generated this capital receives the social benefits paid for by taxation (Jack son, 2010) Intense global competition has begun to affect how companies and individuals manage their tax burdens to reduce costs. Tax minimization strategies have become low tax jurisdictions (Ernst & Young, 2010) As capital has become increasingly mobile, the ability for countries to capture tax revenues has become a central focus of an
18 international tax policy debate How to implement effici ent, competitive yet sustainable tax regimes without creating an onerous business environment has become a formidable challenge for countries in the age of globalization. The inconsistencies and complexities of national tax policy have made it difficult to administer and enforce tax laws. International taxation is a field that is experiencing a great deal of debate and controversy as countries decide how to maintain and boost their revenue sources within a globalized financial system. Sovereignty, Tax Compe tition and Transparency: A Contemporary Debate How to regulate mobile capital and ensure that states are receiving due compensation through taxation is intimately tied to sovereignty, a subject that has been nteraction of tax systems can have effects (OECD, 1998) The use of tax incentives to attract businesses to a country has been discussed as a key component of national tax policy, an area in which countries can compete against one another for foreign investment (Vlcek, 2008) Hines (2004) qualifies this their tax system to fit circumstances and opportunities, and as a consequence, tax regimes exhibit considerable diversity. asserts that international taxation has the capacity to influence the behavior of firms and individuals. These rules impact tax p lanning strategies, business strategies and have the potential to divert large amounts of capital in the form of foreign direct investment based on how these policies are articulated (Hines, 2004) From a business perspective, tax havens introduce competition and prevent governments from over regulating global capital. Multinational corporations have incorporated tax havens into their tax planning strategies by realizing their profits in
19 these jurisdictions and locating subsidia r ies within their territorial boundaries T ax (Gonzalez et al., 2011 p. 42) However, these offshore financial centers (OFCs) often derive their benefits from weaker regulatory ov ersight which translates into lower administrative costs. Such a cost advantage does not contribute to best business practices (Gonzalez et al., 2011) Jeffrey Owens, Director of the Center for Tax Policy and Administration of the OECD, offers a similar pe governments forcing them to continually review their tax system to ensure they provide (Ernst & Young, 2010) But he also explains that transparenc y and disclosure are critical to realizing the benefits of tax competition. Palan et al. (2010) and Shaxson (2011) describe tax differentials as harmful policies that distort glob al economic flows. They introduce a moral argument into the debate by suggesting that low tax jurisdictions encourage wealthy and high net worth imbalance in global welfare by disproportionately shifting tax burdens from the wealthy to the middle and lower classes. This argument has been expanded upon by organizations such as the Tax Justice Network (TJN) 4 and Global Financial Integrity (GFI) 5 (2012) These groups have connected tax evasion to the erosion of economic growth, the exacerbation of poverty and other consequences connected to social and 4 Tax Justice Network (TJN) is an independent organization launched in 2003. It is dedicated to high level research, analysis and advocacy in the field of tax and regulation. They work to analyze the role of taxation and the h armful impacts of tax evasion, tax avoidance, tax competition and tax havens to encourage reform. See TJN website at: http://www.taxjustice.net/cms/front_content.php?idcata rt=103&lang=1 5 Global Financial Integrity (GFI) is a program of the Center for International Policy, a think tank in Washington, DC. GFI promotes national and multilateral policies, safeguards, and agreements aimed at curtailing the cross border flow of illicit financial flows by conducting research and producing policy reports in promotion of this end. See GFI website at: http://www.gfintegrity.org/content/view/14/127/
20 human rights. TJN (2012) similar to Palan et al. and Shaxson, appeals for a more transparent, equitable approach to taxation to promote compliance. Whether the proliferation of tax treaties and TIEAs stems from efforts to increase transparency or more efficiently levy taxes is open to debate. Subtle Differences: Avoidance & Evasion Embedded within the conflict over the legitimacy of tax havens enhancing competition is the distinction between tax avoidance and tax evasion. Tax evasi on is the act of tax avoidance when tax should have been levied, or mo re simply, it is a violation attempts in any manner to evade or defeat a tax imposed by this title or the payment thereof shall, in addition to other penalties provided by la ( 26 U.S.C. Â§ 7201 ) This applies to foreign holdings by U.S. citizens that they fail to report to the Internal Revenue Service (IRS) and it is one of the primary problems that arise in Panama (Szarmach, 2010) Contrary to Panamanian law, tax evasion is a criminal offence based on U.S. code. Because the evasion of U.S. taxes is not a criminal offence in Panama, these acts go unpunished while the U.S. loses tax revenue. The distinction between evasion a nd avoidance can be difficult to define. avoidance, implying the existence of a n ethical element The OECD states that tax authorities are not authorized to make such a distincti (OECD, 1987 p. 16) Corporations and individuals may practice tax avoidance through the use of tax havens or other strategies (Morriss, 2010) While these practices are not new (Hines et al., 1990) some argue that these practices have become abusive given
21 the magnitude of capital diversion that has resulted (Pala n et al., 2010; Shaxson, 2011 ; Tax Justice Netw ork, 2012) avoidance is evolving Andrew Witty, the Chief Executive of GlaxoSmithKline, captured this sentiment in a 2011 interview: "One of the reasons why we've seen an erosion of trust broadly in big c ompanies is they've allowed themselves to be seen as being detached from society and they will float in and out of societies acco rding to what the tax regime is" (Channel 4 News, 2012) Aggressive reallocation strategies are in creasingly viewed as ethical violations rather than expressions of strategic tax planning. Tax Enforcement & Compliance: OECD to Global Initiative Tax enforcement initiatives have increased in recent years due in part to the OECD In its report, Harmful Tax Competition: an Emerging Global Issue, the OECD defined harmful tax practices as those arising from aggressive tax avoidance and the provision of bank secrecy to enable tax evasion. The report called for transparency and effective information exchange to combat these harmful practices, which led to the creation of a new OECD initiative (OECD, 1998) Witherell suggests that the OECD Initiative to Combat Harmful Tax Practices, in conjunction with other policies attem pt s to increase transparency by reducing the abuse and financial risk introduced into the financial system by OFCs lacking strong supervisory bodies. As a result, OFCs are reforming their regulatory practices, and they are recognizing that complying with t hese international standards is in their long term best interest s (Witherell, 2002) However, Vlcek (2008) views this international pressure as an attack on sovereign state s. Antoine (2010) has described this endeavor as a disingenuous attempt by developed nations (i.e., OECD member states) to recoup tax revenue by
22 undermining the legal principles of confidentiality and trusts in the name of combating mo ney launderin g The prevention of money laundering has been used as a pretext to counteract a weak legal position on tax issues according to Antoine and has enabled developed countries to frame the debate using accusations of illegal financial practices (2010) tax havens (Elsayyad, 2012) which initially focu sed on improving transparency and exchange of information for tax purposes, has evolved into a global initiative to implement standards in these areas and is carried out through the Global Forum on Transparency and Exchange of Information for Tax Purposes, (2010 p. 1) With the expansion of this initiative, other international institutions and regulatory bodies have undertaken new programs to confront tax havens and tax evasion. T he recent G20 crackdow n and OECD initiative to combat unfair tax practices has yielded a proliferation of tax treaties and TIEAs (Elsayyad, 2012) ( Figure1 2 ) (Figure 1 3) It is unclear whether government authorities intend to strongly enforce such agreements to routinely prosecute violators and recoup profits or whether this is a policy gesture designed to appear effective before the public. However, statistics suggest that the U.S. has chosen to pursue tax evasion aggressively. A U.S. GAO Report fo und that 5,111 requests for information between the U.S. and a foreign jurisdiction were completed: 4,217 originated abroad and the U.S. initiated 894 requests (U.S. Government Accountability Office, 2011) Arce claims that tax treaties have assisted tax authorities by enabling the prosecution of individuals hiding their assets from U.S. tax
23 authorities. Using information acquired through the U.S. TIEA with Bermuda, the IRS and the U.S. Department of Justice recently succeeded i n achieving the criminal conviction of a U.S. citizen for tax evasion ( IFC Review, 2010) Without the information obtained through the TIEA, these agencies would not have had sufficient evidence for a conviction (Arce, 2009) The recent emergence of many of these tax treaties which are designed to foster tax compliance suggests that their performance and effectiveness will continue to be questioned until they can be further assessed in practice. Review of the Literature The Purpose of Tax Treaties The intended objectives of tax treaties and international tax agreements appear to be straightforward Barthel et al. ( 2010 ) explain that t hese agreements are designed to facilitate information exchange for tax collection purposes an objective which affords them the ability to deter fiscal evasion The OECD concurs and adds that tax treaties (OECD, 2012) However, these views only convey the per spective of tax treaty proponents, namely, OECD member states and G20 countries. Such assessments fail to consider the highly political nature of these agreements as well as the political consequences these agreements may carry beyond the scope of tax poli cy. The U.S. Government views tax treaties as a mechanism through which to ensure that the tax laws of each nation party to the treaty are appropriately applied and enforced (U.S. Government Accountability Office, 2007) To enf orce its worldwide tax regime, the U.S. often requires records from foreign based financial institutions to verify taxpayer information and reporting (U.S. House Joint Committee on Taxation, 2009) Thus, the U.S. considers tax treaties to be tools that enable the enforcement of U.S. tax
24 laws abroad. Antoine (2010) rejects this approach By advancing an argument based on the principles of sovereignty embedded in international law, she contend s that countries should not be expected to enforce the tax laws of another nation or be subject ed to punishment for fail ing to do so. She asserts that m ost jurisdictions are reluctant to compromise financial privacy for the administration of another countr which is consistent with customary international law a reasonable argument considering the cost implications of tax law enforcement (2010) Such divergent interpretations of the legality of tax law enforc ement abroad highlight s an important aspect of the controversy over tax treaties. Tax treaty objectives may vary from their defined application based on the interpretation of the agreement and the policy objectives of those countries that are a party to th e treaty. Such discrepancies suggest that t he purpose of these tax treaties may extend beyond tax ation Sullivan (2007) suggests that the U.S. is trying to invade the financial privacy of its citizen s. Meanwhile, t he OECD (2011) claims that these agreements introduce more transparency into the global business environmen t Arce (2009) further very of tax and financial information is the most effective way to secure the evidence required to reach a conviction for fulfilled by the TIEA with Panam a TIEA s have enable d the U.S. Government to obtain the case evidence for use in the prosecution of criminal offenses related to taxes, similarly to what occurred in Switzerland with UBS. 6 U.S. targeting of offshore accounts 6 The U.S. launche d a criminal investigation into UBS in 2008 when it was discovered that the bank had been selling a structured tax evasion scheme to many wealth American clients through its cross border services division. UBS consciously concealed this information from U. S. tax authorities (Pacenti, 2008)
25 cases still awaiting trial and many (Saunders, 2011) Much of the literature fails to acknowledge the political nature of tax treaties and instead focus es exclusively on their technic al application by addressing tax related administrative problems. Overlooking the policy objectives of those countries pursuing tax treaties limits the value of such analyses and fails to explain the broader issues that are precipitating these changes in i nternational tax policy. Effectiveness of Tax Treaties & TIEAS in Tax Enforcement The cumbersome government to government information exchange process relied upon by tax treaties may limit their effectiveness in promoting transparency Keen and Ligthart ( 2004) characterize information sharing as an administrative approach to reforming international tax policy. Although this strategy can be effective, the y claim that barriers to information collection, costs of compliance, and political challenges may weake n the outcome. Michaels and Yates ( 2009) believe the usefulness of tax treaties to be minimal given the number of resources that must be exhausted to obtain tax information prior to invoking them Yates et al. (2011) c laim that the number of actual information requests filed, when compared to the number of tax treaties in place is o verwhelmingly small They assert that other U.S. legislation such as the Hire Act and FATCA, require s m ore stringent reporting from inter n ational financial institutions rendering TIEAs rather ineffective by comparison (Yates et al., 2011) The ability of tax treaties to address tax policy problems is clearly questionable. However these critics (Browning, 2009) Subsequently, the U.S. has indicted Wegelin a historic Swiss financial institution that opened its doors in 1741, for enabling U.S. citizens to evade taxes. This is the first foreign financial institution to be indicted by the U.S. Government. The bank was rapidly sold, but the U.S. continued to p ursue recourse with 11 other Swiss financial institutions for similar practices. The U.S. is actively prosecuting tax crimes and making an example those who enable tax evasion (Bachman, 2012)
26 fail to address why countries continue to pursu e these agreements if they are so fraught with potential enforcement problems and challenges Information Exchange May Not Deter Tax Evasion Tax information exchange procedures contained in tax treaties continue to be criticized for their inability to red uce tax evasion. TJN asserts that information sharing by request is a fruitless exercise (2012) Offshore lawyers from the Bahamas, Caymans and similar jurisdictions claim that TIEAs have failed to effectuate the antic ipated crackdown on havens. They proclaim that the myriad of trusts and other legal vehicles available would continue to effective ly protect hidden wealth from taxation (O'Hare, 2011) Critics including Yates et al. (2011) and TJN (2012) attribute the se limitations to the specificity required for information requests and the need for government officials of two countries to mutually depend on one anothe r which can further complicate the process effective information exchange. Such a standard, he explains, demands automatic information exchange to be permitted in some cases (2011 p. 481) TJN (2012) Palan et al. (2010) the OECD (2012 ) and others have increasingly promoted automatic information exchange. McIntyre (2011) elaborate s on this process by explaining that b anks required to collect client data would share this information with government authorities if the client was a non residen t Such a process, rather than a formal, bureaucratic procedure, would then require authorities to authorize information exchanges with a non indicates info rmation exchange might be the only way to stop evasion, which would require (Gravelle, 2010 p. 30)
27 Jeffrey Owens of the OECD asserted that automatic information exchange was the most efficient way to eliminate evasion and ensure compliance in his congressional testimony before the U.S. Senate in 2007 (U.S. Senate Committee on Finance, 2007) While these proposals may improve upon the information exchange model implem ented in existing tax treaties, they suggest that the existing treaty model fails to achieve its purported goals. Yet, countries continue to invest significant resources into their negotiation and implementation suggesting that other issues may factor into the process which have not been considered. A Bilateral Approach to a Multilateral Problem Most tax treaties are bilateral, reducing their scope of tax enforcement. Their limited aim in enhancing tax harmonization between two jurisdictions implies that m any are needed to effectively promote a particular objectives related to taxation. Rawlings suggests that t his bilateral tax treaty trend has decreased the potential for effective regulation and has actually strengthened international so vereignty and tax competition (2007) Both he (2007) and Brooks (2010) suggest that a multilateral approach would be preferable claiming that it would enable countries to maintain tax system s appropriate for their national interests rather than reducing taxes to compete with other jurisdictions. A multilateral tax treaty would advance tax cooperation by reducing abusive tax arrangements and prom oting an efficient distribution of tax burdens among residents according to Brooks (2010) She proposes that e nhanced cooperation would reduce high compliance costs and other burdens. Furthermore, it would reduce inves tment barriers and ensure that investments are made based on expected returns rather than a favorable tax regime, implying a more efficient allocation of resources overall (Brooks, 2010) This approach overlooks the fact that t ax
28 treaties and TIEAs continue to evolve. Thuronyi briefly mentions this challenge suggesting that it may result in a network of TIEAs with inconsistent wording and scope (2010) Rather than diminishing the complexity of international tax policy, bilateral tax agreements have the potential to exacerbate the problem and impose additional barriers to tax transparency. The Tax Justice Network (2012) has advocated for a broader multilat eral approach to tax compliance TJN proposes that the United Nations should create a panel to determine which states are considered compliant with the principles of fair tax practices and that it should deny recognition of any country that fails to comply The TJN has also suggested that the IMF and World Bank should include tax compliance in their country reports (Gravelle, 2010) This policy approach may be difficult to incorporate at the international level, limiting its eff ectiveness. However, these scholars acknowledge an alternative to the existing bilateral tax treaty model and realize the need to address a broad array of policy interests, not only those of tax treaty proponents. Altering the bilateral nature of tax treat ies could mitigate associated political issues, such as differences in bargaining positions. Why Sign a Tax Treaty? Coercion or Negotiation I nternational political pressure has been a theme in this movement to negotiate and expand the network of internatio nal tax treaties, calling into question the credibility of these agreements and the legitimacy of their stated purpose. Vlcek (2008) has criticized t he campaign to pressure tax havens into compliance as a manipulative approach to enforce tax laws often against the national interests of one of the signatory members of these agreement s Sharman (2009) achieve policy goals. He asserts that
29 t heir effectiveness is based on the potentially damaging effects upon the reputation of the country under scrutin y In the case of Panama, it would seem this approach succeeded. Because e component of its economy such attacks jeopardize d its legitimacy and business prospects, forcing it to negotiate tax treaties (Duarte, 2008) Because this movement has been promulgated by developed economies, scholars and pol icy advocates have criticized this strategy as being undiplomatic and antagonistic towards developing economies, especially those highly dependent on the financial activity generated by portfolio inflows. The potentially high price of noncompliance has be en a strong motivator for committing to these agreements. Although often considered to be against national interest s in some cases (Morgan, 2012) many countries are negotiating tax treaties at a rapid pace. Panama is no e xception. Gonzalez and Schipke (2011) explain that the stigma attached to offshore financial centers and tax havens, which is exacerbated iness if the jurisdiction is trying to abide by international standard s Barthel et al. (2010) findings in their study of tax treaties and their influence on FDI stock confirm this statemen t These scholars broaden the tax treaty discussion by acknowledging that tangential economic and political objectives play significant roles in the treaty negotiation process Continuing to evaluate these issues would offer a deeper understanding of the emergence and relevance of tax treaties. Bargaining power, intent and other factors shape treaty negotiation s and the resulting tax agreement s Pistone (2010) provides an insightful tax treaty analysis from the perspective of developing countrie s, justifying why such agreements may only be
30 beneficial to the developed countries prompting their negotiation His analysis is Pistone states that tax treaties negotiated b etween a developed country and a developing country generally do not promote the policy interests of the latter. Given disparities in bargaining position, such treaties are often modeled on the tax treaty model or preferences of the developed country. Freq uently modeled after the OECD tax treaty framework, he establishes that this tool has become the rules of global tax law, but its application to developing countries seems to b e a major source of unfairness in taxation (Pis tone, 2010 p. 437) Because the OECD has established a body of soft law in international tax policy, these agreements promote an unbalanced approach to tax policy that is not necessarily endorsed by the international community. This argument has been cite d by several Panamanians (Gmez Arbelaz, 2010 ; Morgan, 2011) They and others have vocally advocated against the TIEA claiming it is an ill the U.S. by allowing it to enforce tax laws on Pan amanian soil They further claim that it violat es international law and the principles of sovereignty which are cited by Antoine (2010) and Vlcek (2008) as fundamental issues in t his contemporary tax policy debate. These valuable perspectives broaden the view of tax treaties and provide greater insight into their potential implications. Such concepts allude to a broader debate within international tax policy about how to allocate t ax rights in the global economy. T ax treaties and TIEA s are designed to enforce existing tax laws and policies, an objective shared by the U.S. Government and the leaders of other countries S ome scholars (Palan et al. 2010 ; Shaxson, 2011) distill
31 the deb ate into one over tax competition versus tax harmonization or cooperation implying that tax havens distort the international financial system. Kemmeren (2010) expands the conversation claiming that tax allocation prin ciples require revisio n Rather than disputing the efficacy of such agreements, he notes that these agreements enforce tax principles developed starting in the 1920s global economy Particularly relevant is Kemme disapproval of the U.S. approach to tax policy that imposes tax burdens on the basis of citizenship or nationality. He claims such policies are not appropriate because these political and legal relationships do not generate income or capital formatio n. Overall, he calls for tax reform to modernize the existing international tax system in order to tax capital based on its /or physical infrastructure to establish and (Kemmeren, 2010 p. 311) H is argument proposes that policymakers should review their tax codes and their underlying principles rather than negotiating a plethora of agreements t hat fail to address the modern financial landscape. Such an analysis reinforces the argument that tax treaties are ineffective instruments that attempt to extend the reach of tax law enforcement without consideration for their broader consequences. The Sig nificance of Implementing Tax Treaties The significance of successfully implemented tax treaties may send signals about ional rules and norms. Elsayyad (2012) states that c ommi tting to a TIEA or tax treaty implies that the country has committed to tax transparenc y development assistance influenced the likelihood that a haven would enter into such an
32 agreement in creasing the possibility that they would have signed a TIEA (Elsayyad, 2012) McIntyre ( 2009) cautions that tax havens and other uncooperative jurisdictions are receiving undue credit and praise for their willingness to ne gotiate such agreements because these actions imply that these jurisdictions are now transparen t This assessment may carry validity given that t he OECD report on Harmful Tax Practices has outlined a number of punitive measures to induce tax havens to com ply with tax treaties (OECD, 2011) Basically, a foreign country could discriminate against income generated in tax havens by levying a high tax or it could pressure financial institutions to avoid transacting with havens (Elsayyad, 2012) Such consequences could be damaging to a tax haven country that is likely to be highly reliant on foreign investment flows and its international reputation prompting them to enter into a tax treaty without intendi ng to encourage strong enforcement Similar discriminatory principles have been noted by other scholars (Lang et al., 2010 ; Morriss, 2010) Pistone (2010) and Thurony i (2010) note that such treaties may not promote the interests of developing nations, and their interests would be better served to avoid such agreements, both from a cost perspective and the requirement to cede taxing authority to foreign entities Many countries view these agreements as a necessary evil, sacrificing national interest to avoid costly economic consequences. Such analyses offer a valuable dimension to the tax treaty debate, but they fail to explore many of the issues encountered by developing cou ntries and those non OECD member states pressured to comply to avoid political and economic consequences. These perspectives are valuable, however, because they demonstrate that tax treaty
33 proliferation is not solely based on promoting tr ansparency, but that their political and financial implications can be significant. Impact of Tax Treaties & TIEAs: Overlooking the Domestic Perspective There is a vast body of literature about the use, negotiation and implementation of tax treaties. The e ffectiveness of tax treaties and TIEAs remains unclear and their utility will continue to be debated as more agreements of this type enter into effect. Critics and proponents tend to aggregate these agreements in their analyses, view ing them with a broad, macro perspective. T hese studies have not evaluated th eir individual effects on the jurisdictions that are signing these agreements in great detail. Because these treaties are controversial, and in some cases, contradict the laws of the country that is a p arty to the agreement, it is important to understand their effect from a micro perspective as well. Using my case study, I am attempting to contribute greater insight into the impact of these treaties on the jurisdictions that are signing them with the U.S ., especially in cases where those countries are reluctant or have legal codes that conflict with such treaties. Understanding their negotiation, implementation, and administration from the perspective of a treaty member that did not promote the OECD initi ative against tax havens would provide useful knowledge in assessing the political, economic and legal implications of these treaties. M y study offers unique insight into the tax agreement implementation process, adding a domestic, micro perspective that is frequently overlooked in the literature. Although the findings may not be extrapolated to all TIEA s or tax treaties, the c ase will provide a comprehensive assessment of the complex challenges and political issues indirectly brought about by tax treaties in this global policy movement This analysis will contribute a greater understanding of the issues that may arise during negotiation,
34 implementation and the challenges posed therein by countries of diametrically different tax systems and tax policy objec tives. Analyzing the political, economic and legal consequences for Panama, a country pressured into negotiation will offer greater insight into the effectiveness of these tax agreements and how they are aggressively changing the legal norms related to in ternational tax law enforcement. Research Methods I used a case study approach to analyze the TIEA as an example of a broader international tax policy movement that increasingly appears to be an expression of regulatory compliance in the post financial cr isis global economy. The foundation of this topic was derived from a law school seminar in which I participated with Professor Fletcher Baldwin, International Financial Crimes. Through this course, I acquired the basic research skills and knowledge to unde rstand the legal dimension of tax crimes and tax evasion. I familiarized myself with international financial regulatory agencies and organizations involved in targeting financial crimes. I conducted political and economic research on Panama, particularly i n connection with the U.S. Panama FTA, to With this preliminary foundation, I conducted field research in Panama City, Panama to understand the domestic interpretation of th is agreement, its implications and the political debate surrounding its implementation. Ms. Victoria Figge Cederkvist, a financial compliance and risk consultant, and the U.S. American Chamber of Commerce in Panama assisted me in identifying key informants I used snowball sampling to identify additional key informants with whom I conducted semi structured interviews. A questi on guide has been included ( Append ix A ); however, I framed each discussion to draw upon the expertise of the informant being intervie wed. A different question set was
35 owever, in many cases the informants drove the discussion with little guidance on my part. Interview participants included a U.S. State Department Foreign Service Officer, a Panamanian journalist, financial consultants, economists, lawyers, and tax specialists (Appendix B). and deeper level. I built on the information gather ed by conducting research using legal sources, accounting publications, business journals, press articles and other trade journal literature to produce a broad based policy assessment for the purposes of this case study I have used this information and da ta to analyze the case of Panama within the global tax policy debate while addressing the local political and cultural dynamics that shaped the emergence of the TIEA. Organization This study is comprised of five chapters, including this introduction. The second In this section, I elaborate on the relationship that developed between the U.S and Panama over the Panama Canal and the special role that the U.S. played in Panama nian politics. Through this discussion I also highlight the political culture of business practices. g the political terminology associated with financial practices in the offshore world as well as s of sovereignty,
36 bank secrecy emergence and its role in this environment. The fourth chapter presents a case study of the TIEA that Panama signed with the U.S. In this chapter, I analyze the text of the TIEA, the political debate surrounding its implementation, and address the question of why Panama entered into this agreement. The conclusion will summarize the findings questions as to the potential implications based on its relationship to the international debate over tax policies and financial regulation.
37 Figure 1 1. Increasing Amount Global Asset and Liabilities Holdings in Offshore Financial Centers (Gonzal ez and Schipke, 2011) Figure 1 2. Proliferation of TIEAs from 2004 to 2010
38 Figure 1 3. TIEAS & Double Tax Conventions Signed between G20 Summits based on initiative to reduce tax evasion and promote tax transparency (OECD, 2012 c )
39 CHAPTER 2 LOPMENT: A POLITICAL & ECONOMIC OVERVIEW The TIEA and the Panamanian reaction to its implementation are grounded in and its historic relationship with the U.S T he TIEA has been characterized as an expression of U.S. interf erence in Panamanian development similarly to past historic events O pponents have argued that this agreement is an affront to national sovereignty and contrary to the interests of Panama, drawing parallels between it and the first treaty that handed the C anal to the U.S. Understanding the TIEA may provide insight into a new relationship that has evolved between the U.S. and Panama, one that treats the nation as a business colleague rather than a partner This chapter discusses the political and economic hi story of provides the insight into understanding why Panama agreed to sign a TIEA with the U.S. Understanding t he U.S. relationship with Panama and its role in shaping Panamanian political culture are essential to contextualize Panamanian reaction s to the TIEA. Historically, U.S. influence in Panama was motivated by protection and defense of the Canal. American presence and culture contributed to a service the U.S. indirectly facilitated its development as an international banking center U.S. involvement, although viewed as interference at times, equipped Panama with the infrastructure and economic activity to propel itself into becoming the regional cente logistical hub. Its economic service offerings have evolved to respond to the commercial needs of this industry, generating spillovers into finance, insurance and other ser vice
40 offerings. The tax treaty movement to promote tax transparency, of which the TIEA is a attrac t business to these industries because a negative image could result in economic losses reputation, making it essential to understand the business practices that pre cipitated its negotiation. A Political History of Panama: A Special Relationship with the U.S. The Republic of Panama emerged through a series of negotiations and political maneuvering between the U.S. and Colombia over the creation of a canal through the isthmus (Diaz Espino, 2001) (Appendix C) Panama declared independence from Colombia in November 1903 with U.S. encouragement and then became a protectorate of the U.S. under the Hay Bunau Varilla Treaty The Treaty establishe d permanent U.S. presence and influence in Panama which continued through the turn of the 21 st century (Bsquez, 2004) T he mile (wide) b y fifty mile (long) strip of land (Zimbalist et al., 1991 p. 22) The U.S. purchased the rights to the Canal from the French, as a part of the treaty negotiations, and took over construction of the Canal. Within the Canal Zone, a small Ame rican community developed on what was considered to be U.S. territory within the boundaries of another sovereign, Panama. The U.S. would have sole operating rights of the Canal upon completion until it was returned to Panama at the end of 1999 (Zimbalist e t al., 1991) (Zimbalist et al., 1991 p. 22) the Hay Bunau Varilla Treaty has been characterized as an expression of the
41 Monroe Doctrine and U.S. expansionist tendencies in the region It has also been considered seeking to benefit from the construction of the Panama Canal (Bsquez, 2004; Fuentes, 2011) N egotiated and signed in Washington, DC, it was neither formally discuss ed nor approved by any Panamanian authorities prior to its signature. Panamanian national sentiment considers the manner in which this treaty was negotiated as deliberate and deceptive (Gmez Arbelez, 2010) According to Zimba list and Weeks offenses to national pride associated with U.S. occupation of the Canal Zone emerged (1991 pp. 16 17) Article 136 of the 1904 Panamanian C ons titution granted the U.S. the right to intervene in Panama if the peace or constitutional order were threatened This provision wa s maintained in later versions of the Panamanian C onstitution, with some amendments, until the early 1990s (Bernal, 2004) Construed by some as interference in national politics, Zimbalist and Weeks (1991) suggest that this status conferred advantages on the ruling elite The elite commercial class enjoyed political power but they lacked the economic authority to fully consolidate their control over Panama Therefore, the y legitimacy, protection, and economic income (Zimbalist et al., 1991) The U.S. maintained an active presence in Panama until the Canal was returned to the Panamanians on December 31, 1999 in accordance with the Carter Torrijos Treaty (Sullivan, 2011) American control over the Canal Zone included construction of U.S. facilities and military b ases in the country to ensure control over the Canal and to
42 exploit its strategic location. Panama experienced an economic boom during World War II (WWII) as the U.S. increased its military expenditures. Global shipping routes disrupted by the war began to traverse the Canal in higher numbers (Rojas Acosta, 2004; Zimbalist and Weeks, 1991) Panama was even considered a combat zone during WWII because of its relationship with the U.S. (Rojas Acosta, 2004) From Occupation and Int ervention to Exit The Panama Canal has played a central role in national politics and development since its incepti on. Its return to Panama became a n issue in local politics almost immediately after its completion in 1914. Panamanians received little direc t benefit from Combined with the striking social and economic disparities between the Zone and the rest of the country, the Canal be came a national symbol of occupation for many Panamanians (Prez, 2011) Over time, they began to view the U.S. as a colonial occupier, despite solid bilateral relations. The U.S. military presence in Panama made bilateral relations unequal and violated sovereignty in minds of Panamanians, regardless of the treaty provisions enabling it (Hornbeck, 2012 ) Mounting political pressure from Panama to return the Canal resulted in the signing of the Carter Torrijos Treaty in 1977 (Sullivan, 2011) President Omar Torrijos negotiated the terms of the U.S. drawdown in Panama with President Jimmy Carter, which marked a turning point in U.S. influence. From 1977 on, the U.S. began to train Panamanian personnel to assume Canal operations (Sullivan, 2011) The decision to return the Canal to Panama met an unwelcome reception in the U.S. Many politicians criticized the treaty, claiming that the Panamanians would not succeed in operating the Canal or that corruption would lead to its financial demise. Despite these concerns, December 3 1, 1999 marked the official end of U.S. occupation
43 in Panama and its direct influence in the country. All military bases and landholdings became property of the Panamanian government. That day marked a moment of national celebration and pride as Panamanian s were finally able to assume complete control of their country without a foreign presence on their soil for the first time in many years, even prior to U.S. involvement This sentiment was not reciprocated by the U.S. which reportedly did not send any hig h level officials to preside over the transfer of control (The Economist, 1999) Despite the U.S. exit from Panama, the Neutrality Treaty, a corollary to the Carter Torrijos Treaty, maintains the right of the U.S. to intervene if the Canal is threatened or not kept open to free and fair access by all vessels (U.S. State Department, 2001) Prior to returning the Canal, the U.S. exercised its right to intervene in Panama to protect the Canal and ensure the security of its citizens residing there by removing its economic infrastructure (Sullivan, 2011) His control of Panamanian politics was characterized by violence, murder, drug trafficking and money laundering. During the violent against the opposition. The U.S. employed economic sanctions and other tactics access to aid and international financing 1 ( IADB 2005) T he U.S. invaded Pan ama to remove Noriega from power in Operation Just Cause in December 1989 (Sullivan, 1 This is the only point in histor y when Panama suffered a financial crisis. The onset of this crisis was linked to Noriega and the banking sector was able to recover despite considerable setbacks and losses in deposits (Barletta, 2004; Zimbalist et al., 1991)
44 2011) Panama has since returned to a stable democratic form of government, but licly linked its banking sector with large scale money laundering having used the center to launder drug trade proceeds and profit Direct U.S. influence in Panamanian affairs has subsided although the countries remain close partners. U.S. Panamanian rela tions have evolved into a commercial and economic relationship bolstered by cooperation over security issues. The negotiation of the U.S. Panama Free Trade Agreement in 2007, passed by the U.S. Congress in 2011 reflects this (Hornbeck, 201 2 ) The U.S. con tinues to offer economic assistance to strengthen Panamanian institutions and counter the drug problems endemic to this transit economy (Sullivan, 2011) The negotiation of the TIEA, undertaken in this context, illustrates the new dynamic of this relationship. Panama is a sovereign and it is no longer under direct U.S. protection, although the U.S. maintains an interest in Panamanian affairs. Political Culture in Panama: The Commercial Elite The Panamanian political structure pa rallels that of the U.S. There are three branches of government including an executive, a legislative (National Assembly) and a judicial branch. Panama is a nation based on democratic principles and institutions; however, there was an interlude of military dictatorship that began in the 1960s and ended with the fall of Noriega. Since 1989, Panama has been consolidating its democracy and strengthening the necessary institutional infrastructure to promote national growth (Prez, 201 1) The country has experienced many advances since its return to democracy, but the Noriega era tarnished financial sector. Confronting and overcoming this stereotype has continued to be a challenge.
45 d itself after Noriega as a democratic, transparent society that abides by international norms and regulations has been complicated by political and institutional corruption. A ruling class composed of commercial and entrepreneurial elites sha ped and they consolidated their power through commerce (Prez, 2011) They controlled the transportation of goods, rent of property and related economic activities. This prevented th e establishment of a fully integrated economy and limited the development of labor and other popular sectors. Therefore, no social group emerged with the political strength or dominance to challenge the elite until the military dictatorship took control in the mid 1960s. Prez (2011) asserts this is part of the political economy of a transit economy. Differing from the hacienda and landowner system s political leadership derived its strength from pragmatism and oppo rtunism. According to Prez, these characteristics made the elite highly flexible and adaptive during the period in which the U.S. operated the Canal. They were able to develop alternative income generating mechanisms alongside Canal related services based on their tight social and economic networks. oriented agenda. Their welfare depended on logistics and the spillover busines s generated by the Canal. The prospect of increased economic opportunities offered by the Canal motivated and sustained their lobbying efforts to call for its return to the Panamanian people (Prez, 2011) Their
46 interests are i have been instrumental in establishing a framework to promote their interests. Panamanian Economic Development: Positioned to Become Banking Center location has shaped its history and defined the (Warf, 2002) Panama has capitalized on its geostrategic position as a s ource of comparative advantage, which resulted in the development of a service oriented economy that neglected traditional sectors such as agriculture and manufacturing (Zimbalist et al., 1991) This trajectory is distinct from other Latin American economies Panama has primarily relied on the exportation of services over commoditie s, caus ing the country to surpass its regional counterparts in many areas of commerce from the Canal and related service industries (U.S. Commercial Service, 2012) oriented economy has produced high, yet uneven levels of growth. The primary drivers of the economy discussed in the following section include the Canal, the Colon Free Zone and the internatio nal banking sector. A lthough productive these areas are not fully integrated wi th the local economy, limiting job creation and reducing fiscal revenue ( IADB 2005) According to the Inter American economy (2005) The service side is integrated with the global economy and highly competitive whereas the agricultural and manufacturing sectors remain small, relatively undeveloped and only target the domestic market. This duali ty has exacerbated income inequality and maintained high levels of poverty outside of urban centers (IADB, 2005)
47 economy. Investment in edu cation and training is needed to enhance overall growth (IMF, 2012 b ) Economics of the Canal Upon completion of the Panama Canal in 1914, a service oriented economy began to materialize as the international commerce traversing the Canal increased Due to proximity and its ownership of the Canal, the U.S. was the primary beneficiary of the transit passing through the interoceanic passageway until 2000. But as global trade ry dependence on U.S. commercial flows. Today, the U.S. and China generate 60 to 70% of Canal traffic based on trade (Autoridad del Canal de Panam, 2011) e creation of related industries and professional service offerings. Ship registration, insurance, logistics services and other spillover industries have emerged to accommodate the business attracted by the Canal. Between 2008 and 2011, the Canal contribut ed approximat ely $6.6bn Revenues from the Canal composed 7.7 and progress (Autoridad del Canal de Panam, 2011) ( Figure 2 1 ) This tre nd is expected to continue based on the Canal expansion project Traffic and income from the Canal began to decline in the 1990s because it could no longer accommodate the larger Panamax ships that many shippers began to use for cost efficiency purposes. P anama voted to expand the Canal through a national referendum in 2006 (The Economist, 2009b) The Canal expansion project has generated economic activity which helped offset the effects of the global economic downturn. The increase in traffic is expected to
48 enhance growth. The project, financed by a consortium of international financial organizations, is underway and completion is expected in 2014 at a cost of approximately $5.25bn (The Economist, 2009 b ) The expansion will nearly double the t capacity (IMF, 2012 b ) The Panama Canal Authority (ACP), the independent government agency charged with managing the Canal, estimates that the completed project will increase annual growth by 1.2 percentage points, resulting in an increase in GDP over 2. 5 times the 2005 level by 2025 (The Economist, 2009 b ) (Figure 2 2. ) Consequently, the government has discussed plans to create a Sovereign Wealth Fund, similar to that of Chile, using the profits generated by the Canal. If they succeed, this fund has the potential to strengthen framework (Economic Intelligence Unit, 2011) Unlike many political institutions in Panama, the ACP is considered to be a well managed and transparent enterprise (U.S. Commercial Service, 2012) However, this characterization does not necessarily carry over when Canal profits are remitted to the government Speculation implies that some income may be misused or in appropriately allocat ed Concerns exist that political corruption may extend to the ACP when Canal (Oppenheimer, 2011) Some have criticized P resident Martinelli administration for attempting to inte rfere in ACP management (Brannan, 2012) Whether this government agency maintains its reputation in the face of rising revenues and continues to resist any temptation exerted by corrupt political entities remains to be seen. Co lon Free Zone The Colon Free Zone (CFZ) emerged as a corollary to the international commerce traversing the Canal. The project to create the Zone began in 1948 and it
49 opened for operation in 1952 2 Thomas Lyons, an agent of the U.S. Department of Commerce strongly promoted the project which was predicted to offer advantages to the economy by increasing the level of international trade movement through Panama By using the CFZ, commercial agents could avoid complex customs and government regulations and c onnect with buyers from Latin America who often travelled to the U.S. and Europe for purchases. Th e CFZ would reduce travel time and expenses for both buyers and merchants. Additionally, sellers could warehouse their merchandise at a lower cost and these i nventories would facilitate faster deliveries. The Panamanian economy would enjoy direct benefits from the jobs created to construct and manage the CFZ, the rental income, increased business trav el to the country and other spillover effects. According to Z imbalist and Weeks (1991) the CFZ contributed to logistical hub for global commerce. The CFZ is the second largest zone in the world based on trade volumes. It is expected to move $31bn in merch andise in 2012 ( Ciudad de Panam 2012) As a free zone, its main service lines are dedicated to the re shipment of merchandise to third country destinations, especially for goods of Asian origin (U.S. Commercial Service, 2012) The CFZ has become a distribution point for large multinational corporations with nearly 3,000 companies currently operating there (IADB, 2005; U.S. Commercial Service, 2012) However, the CFZ has confronted problems with the shipment of contraband and m oney launderin g. The rules of the Z one, more lax than other parts of the economy, have attracted this illicit economic activity. T he CFZ continues to be a 2 A fr ee zone is essentially a duty free economic area within which merchants can freely move, store and repackage merchandise for distribution without paying any duties. See http://colon freezone.com/
5 0 prime location for such illegal transactions despite efforts to reduce it (U.S. State Department, 2012) Dollarization advanced its economic progress Panama has operated under a dollarized monetary system since t he Taft Agreement formalized the dollar as circulating currency in 1904 This provision was in corporated into the 1904 Panamanian C onstitution later that year (Barletta, 2004) Although the official currency is the Balboa, it is pegged to the dollar. The U.S. dollar is the only paper currency used. The political status as a U.S. protectorate. However, Panama has maintained this currency regime. Dollarization has conferred advantages and disadvantages on the Panamanian economy. The use of the do llar has been viewed as an alternate form of American imperialism due to the lack of a central bank to establish a money supply independent from that of U.S. This makes it more difficult to directly manage the economy or implement controls when required (Z imbalist et al., 1991) T exports, which are generally stable in volume and price, have prevented the liquidity problems that often arise within a dollarized economy. The dollar has engendered stability in the Panamanian economy and pro tected it from the inflation and domestic financial crises that plagued other Latin American countries. Consequently, it has not suffered the ill effects of capital flight associated with such crises (Barletta, 2004) A lack of currency exchange risk has stimulated foreign investment and increased the ease of doing business internationally (Moreno Villalaz, 2005) However, the use of the dollar aundering drug trafficking profits and income from other illicit activities (Zimbalist et al., 1991)
51 Emergence of the International Banking Sector to service the financial activity attracted by the Canal. Several legislati ve actions banking system, which was formalized i n 1970. The 1927 Commercial Code (Gaceta Oficial No. 5067 1927 ) 3 allowed firms to incorporate with few bureaucratic requirements and established the basis for t ax free offshore operations. Law No. 18 in 1959 (Gaceta Oficial No. 13766) provided for additional corporate secrecy by permitting the use of numbered bank accounts (Barletta, 2004; Zimbalist and Weeks, 1991) legal infrastructure was designed to promote the attraction of foreign capital. chief economic advisor Nicols Barletta Panama as an international serv A number of improvement projects commenced to advance this strategy including the expansion of the Colon Free Zone, Canal improvement projects, and the construction of the transisthmithian oil pipeline. Barletta has also been credited f or the creation of an international banking center (Zimbalist et al., 1991 p. 27) By issuing Cabinet Decree No. 238 in 1970 (Gaceta Oficial No. 16640) Barletta designed a system to formalize and strengthen the banking center through reorganization This legislation required banks to have a minimum level of paid in capital ($250,000), established new reserve requirements and created a new regulatory agency to oversee banks the Nationa l Banking Commission. This D ecree also strengthened secrecy laws and established 3 The Official Gazette, or Gaceta Oficial is the official reporting source for amendments to any and all Washington University Manual of International Legal Citation: Republic of Panama, available at: http://law.wustl.edu/WUGSLR/CitationManual/countries/panama.pdf
52 different licenses for banks seeking to conduct onshore or offshore operations, the lat t er conferring tax advantages. These changes strengthened the banking sector by promoting stability and secrecy to attract business (Zimbalist et al., 19 91) The banking sector has had a tremendous impact on the Panamanian economy by attracting high levels of portfolio flows and investment Growth Amidst Crisis: Current Economic Overview (WorldTrade Executive, 2002) In some respects, this phrase remains true today as Panama continues to enjoy economic progress. The Panama Canal and the Colon Free Trade Zone have made the country a co mmercial transit center from which its economy has derived great benefit. Such activities have bolstered the banking center and attracted foreign investment. The project to expand the C anal has precipitated a new wave of economic growth and investment (Brechbhl, 2007) Its relatively stable political environment since the U.S. removal of General Noriega, combined with the fact that its economy is dollarized has heightened international appeal (Grosse, 2001) The growth of the financial sector has increasing GDP, and improving overall infrastructure using foreign investment (Sullivan, 20 11) However, illicit financial practices continue to thrive. According to GFI, these activities created $3,940 million in illegal cash flows annually between 2000 and 2009 in Panama alone (2011) performance has been impressive to observe amidst a global economy that is struggli ng to recover from crisis. Sustained GDP growth 3). Since 200 3, Panama has
53 averaged a GDP growth rate of 8% (ECLAC, 2011) The economy is forecasted to grow at 7.5 % for 2012 (IMF, 2012a) If Panama achieves this rate of growth, it is anticipated to be the strongest performing Latin American economy in the coming year (Oppenheimer, 2012) The Canal expansion project is credited with much of this economic boom, however the Panamanian government has proactive ly stimulat ed as a world (IMF, 2012 b ) In addition to successfully managing t he Canal and the expansion project, the government has been implementing strong macroeconomic policies designed to promote an open market and increase trade. Regulatory agencies, such as the Panama Canal Authority, have been effective managers and provided the stability and efficiency needed to enhance growth despite concerns related to corruption. Overall, economic analysts have predicted a strong, continued growth pattern for Panama in the near future (U.S. Commercial Service, 2 012) foreign capital. I t has become a prime destination for foreign investment in recent years The country offers a variety of investment opportunities ranging from high tech c ommunications to real estate and tourism investments (U.S. Commercial Service, 2012) FDI has continued to increase since the U.S. invasion in 1989 This trend is likely to continue in the near future based on the Canal expansi on and government plans to ure ( Figure2 4 ). Plans to improve the Tocumen that Panama is pressing forward with advancements designed to fo economic infrastructure (Oppenheimer, 2012)
54 is positive, barring some concerns about transparency and the protection of investor r ights (2012) Open market policies that do not restrict the flow of capital or overly burden investor s with domestic requirements have foreign investors. Easy access to favorable financing options also promotes investment e attention of rating The three credit rating agencies, investment grade rating on debt (U.S. Commercial Service, 2012) in June 2011, putting it on t he same level of such regional economies as Mexico and Brazil (Sabo, 2011) These ratings will likely improve attracting more economic activity to the country The international banking center ha s survived the global financial crisis bette r than most developed economies due to high reserve requirements and the lack of a central bank. Without a lender of last resort, banks in the Panamanian market have been forced to hold higher reserves beyond tho se required by law as a sort of insurance policy. Such conservative and prudent bank management policies have insulated many of these institutions from the global financial crisis and have actually encouraged growth in (IMF, 2012 b ) In fact, f inancial intermediation grew at 7.6% in 2011 (Figure 2 5).
55 U.S. Panama Free Trade Agreement R ecent passage of the U.S. Panama Free Trade Agreement will likel y generate more economic growth ce sector will become more accessible to U.S. investors and companies. T he FTA is anticipated to produce numerous non tangible benefits I ts signal to investors may have a positive impact on future FDI and portfolio investments originating in the U.S. The FTA will provide an additional level of protection for U.S. investors by offering the option of alternative dispute resolution rather than dependence on the Panamanian judicial system. This legal protection may mitigate concerns related to local business p ractices arising from a weak rule of law (Hornbeck, 201 2 ) Battling Corruption with Transparency: Democracy after Noriega Despite robust economic growth, the Panamanian economy continues to be affected by the Noriega era image of money laundering and inst itutionalized corrupt Panama continues to struggle against this persistent problem that stems primarily from politics and spills over into the business arena. Concern s over a lack of transparency are legitimate since Panama has become a premier destination for foreign investment. Economic progress has improved the business environment in Panama, but meaningful reform designed to target corruption is still lacking. With out the political will to systematically eradicate this cultural phenomenon, corruption may hinder growth to some extent (Sullivan, 2011) International organizations and U.S. Government officials have expressed concern over t he persistence o f corruption they have observed (TI) 2011 Corruption Perception Index, Panama was ranked at 8 6 out of 182 countries
56 falling 13 spots compared to 2010 and received a score of 3.3 on a 10 point scale, with 1 0 being the least corrupt (Transparency International, 2011) T his ranking is better than its regional counterparts, but Anglica Maytn, E xecutive P chapter, explained that this is a setback for Panam a, marking an increase in the level of corruption has not improved significantly over the past three presidential administrations (Rodrguez, 201 1) (Figure 2 6). U.S. Government officials believe that the corruption linked to business practices is an expression of political culture. During our meeting, Heather Coble, an Economic Affairs Officer suggested that the political and economic infrastr ucture allow for corruption in Panama. She explained that some Panamanians consider positions of power and elevated rank to be entitled to certain perks, implying an acceptance of corruption. This practice is the way it has always been based on her observa tions Benefitting from the power of higher office, often in corrupt ways, is viewed as a right and perk asso ciated with the post (Coble, 2011). 4 Perz suggests that the structure of the post invasion legislative branch has encouraged rent seeking behavi or, leaving their legislative power available for purchase Politicians have resorted to funding their activities and augmenting their salaries through corruption, bribery and graft. The judiciary is also subservient to the executive branch, which wields u ltimate authority over the judiciary and legislative branches in spite of the balanced constitutional system. This structure parallels many 4 I met with a U.S. Foreign Service Officer in charge of Economic Affairs at t he U.S. Embassy in Panama in July 2 011. These remarks were obtained during that meeting for the purposes of furthering my research.
57 constitutional frameworks in Latin America that have traditionally given greater authority to the president or execu tive. I nstitutional disposition towards corruption has resulted in inefficient governance, especially in the judiciary branch (Prez, 2011) Bribery is considered to be the cost of doing business and nothing out of the ordinary in the political sphere. In an interview with the former U.S. Ambassador to Panama prior to his departure from office, William Eaton cited the following: There are still problems with the issue of corruption in Panama, and this affects the investment cli it sends a signal to th e people, even the children learn how to play the game ( juega vivo ). (Morales Gil, 2008) It appears that corrupt practices are ingrained in the political culture and continue to persist. Some reforms have been undertaken. Recently, an anti corruption academy was established with support from the United Nations as a regional facility to train judges, political officials, and law enforcement officials to detect and counteract corrupt practices (U.N. Office on Drugs and Crime, 2011) A transparency law enacted in 200 2 requires officials to disclose reports of their activities in office. This law has produced mixed results because many officials consider the requirements to be inapplicable to them, and in some cases, the courts have failed to enforce them (Mizrachi Angel, 2011) Until this cultur al paradigm begins to shift, institutional corruption will continue to inhibit Panama Summary Panamanian reaction to the TIEA is explained in part by the special relationship that Panama had with the U.S. throughout the twentieth century. From the building and management of the Canal to the military intervention that ousted Noriega in the late 80s,
58 the U.S. played a prominent role in Panamanian affairs. U.S. presence and influence were ke y factor s throughout the twentieth ce ntury and into the twenty first. This relationship remained unchanged until the U.S. withdrew from Panama after relinquishing control of the Canal in 2000 (Sullivan, 2011) Until that point, Panama was treated as a protectorate and it enjoyed an elevated status in comparison to its regional counterparts. impressive recent economic growth is the result of strong market based policies intertwined with U.S. influence. The use of the U .S. dollar as legal currency has provided Panama with currency stability that facilitates portfolio investment inflows These capital inflows prompted the creation of the international banking center and the development of legal services to protect these i nvestment s Reliance on a service economy means that the global business community Panama is important. The negative political rhetoric associated with the TIEA and the identification of Panama as a tax haven may potentially be dangerous to foundation. P olitical corruption w eak contract enforcement and bribery T hese practices appear to be grounded in political culture that considers positions of authority as being entitle d to such privileges. Although corruption is not as pervasive as in other Latin American countries, it undermines Panamanian institutions and may deter some foreign investors The tax haven debate draws upon these deficiencies as evidence of a non transparent banking and financial practices Strong institutions would enable Panama to dismiss such
59 with the symbolism of compliance and transparency that this agre ement afforded.
60 Figure 2 1. Panama Canal Revenue as Percentage of GDP, 2008 2012 Source: Panama Canal Authority 201 1 Figure 2 2 Projected Fiscal Income from Panama Canal Expansion 8.7 8.1 7.4 6.7 6.9 0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 2008 2009 2010 2011 2012 Percentage
61 Figure 2 3. Panama GDP Growth, 2003 2013 Sources: Economic Commi ssion for Latin America and the Caribbean (ECLAC) 201 1 and International Monetary Fund (IMF) 2012 Figure 2 4. Panama Net Foreign Direct Investment, 2003 2012 Source: Economic Commission for Latin America and the Caribbean (ECLAC) 201 1 4.2 7.5 7.2 8.5 12.1 10.1 3.9 7.6 10.6 7.5 6.6 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Percentage Change 624 467 99 818 1,019 918 2,547 1,899 2,196 1,773 2,363 2,568 0 500 1,000 1,500 2,000 2,500 3,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Millions of US Dollars
62 Figure 2 5. E conomic Growth (Percentage) of Financial Intermediation, 2007 2011 Source: Panama National Institute of Statistics and Census, 2011 Figure 2 6 Evaluation Past Three Presidential Administra tions in terms of Corruption Measured by Transpa rency International Sources: La Prensa, 2011 and Transparency International, 2011
63 CHAPTER 3 PANAMA: TAX HAVEN OR REGULATED OFFSHORE F INANCIAL CENTER? The laws and investment standards positioning Panama as the financial hub of the Western Hemisphere w ere established in the 1920s and substantively amended in the 1970s These policies instituted bank secrecy and a high level of legal protection to attract foreign deposits and investment. Initially a development strategy adopted to promote economic growth the offshore banking system came to be seen as the as a tax haven misconceptions about current banking pr actices being similar to those employed under Noriega Global debate about tax competition and financial transparency targeted Panama for institutionalize d in the banking sector. This chapter discusses the debate surrounding Panama as a tax haven and of fshore financial center. Both terms suggest a lack of regulation and oversight. By examining the law s that Panama adopted to improve its international banking sector, I explain how the negative connotations of became inextricably linked with Panama. The country introduced a number of reforms to comply with international regulations to counter any negative effects these labels posed These amended operating standards appear to challenge the characterization of Panama as a financial miscreant, and indicate that Panama is cooperating in efforts to deter financial crimes and implement internationally recognized operating standards The use of the TIEA and other tax treaties to introduce transparency into the Panamanian banking sector may be overstated. Such assertions fail to acknowledge
64 the legislative amendments and regulations that have been implemented, especially after 9/11. This section addresses the legal principles challenged by the TIEA as well as those legal norms that provo ked the proliferation of tax treaties. I conclude by discussing the international movement targeting harmful financial practices, led by the OECD, and the tactics used to encourage compliance. These issues frame the and the politics that precipitated the emergence of similar agreements. Offshore Financial Practices: Opacity or Efficiency? The concept of offshore financial centers (OFCs) in the financial world is often juxtaposed with what presumably would be its oppo site, onshore banking. However, the description and definition of what distinguishes an OFC has been debated. Vlcek practices that lack regulation. He challenges this a ssumption claiming that OFCs are frequently established within countries that adhere to financial norms and regulations. The distinction is that these countries have pursued a less regulated approach to (2008 p. 19) The delineation between offshore and onshore may be a matter of perspective based on the directionality of financial flows, regulation and the overall economic effects these factors have from the viewpoint of the onshore economy. OFCs have been (Johnson et al., 2003) and stimulate international competition They offer corporations and non residents a strategic way to decrease their tax bu rden and avoid cumbersome, costly regulation. In this regard, OFC competition encourages onshore regulatory agents to avoid onerous policies (Dionne et al., 2010)
65 fshore A difficulty that arises in defining offshore finance is the fact that most financial centers provide both onshore and offshore services (Witherell, 2002) charact erizes an offshore financi al center as, a center where the bulk of the financial sector activities is offshore on both sides of the of the institutions involved are con (Witherell, 2002) The broad nature of this definition encompasses reputable OFCs that comply willingly with international regulatory norms and others t hat facilitate financial crimes. According to the U.S. Government Accountability Office (GAO), the U.S. Internal Revenue Service (2007) The as a source of growth and a legitimate area for economic diversification. For critics, OFCs are a stark reflection of the severe problem s including tax evasion and money laundering triggered by the lack of transparency and regulation that comes with (Gonzalez and Schipke 2011 p. 44) Secrecy is an Offshore Commodity OFCs emerged alongside the development o f the global marketplace The newly floated currency exchange rates established by the Bretton Woods Agreement enabled states to adopt variations in banking regulation, interest r ates and other financial tools The emergence of the Eurodollar, and more generally the Eurocurrency market 1 1 E urocurrency is any currency deposited by a government outside of its home jurisdiction where that currency is legal tender. For example, a Eurodollar market exists in Japan since the U.S. dollar is not the
66 allowed OFCs to capitalize on the expansion of this niche market, attracting extraordinary levels of capital investment compared with the local economy (Burn, 2006) Some small states embraced this a pproach as a development strategy, which is the plan that Panama implemented in the 1970s (Vlcek, 2008; Zimbalist and Weeks, 1991) The legitimacy of OFCs has come under scrutiny; yet Antoine (2 010) argues that they are not only legitimate, but their existence is founded upon the laws established OFCs to lobby on their behalf and seriously engage in the debates underlying the legality of offshore laws; laws that she explains are designed to attract and cater to foreign investors. Palan et al. (2010) claim that OFCs represent s offer secrecy and apply little regulation to ensure that the real location or identity of an schemes that appeal to firms seeking to cut their tax b (Gonzalez and Schipke 2011 p. 42) C ost competitiveness is often the result of lower regulatory standards, which produce fewer administrative costs (Gonzalez and Schipke 2011) Although a number of financial and legal service offerings can be foun d in an offshore financial center, the central offering is the protection afforded by secrecy (Tax Justice Network, 2007) This principle supported the development of international banking in Panama, and it has been a primary d river behind its appeal to foreign investors. local currency. During the 1950s and 1960s, international financial markets began trading Eurocurrencies on a global scale providing new investment opportunities for businesspeople and an available source o f mobile capital (Burn, 2006)
67 The success OFCs have enjoyed, by luring capital from onshore markets, has put them in the center of a political controversy related to regulation and taxation. Antoine (2010) points out that OFCs should not be attacked for their success or berated for their laws, but rather, should be considered expressions of commercial enterprise. Bank confidentiality is valuable in OFCs, and consequently, policymakers outside of these jurisdictions have challenged it as an impediment to tra nsparency prevents government access to financial information to determine asset ownership for tax purposes or to enforce other financial regulations. This standard can apply within the jurisdicti on or to the sharing of such information with foreign jurisdictions. Violations are often subject to criminal charges (U.S. House Joint Committee on Taxation, 2009) According to the U.S. House Joint Committee on Taxation, seek ing such confidential information can produce tensions between states when the information is sought for enforcement purposes (2009) U.S. laws protect individual financial privacy from public disclosure, but the gover nment requires U.S. financial institutions to maintain records of certain transactions to counter money laundering based on the 1970 Bank Secrecy Act (U.S. House Joint Committee on Taxation, 2009) This practice runs counter to the culture of secrecy jurisdictions which prevent government incursions into financial privacy at all costs. Section 319 of t he Patriot Act has reduced bank secrecy by requiring all correspondent banks 2 to comply with disclosure requirements to combat mo ney laundering. Financial institutions outside of the U.S. that hoped to preserve access to U.S. banks and the U.S. financial 2 A correspondent bank is a bank that ha s a relationship with a foreign bank or affiliate, and in some nding. U.S. correspondent banks are required to comply with U.S. bank regulations and requirements to maintain this status.
68 market consequently implemented these disclosure requirements for cases in which money laundering was suspected. T he Patriot Act u nderscores the demise of bank secrecy, presuming it is still a viable commodity (Preston, 2002) Transparency and access to information are cornerstones to this discussion because the existence of tax havens is based upon secr ecy. Without opaque secrecy laws, tax havens supposedly would not be equipped to provide the services they are currently able to render E liminat ing this barrier to institutional transparency is at the Global Forum on Transparency and Exchange of Information for Tax Purposes (OECD, 2011; Tax Justice Network, 2012) The movement to eliminate tax evasion has pro voked a highly political debate Financial centers recognized for anonymity and bank secrecy have responded by altering their operating standards. The Swiss began to reduce the stringency of their secrecy laws to comply with foreign authorities in tax evasion and money laundering cases after the UBS Scandal in 2008. 3 Refer r ing to this poli cy change, outgoing opinion states are no longer prepared to accept their citizens evading ta (Hollingshead, 2012) Other jurisdictions have responded out of concern for their future financial solvency if the y continue to resist changing their bank secrecy restrictions. Lichtenstein, another recognized secrecy jurisdiction, relaxed its secrecy restrictions to allow the 3
69 country to comply with foreign tax information requests in 2009 A number of other Lichtenstein including Luxembourg, Andorra and Austria (Simonian et al., 2009) A recent article on Lebanon, another country with strict secrecy laws and sizeable financial flows, analyzed the impact that increased reporting standards required by U.S. authorities would have on its financial sector Lebanon lifted bank s ecrecy to cooperate in cases of money laundering in 2001, but similar to Panama, resisted comprising bank secrecy to combat tax evasion. However, legislation proposed to criminalize tax evasion has been proposed, a response evoked by the tax transparency m ovement in tandem with international political and economic pressure (Nash, 2012) Numerous countries, especially those with high levels of bank secrecy, have followed the Swiss example, illustrating that bank secrecy is increa singly losing its allure (The Economist, 2012) T he U.S. Panama TIEA reflects the se interactions of bank secrecy, transparency, sovereignty and rule of law It contributed to introducing new policy standards into latory environment. Panama is classified as an OFC because of its robust international banking center and the related legal and other service offerings challenged in the g lobal crackdown on tax havens for its legal infrastructure. Bank a thriving international banking center, but it is no longer its defining characteristic according to my informants Victoria Fi gge Cederkvist and Jos Javier Rivera. This campaign against secrecy is heavily motivated by tax revenue collection, rather than the publicly stated effort t o promote transparency, but it has been effective in establishing new
70 mechanisms to enhance tax law enforcement. The next section will discuss the laws that contributed to Panama becoming an OFC and how these rules have changed over time to respond to changing international norms. Overview of Panama Banking Laws & Financial Regulations infrastructure designed to cater to a service based economy is grounded I ts financial and banking laws evolved to promote the activities associated with commercial transit and cross border investme nt These laws contributed as a tax haven and brought significant bank deposits into the country However, these laws have evolved to respond to changing international norms. appealed to foreign banks and investors by (Illueca, 1990 p. 1) This principle was institutionalized with the adoption of the Law No. 32, the General Law on Corporations ( Ley General de Sociedades Anon mas ) in 1927 (Gaceta O ficial No. 5067 1927 ) These provisions confer tax benefits on companies incorporated in the country, comparable to incorporation laws (Delaware Corporation and Business Entit y Laws, 2012) Law No. 32 allow s anyone, Panamanian or foreign resident to form a corporation for licit purposes without a physical presence in Panama. It provided these corporate entities a tax free nian territory (Illueca, 1990) This legal structure paved the way for the creation of private trusts and other asset protection vehicles that shield beneficiaries from tax authorities in their home countries; however, much of this system has changed.
71 Secrecy has been enshrined in Panamanian law. The tenets of privacy are embedded in the Panamanian Constitution and its Administrative Code, both of which protect personal information and private communications (written or verbal) from public disclosure without a judicial order (Illueca, 1990) Subsequent legislation fortified these privacy provisions and extended them to banking practices. Law No. 18 of January 1959 (Gaceta Oficial No. 13766 1959 ) es tablished provisions for the creation of numbered bank accounts similar to the Swiss banking system. T his law protected t he identity of such account holders, which included punitive fines for disclosure. Additional provisions stated that even in the case of disclosure, judicial or legal authorities would not have the right to freeze or confiscate assets. Subsequent laws modified and strengthened these bank secrecy provisions. Enacted in January 1961, Law No. 17 modified the Commercial Code with Articles 89 and 93 (Gaceta Oficial No. 14335) which outlines the protection afforded commercial and business records except in the case of a judicial order The Labor Code reinforces the barrier of secrecy by allowing for the imposition of sanc tions if bank informati on were d isclosed without a judicial order particular ly to foreign authorities (Illueca, 1990) Banking legislation adopted in 1970 established the foundation for the modern Panamanian banking system. Cabinet Decree 4 No. 238 ( Gaceta Oficial No.16640 1970 ) enabled foreign banks to operate in Panama and created the National Bank Commission to regulate Panamanian banks and foreign banks operating inside the country. It also provided a high level of bank secrecy and anonymity for depositors by expressly prohibiting banks, bank employees and regulatory authorities from divulging 4 Cabine Julio Cesar Contreras, III at http://www.natlaw.com/pubs/sppnga1.htm
72 account information unless ordered to do so by law (Illueca, 1990) Bank users were offered great latitude in terms of secrecy similar to the Swiss banking system. They were able to easily transfer funds into and out of the country with relative impunity. Domestic and foreign bank depositors have the same rights under Panamanian law and possess the ability to transfer funds tax f ree. Foreign income is non taxable as well as interest earned on local bank deposits and securities (Grosse, 2001) Disclosure of bank information is protected against in different parts of the Panamanian Penal Code This code g enerally protects the right to privacy, for person s and domicile s, and this right to privacy extends to bank information and personal accounting data unless sought with judicial order or warrant In the case of noncompliance it provide s for punitive acti ons such as monetary fines, jail time and professional suspension s (Illueca, 1990) This legal structure has remained unchanged until recent currents in the global business environment have forced Panama to reevaluate its regul atory policies. Panama Historically Resist ed Full Disclosure Panama has traditionally resisted infringements on its strict bank secrecy laws. In the 1980s, the U.S. began to pressure Panama to alter its secrecy provisions (Christ ian Science Monitor, 1986) This initiative was a response to of the banking system, which promoted the laundering of drug profits. During this period, U.S. congressional hearings and reports began to highlight the abuse perpetuated by of fshore centers relying on incorporation and banking laws similar to those of Panama. power, attempted to induce Panamanian acquiescence by threatening to cut off financ ial aid (Labaton, 1990 b ) At the time, Panama refused to compromise its secrecy laws
73 (Christian Science Monitor, 1986) The U.S. lobbie d for tax information exchange, but Panama rebuffed these efforts because the political leadership at the (Toronto Star, 1990) Similar to many of the argument s against the TIEA, Illueca artic ulates these concerns using prose that has been repeatedly affirmed by many Panamanians: On the world stage Panama has too much of its own interests at stake as an international financial center Its national interest is bound to prevail over foreign inte rests and in no way can risk losing economic gains with the hasty adoption of complex compliance measures at the statutory or conventional level which in the end would slow the pace of economic growth and deface its institutional image. 5 (Illueca, 1990 p. 87) Being part of what has contributed to Panama becoming an international banking center, it has defended its reluctance to compromise banking secrecy and its sovereignty using legal and economic arguments. To improve international cooperation, Panama modified its secrecy laws to combat illicit financial activity. The most recent amendment, Art. 111 of Executive Decree No. 5 2, was published in February 2008 ( Gaceta Oficial No. 26035 ) It states that banks may only release client specific information wit h client consent except when sought for statistical analysis when requested by a competent authority 6 when required by court order or when required as part of a criminal investigation associated with money laundering, terrorism or a related financial cri me Disclosure is prevented except when the information is pertinent to an 5 I translated the original text w propios en juego como centro financiera internacional. Su inters nacional est llamado a prevalecer sobre el inters forneo, y en modo alguno puede arriesgarse a perder relevantes conqui stas econmicas con la adopcin apresurada de medidas de complejo cumplimiento a nivel estatutario o convencional, que en fin de cuentas retrasaran el ritmo de su crecimiento econmica y desfiguraran su (Illueca, 1990 p. 87) 6 A Panama, the Ministry of Finance and other such Panamanian authorities See Appendix D, Article 4.1(a).
74 ongoing criminal investigation conducted by a foreign jurisdiction such as cases related to money laundering or terrorist financing. Panamanian banks would be authorized to disclos e client information i n this case, so long as it is relevant and necessary to the investigation and could not be obtained through alternate means Should a bank banking information publicly disclose sensitive information, the individual would be prosecuted under criminal proceedings according to Panamanian law (Superintendency of Banks, 2008) Legislative amendments to Panamanian legal code outline specific cases where inf ormation sharing is permitted; however, it is ultimately at the discretion of Panamanian authorities. Excluded from these cases was any mention of tax avoidance, tax evasion or tax related criminal issues. Panama does not share tax related information unle ss the related investigation falls into the category of a criminal offence. T ax evasion is not a crime according to Panamanian law because it is considered a civil rather than criminal offence (Arce, 2009) Panama also employs the principle o f dual or double criminality 7 (IMF, 2007 b ) An offense would need to be of a criminal nature to warrant the sharing of information without client consent. The fact that Panama does not consider the evasion of foreign taxes to be a criminal i ssue precludes it from sharing abuses by foreign jurisdictions attempting to discount the privacy rights afforded by (Arce 2009) 7 D ouble Criminality requires an action to be a crime in both the country where the act is committed and in the country requesting that the perpetrator be punished (Cryer et al., 2010)
75 The income tax system in Panama is based on the principle of territoriality. 8 According to Art. 694 of the Fiscal Code (Gaceta Oficial No. 12995 1956 ) income generated in Panama or that which is considered to be derived from a Panamanian sourc e is taxable (Gaceta Oficial, 2012) Forei gn source income is non taxable (OECD, 2012 b ) Consequently, the nation has refused to assist the U.S. in criminal investigations of tax evasion. T he territoriality principle implies th at there is a domestic tax requirement for all record keeping and accounting information. If the income is not taxable based on territoriality, Panamanian authorities do not require individuals or companies to present official records to national tax autho rities documenting these finances. As a result, were Panama able and willing to exchange tax related information, their ability to do so would be limited by a lack of information and reporting to respond to such inquiries (OECD, 2012 b ) Panama has been unw illing to substantively alter this legislation for fear that it would lose business in the financial service sector as well as the estate and trust planning industry income and GDP (U.S. State Department, 2012) Confidentiality and secrecy have come to be valued by offshore banking centers, such as Panama, as commodit ies that offer a comparative advantage over other financial jurisdictions (Morriss, 2010) Furthermore, the privacy and secrecy embedded in Panamanian law have cultivated cultural norms and business practices to attract portfolio flows in the form of foreign 8 The territoriality principle describes the principle of levying tax only within the territorial jurisdiction of a soverei gn tax authority or country. The underlying theory is that no taxes can be levied by a state beyond its borders without violating the sovereign tax authority of another state. Consequently, both residents and non residents of a state adopting this principl e are only taxed on the income from sources in that country. Residents are not taxed on any foreign source income, subject to anti avoidance measures. See International Bureau of Fiscal Documentation (IBFD). (1992). International Tax Glossary, (2 nd Ed.) Am sterdam : International Bureau of Fiscal Documentation.
76 investment The U.S. TIEA marks a new direction for Panamanian b anking laws and represents a turning point related to client confidentiality. Client information can now become the subject of U.S. inquiry if related to tax investigations, no longer limiting U.S. discovery for legal cases due to a restricted access to in formation. A Stigma Remains: Drug Trafficking & Money Laundering open regulatory framework lacking currency controls and its dollarized monetary system. Although much of this activity occurred under Noriega, Panama continues to illicit profits by moving these funds through legitimate businesses and investments until the source can no longer be detected to avoid taxes and evade law enforcement. Noriega provided these services to his associates during his dictatorship, which officially his relationship with t he U.S. as a CIA informant, Noriega was able to offer his clients an additional level of security with his laundering services. These activities, combined with political violence and instability, provoked the only major banking crisis in Panama in March 19 88, resulting in bank closures and liquidity problems (Zimbalist and Weeks 1991) These illicit activities harmed the Panamanian banking sector in the short term, but they also attached a stigma The volume of bulk cash transactions that occurred under N with Bank of Credit and Commerce International (BCCI) alone were estimated to exceed $20mn upon his capture in 1989 after having transferred a significant amount of ass ets out of this account (Grosse, 2001) To repair the tarnished image of the banking
77 sector, the Panamanian ambassador to the U.S. wrote a letter that was published as an op ed in the New York Times. In it he expressed the ire felt by Panamanians over this (Rodriguez, 1990) He asserted in another article that, ''Panamanians have been the major victims of money laund ering. It has led to abuses which cost Panama its democracy'' (Labaton, 1990 a ) (La baton, 1990 a ) Reputation can be just as valuable era, but continues today Lingering questions about business practices remain regardless of the accuracy of this portr ayal. Regulation on the Rise Despite its perceived reputation for weak financial oversight, Panama has demonstrated a commitment to conforming to and implementing the terms of international agreements and treaties designed to target illicit financial acti vities. Over the past f ifteen to twenty years, Panamanian authorities have exerted substantial effort to comply with anti money laundering (AML) regulations In line with the Basel Committee 9 25 Core Principles for Effective Supervision, the Superintendenc y of Banks of Panama was created in Panama in 1998 to monitor the banking industry. This regulatory body oversees and promotes financial transparency in the banking center to prevent the system from being taken advantage of by those conducting illicit acti vities 9 supervisory matters. Over recent years, it has developed increasingly into a standard setting body on all established norms to for countries to evaluate the quality of thei r bank supervisory systems. See http://ww w.bis.org/publ/bcbs129.htm
78 (Superintendency of Banks, 2012) U.S. officials believe the Superintendency to be an effective regulatory body that is succ essfully fulfilling its mandate (U.S. Commercial Service, 2012) A fter having been the target of a Financial Crimes Enforcement (FinCEN) Advisory 10 11 for similar reasons ( FATF, 2002; FinCEN, 2000) P anama went on to implement AML legislation, Law 41 (Gaceta O ficial No. 24152 A, 2000) This law expanded the list of predicate crimes 12 that can result in c riminal money laundering charges Recommendations 13 including the act of criminaliz ing money laundering (IMF, 2007 a ) It is also a party to a number of agreements related to anti money laundering, anti corruption and the prevention of terrorist financing. 14 It has a Mutual Legal Assistance 10 FinCEN is a bureau of the U.S. Treasury Department that monitors and deters financial crimes. The counter money lau transactions with Panama should be scrutinized heavily for suspicious activity. See http://www.fincen. gov/news_room/rp/advisory/pdf/advis23.pdf 11 governmental body established in 1989 by the Ministers of its Member jurisdictions. The objectives of the FATF are to s et standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. olicy http://www.fatf gafi.org/pages/aboutus/ 12 Mone y laundering was criminalized by adding Law 41 to the Criminal Code on October 2, 2000. The predicate crimes connected to money laundering include: qualified fraud, illegal arms trafficking, human trafficking, kidnapping, extortion, embezzlement, corrupti on of public officers, acts of terrorism, international theft, trafficking of vehicles and drug trafficking. Notably absent from this list is tax evasion due to its classification as a civil matter rather than a criminal issue. See Norms in Force, availabl e at: http://www.superbancos.gob.pa/documentos_ing/prevention_control_illicit_operations/legislation_norms_i n_force.pdf 13 Th http://www.fat f gafi.org/pages/aboutus/ 14 For a complete list of international conventions to which Panama is a signatory, refer to the Supe rintendency of Banks of Panama, Norms in Force, available at:
79 Treaty (MLAT) with the U.S. to facilitate law enf orcement collaboration that has been in place since 1991 (Superintendency of Banks, 2012) The MLAT allows limited information sharing related to money laundering, narcotics trafficking and other criminal investigations (Arce, 2009) The MLAT does not cover purely tax matters (Sullivan, 2007) Because tax crimes are not considered a predicate crime related to money laundering by Panamanian law, the U.S. cannot request in formation exclusively to investigate tax evasion. However, if this information is sought in connection with a money laundering investigation, Panamanian authorities are able to cooperate provided that the courts do not interfere (Arce, 2009) Panama active ly pursu es criminals who take However, there are clear limitations impeding the regulatory measures in place that continue to enable tax evasion. Rule of Law: Enforcement is Problemati c The international community remains skeptical over the extent that Panama has improved transparency and regulation. Weak judicial enforcement of these regulations affects investor confidence and that of international government authorities. In spite of t his, regulatory agencies have managed to separate themselves from these shadows of doubt. According to the U.S. Commercial Service (2012) authorities in the banking sector have successfully maintained their independence from local political affairs that i nvolve corruption Financial oversight bodies, such as the Financial Analysis Unit 15 suffer from a lack of political will that has underfunded and severely limited its operating capabilities in combating money laundering (U.S. State Department, 2012) A distinct http://www.superbancos.gob.pa/documentos_ing/prevention_control_illicit_operations/legislation_norms_i n_force.pdf 15 Fi nancial Analysis Unit (FAU): Body established by FATF to protect the P anamanian economy from money laundering through deterrence and due diligence.
80 divide exists in Panama between the high level of regulation required and enforced within the financial sector, and the political will to execute such policies outside of the banking sector. Although an independent jud iciary exists in political structure, it is not considered to be a transparent, efficient or a completely independent body by many international organizations. Transparency International ranked Panama at 73 out of 178 c ountries in 201 0 but it fell to 89 in 2011 based on concerns regarding judicial independence and political corruption. According to the World Bank, rule of law in Panama is ranked at 52.4% whereas its neighbor Costa Rica ranks higher at 65.6% (2011). This figure indicates that skepticism rema ins over the predictability of the judicial decisions and countries Although respectable, corruption and institutional we akness are cited as economic infrastructure (Heritage Foundation, 2012). These issues introduce some risk and uncertainty into the business and regulatory environments. There have been small gains in reducing corruption and political bribery, but tangible results remain to b e seen (Heritage Foundation, 2012). The consistent and independent enforcement of the rule of law remains a challenge. Government scandals linked to judicial appointments confirm concerns that the judiciary lack s the authority to act independently and wi thout interference from normalization of (Frantz et al., 2011) Adolfo Linares confirmed this report during our meeting citing that Panama does n o t have the checks and balances or the effective judiciary needed to promote a strong rule of law. He explained
81 that Panama struggles against the caudillo, 16 a phenomenon that empowers executive authority, rather than reinforcing t he rule of law through its de mocratic institutions. Lacking the ability to enforce laws, the judiciary is unable to strengthen and bolster are not sufficient to promote transparency or counteract wha t Heather Coble characterized during our meeting a related to the fact that the rule of law remains weak, a challenge that is further complicated by judicial scandals and interference from the executive branch. Tax Havens & OFCs: Moral Aberration or Strategic Advantage? global economy. Labels such as fiscal paradise, tax oasis or financial miscreants are used to denote the practices of such jurisdictions with a pernicious label that suggests without universal a greement on a technical definition. Yet, there is a general consensus No or only nominal taxes; Lack of effective exchange of information; Lack of transparency; and No substantial [corporate] activities (OECD, 1998) 16 The exact definition of caudillo is debated among scholars and varies based on a number of factors although it has traditionally been defined in terms of an authoritarian or di ctatorial style of leadership. For example, Noriega has been considered a caudillo for his de facto leadership of Panama. In this case, the term caudillo implies a political leader who uses their to keep political forces unde r control by promoting allegiance to the person of the leader. Caudillismo thus, is [a] brand of leadership that acquires and attracts power through personality traits that cultivate a strong following or support, regardless of other governing institut ions in place (Hamill, 1992)
82 Some countries may be opportunistically exploited as tax havens, but there is a distinction between them and th os e jurisdictions that willingly enable capital flight in the act of tax avoidance. Th os e states propose d haven legislation as a conscious, intentional, and long (Palan et al., 2010) Gordon (1981) offers a basic approach to identify tax havens, the is most likely a tax haven (Gordon, 1981) This standard is highly subjective and demonstrates that the tax haven definition can shift based on perception. The list of countries considered to be tax havens remains largely unchanged since the 1980s (Palan et al., 2010) M ost international organizations, policy groups and governments consider Panama to be a tax haven. Identification as a tax haven can have legal implications, which could involve sanctions or other consequences based on this characterization (Gravelle, 2010) Th is prospect evoked criticism from jurisdictions similar to Panama. Many claimed that G20 members, such as the U.S., were some of the largest tax havens based on their treatment of foreign investors and the incorporation laws in states such as Nevada and Delaware (Gravelle, 2010) Thus, er level of regulatory norms, potentially carrying political or legal consequences. The OECD Initiative against Tax Evasion: Panama is a Tax Haven The perception that tax havens facilitate criminal activity is based on differences in tax laws that are designed to promote national interests. What constitutes tax evasion in one country does not necessarily tr anslate across national boundaries. While no country wants to be viewed as permitting tax evasion, some OFCs have capitalized on the
83 deterring effect that high tax jurisdictions have on capital. OFC tax regimes are competitive, not necessarily because they avoid regulation, but because their income collection depends on service and filing fees. In one sense, the campaign to target tax havens could be considered blame shifting on the part of wealth y countries to avoid reforming their tax system s that do not effectively tax mobile capital or allow exemptions that are detrimental to the national economy. T he Organization for Economic Cooperation and Development (OECD) initiated a tive forces have encouraged countries to make their tax systems more attractive to investors. However, some tax practices are anti competitive and undermine fair (OECD, 2011) T ax evasion is OECD, these policies distort the global economy. They can diminish national tax bases, allowing individuals to benefit from public goods without paying for them. Thus, the tax burden is shifted disproportionately often resulting in lower net worth individuals compensating for the tax evasion of those with a higher net worth (OECD, 2011) This debate underlies the current prolife ration of tax treaties and TIEAs. At the core of this debate remains the question of how to tax global capital flows and who has international tax policy. But what const itutes a level playing field or fair tax competition is a bit elusive. From the Panamanian perspective, their tax policy has been deliberately designed to attract foreign investment, which does not conflict with the laws of other nations. Some of the infor mants interviewed (Carlos Ernesto Gonzlez, Eduardo
84 Morgan, Jr. and Adolfo Linares) suggested that the objective to limit competition from the offshore world drove the campaign targeting tax havens. They implied that the U.S. and other OECD members were tr ying to alter the rules of the taxation game in their favor by maligning tax havens and the role they play in facilitating tax competition. Other informants, such as Laguerre and Ocando explained that this opinion lacked perspective about current policy t rends. By seeking information to increase their tax revenues, these countries are forcing a change in operating standards. However, this campaign is not about tax reform, but rather a movement designed to punish tax evaders and those individuals, companies or corporate entities that facilitate this behavior. Panama is considered to be a jurisdiction that enables non residents to evade taxes and this reinforces its reputation as a tax haven. While there is no universally (Gravelle, 2010) By providing bank secrecy and tax ex emption for foreign income based on the principle of territoriality, Panama has codified elements that facilitate tax evasion and related illicit activities from an external perspective (Szarmach, 2010) These trademarks combi information exchange agreements and its reluctance to cooperate in this regard led to Gray List in 2009. This list includes those countries that are considered to be tax havens because they do not adhere to international information exchange taxation or reporting standar ds (The Economist, 2009 a )
85 ? Gray List reinforced the perception that financial practices in the country lacked transparency. According to a report on Panama by Ernst & Young eing on the gray is universally regarded as an impediment to inward investment and a strong international reputation. And Mr. De Lima 17 and the Government wish (Ernst & Young, 2011 p. 3) T h e public criticism with fiscal malfeasance and characterized it as a jurisdiction that willingly facilitated illegal activity. The OECD threatened san ctions if Panama refused to comply with the requirements necessary to exit the Gray List Subsequently, Socit General closed its operations and BNP Paribas sold its holdings to Scotiabank. Both of these French bank s closed their operations in Panama beca use the French G overnment blacklisted Panama 18 after the OECD stating they would return once Panama was removed from the list (CentralAmericaData, 2010) 19 BBVA, a Spanish bank, substantially limited their operations i n Panama City after the Spanish Government 17 Frank DeLima was serving as Vice Minister of the Economy at the time this report was written. He was 18 Under this legislation, investments by French companies in such jurisdictions could be penalized with substantial fines (Ducros et al., 2010) 19 France continued to cite Panama as a tax haven for several months after the conclusion of a bilateral tax treaty citing that its negotiation did not imply that it was be ing enforced. See Francia V uelve a Citar a Panam como P araso F iscal at http://www.prensa.com/impreso/economia/francia vuelve citar panama como par aiso fiscal/42470 In response, Panama initiated the process of withdrawing a loan to a French cons truction firm that had received financing to fulfill its contract to Project. (See Panam le Aplica la Retorsin a Fran cia at http://www.prensa.com/impreso/panorama/panama le aplica la retorsion francia/42975?page=4 ), which subsequently jeopardized French legislative a pproval of its DTT with Panama. In April 2012, France the two countries (see Francia Retira a Panam y Costa Rica de su Lista de Parasos Fiscales at: http://www.prensa.com/uhora/economia/francia retira panama y costa rica de su lista de paraisos fiscales/83850 )
86 placed Panama on its blacklist (Serra, 2009) Panama quite literally could not afford to jeopardize its financial center. Reluctantly, it has pursued a cost mitigation strategy by nego tiating the tax agreements needed to repeal this label. Other countries recognized as tax havens or named by the OECD Gray List for failing to commit to international tax standards have pursued a similar strategy. 20 A number of opinions and assessments have emerged in relation to this policy campaign to promote tax transparency. Recently, Mark Summers 21 an international estate planning and tax expert, authored an article that clearly portray s the dynamics and politic s of this debate : Whether or not you agree drives to obtain further information and prosecute both tax evaders and the organisations that assist them, the reality is that those governments have viewed the undermining of their tax base as tantamount to an act of economic warfare and have responded accordingly. There is a large disparity in the power of the armouries of each side. Western governments have managed to galvanise public opinion and journalists behind what was previously quite an esoteric subject by linking it to funding their way out of the present economic crisis and limiting austerity measures. Running and hiding has one inevitable conclusion when faced with such inequality of economic firepower. (Summers, 2012) Sum mers clearly conveys the message of this policy struggle: tax evasion is no longer an accepted business practice and those who enable or facilitate this activity will be subject ed to political and economic consequences. By noting European examples 20 Based on comparing 2009 and 2012 Progress Reports on the Jurisdictions Surveyed by the OECD Global Forum in Implementing the Internationally Agreed Tax Standard, such countries include Andorra Anguilla Antigua and Barbuda Aruba Austria, the Bahamas Bahrain Belgium, Belize Bermuda British Virgin Islands Brunei, Cayman Islands Chile, Cook Islands Costa Rica, Dominica Gibraltar Grenada Liberia Liechtenste in, Malaysia, Marshall Islands Monaco Montserrat Netherlands Antilles Panama Philippines, St Kitts and Nevis St Lucia St Vincent & Grenadines Samoa San Marino Singapore, Switzerland, Turks and Caicos Islands Uruguay and Vanuatu (OECD, 2009; OECD, 2012c) 21 Mark Summers an expert in international estate planning and tax issues, heads Speechl Zurich office, an international law firm See his employment profile at: http://www.speechlys.com/our people/mark summers
87 reconcil ing tax obligations 22 he illustrates that this policy movement is not a unilateral campaign promoted by the U.S. Although the U.S., Europe and other western economies are employing different approaches and policy tools, they are actively trying to increase tax receipts by ensuring compliance on the part of their respective tax bases. Forced to comprise bank secrecy, Summers asserts that jurisdictions similar to t he Swiss will have to increase their competitiveness through savvy investment strategies to rein force the appeal of their service offerings Panama and similar financial centers may need to revise their business strategies to develop a new source of competitive advantage or promote their services using alternate investment strategies. Domestic Reacti ons & Political Recourse in Panama Initially, the Panamanian s responded with astonishment and anger at having been labeled a fiscal paradise a sentiment conveyed by a majority of my interview participants regardless of their opinion of the TIEA Headlines Targeted by the OECD 23 economies were on a crusade against tax havens (Duarte, 2008) Panama rejected the tax haven label, claiming that compromising bank secre cy and providing tax information would violate its ies ( Arbelez 2011; M organ, 2011). Yet, Ricardo Alba, a Panamanian lawyer with expertise in regulatory compliance suggested that combating this label would not yield 22 under which Swiss accounts that have never been declared to the German or UK tax authorities are to suffer a sizeable one off withholding payment have forced many account holders into disclosure. Generous amnesties such chtenstein Disclosure Facility have been key in persuading many to go down the disclosure route. Even though the EU may have put these agreements in doubt, they still seem to have had the desired effect of bringing the tax evaders 012, p. 2) 23
88 results with the OECD and global economic players. He pointed out that Panama had agreed to cooperate with efforts to promote tax information exchange related to criminal and civil offenses in 2004 and 2005, but had failed to fo llow through on the agreements to fulfill this obligation. But he implied that the discriminatory measures used by the OECD against non members, such as Panama, were disgraceful and warranted the application of th e Law of Retaliation (Gaceta Oficial No. 24 701 2002 ) a law allowing Panama to punish countries that defame Panama typically using economic means to retaliate 24 S uch petitions were also requested by the Chamber of Commerce and the Association of Panamanian Bankers, a local association of banking p rofessionals. Invoking this law would have prevented Panama from conducting any transactions with countries that labeled it as a tax haven in an attempt to reverse the reputational damage provoked by the OECD (Duarte, 2008) G etting off the OECD Gray List: T he Beginning of New Era T he Panamanian government decided to comply with the procedures required to remove this financial stigma (Duarte, 2009) To achieve removal from the Gray List Panama needed to sign 12 tax treaties that allowed for the exchange of tax information with any country it chose (BNA, 2010) 25 Panama was removed from the OECD Gray List in July 2011. Achieving removal from this list was a pri mary ob jective for the current Panamanian G global 24 The Law of Retaliation, or Ley d e Retorsin (Art. 3, Law No. 58 Gaceta Oficial No. 24701, Dec. 17, 2002), is a Panamanian law allowing Panama to engage in reciproca l, discriminatory treatment against another country when that country has targeted Panama using discriminatory treatment or practices. However, Gmez Arbelaz cautions that such diplomatic retaliation should be carefully considered prior to acting, which i t was not in the situation with France (Gmez Arbelez, 2011) 25 A additional tax agreements the country has negotiated to da te.
89 financial r eputation. prospective business and investment flows, especially if punitive actions we re threatened against those financial institutions facilitating these transactions by the government of their resident country. The Panamanian G overnment negotiated and signed over 12 double taxation treaties primarily with OECD member states, and a TIEA with (Appendix F) The Panamanian government is continuing to expand its network of international tax treaties as of the writing of this report (DGI, 2012) Complying with OECD requirements demands more than negotiating tax treaties. As Luis Ocando noted during my Although the OECD approved the 12 tax treaties signed by Panam a and removed it from the Gray List Panama may risk reappearing on the Gray List or suffer puni tive economic consequences if the OECD later finds that Panama has not substantively implemented and enacted these agreements. Ocando continued to reaffirm during our meeting that this is a new standard of tax policy and Panama must adhere to these norms g oing forward. As a part of its t ransparency initiative, the OECD is conducting an ongoing Peer Review process to assess and evaluate the level of tax transparency across wo y framework (Phase 1) and practical implementation (Phase 2) of the standards on (Zagaris, 2011 p. 653) Periodic reviews will continue after this initial process to ensure continued complianc e with OECD tax transparency norms (Zagaris, 2011) This initiative evidences the new
90 era of international tax enforcement and growing pressure to ensure international compliance. Naming & Shaming: The U.S. Panama FTA Connectio n Gray List prolonged U.S. Congressional approval of the U.S. Panama FTA, which had been negotiated in 2007 and approved by the Panamanian legislature that same ye ar. Congress resisted approving the bill until October 2011. S ome U.S. politicians, such as Senator Levin, used the OECD campaign t with the TIEA. During my interviews, m any of my informants implied that t he TIEA became a prerequisite for passage of the U.S. FTA in political debate and in s tatements given by U.S. government representatives. Panama had negotiated the agreement in good faith, expecting to attract international investment and other non tangible trade benefits. It identification as tax haven complicated these efforts, unfairly, according to my interview with Adolfo Linares. Summary Panama is a functioning offshore financial center by conventional definitions. Its highly regulated international banking center developed as a result of commercial activity attracted to the country th rough the deliberate structuring of its banking laws complemented by its geographic position Strict bank secrecy provisions attract ed non residents to establish corporations and other asset protection instruments. The s ecrecy offered by OFCs diminished wi th the enactment of the U.S. Patriot Act. The TIEA and the campaign against tax evasion have a vast amount of money laundering under Noriega, attach ing a stigma to its image that remains to this day. D ue to its transit economy and its strategi cally positioned banking sector, Panama
91 has undertaken efforts to combat money laundering by adopting international norms and regulations. However, it continues to struggle with a weak rule of law. Fortunately, bank supervisory bodies appear to be effective and relatively transparent in the administration of their oversight responsibilities. These regulatory standards have changed the traditional definition of ban k secrecy as it was once defined and have nearly made its existence obsolete. These regulatory standards did not protect Panama from being targeted in the ns into agreements to facilitate the exchange of tax information has been business environment T he U.S. embraced this initiative to strengthen its bargaining position in obtaining the TIEA by subsequently ma king the TIEA a prerequisite for passage of the U.S. Panama FTA These efforts finally gave the confidentiality laws for tax collection purposes The TIEA, and other tax treaties to which Panama is a party, have precipitated the need for legi slative reforms in order for Panama to comply. These changes imply that a new international standard in information exchange and transparency has emerged in international taxation to which Panama must adapt
92 CHAPTER 4 ANALYSIS OF TIEA & I MPLICATIONS Si nce 2009, Panama has engaged in an aggressive strategy to negotiate and Gray List in March 2009, Panama has successfully negotiated tax treaties with many countries, primarily OEC D member states (Appendix F) The U.S. Panama TIEA signed in 2010, was one of the agreements signed as a part of this public strategy to and its business interests This case study is designed to understand this agreement both from a domestic and a global policy perspective. The movement towards international tax transparency and cooperation is provoking significant changes at the national level. For Panama, this TIEA encompasses a range of issues with economic, political and legal implications. To analyze the U.S. Panama TIEA and understand why Panama signed the agreement, I conducted 17 semi structured interviews with key informants in Panama City, Panama and one interview via Skype Participants included Panamanian professionals from the legal and business sectors, and government officials representing the U.S. and Panama respectively. Appendix B lists the informants with their respective organizations and professions and any ps eud onyms used have been noted. The interview guide used to conduct these semi structured interviews is included (Appendix A) Not all questions were discussed in each interview and many were adapted to address the expertise of the participant Given the open format of these interviews, the participant often guided the content of the meeting. Most of these interviews were conducted in Spanish, while two were conducted in English. I translated the content of the Spanish interviews. Since the insights and comment s gathered cover
93 the entirety of the TIEA process, from the negotiation through its prospective administration, I have incorporated my findings into my analysis and explanation of the TIEA to produce a broader understanding of this agreement. Additional fi ndings will be discussed following the treaty analysis to address why Panama signed the agreement, why the U S pursued this style of tax agreement and what potential implications this agreement suggests for Panama and other jurisdictions negotiating tax t reaties. Tax Treaties: TIEAs & DTTs The TIEA is a specific type of international tax agreement that is limited in scope when compared with other tax treaties. A TIEA is a detailed agreement limited to addressing information exchange related to tax investig ations and the enforcement of tax laws The limitations of this agreement suggest a different objective from the more standard treaty, a Double Taxation Treaty (DTT). A DTT is designed to avoid double taxation on investment capital in both the source count ry and the recipient country to facilitate international invest ment. These treaties include a range of issues addressing differences in tax codes and how credits and tax extensions will be administered between the two countries (Lang et al., 2010) Ocando, Laguerre and Ri vera noted that such agreements promote cross border investment by providing a clear set of rules and regulations for investors. A clear set of guidelines strengthens investor confidence and the ability to calculate their investment returns an advantage that benefits both parties of the treaty. DTTs include a clause that provides for information exchange, the principle that constitutes the entirety of a TIEA (Lang et al., 2010) These information exchange clauses vary based on the language of the agreement that is negotiated Although each treaty is subject to revisions during the negotiation process, most DTTs are based on
94 either the OECD or UN Model Tax Convention. Substantive differences exist between the two models, which conti nue to be revised and amended (Lang et al., 2010) The information exchange clauses contained in these models strongly resemble those provisions contained in a TIEA; however, the TIEA expands upon this process in a deliberate and substantive way. I will limit my an alysis to the TIEA for the purposes of this study. OECD & UN Model Information Exchange Articles The definition of information exchange differs little between the OECD and UN models. The content and scope of the information subject to request typically i ncludes federal and national taxes of the parties to the agreements, excluding tariffs and municipal taxes. The distinctions arise from the language used to describe the process. The UN model allows for greater latitude in qualifying information exchange r equests; whereas the OECD model uses more narrow language to avoid the possibility that a court appeal or other barriers may impede the exchange process (Lang, et al ., 2010). In contrast, TIEAs expand the information exchange process by defin ing the scope of requests and the information subject to inquiry with greater detail. TIEAs have required countries to adopt new legislation to enable their enforcement; whereas, the alternate models in their current state, often refrain from prompting such extensive r eforms For the purposes of obtaining foreign evidence, TIEAs are more specialized and effective to the U.S. Criminal Tax Manual (U.S. Department of Justice, 2008 p. 41.04) This di stinction suggests that TIEAs are more aggressive instruments.
95 Responding to International Criticism: Panama Tax Treaty Strategy The public characterization of Panama as a tax haven jeopardized the integrity of its competitiv eness and its ability to conduct international business fr As President Torrij administration drew to a close in 2009, it established a committee designated to advise the government about the best way to service sector and advocate on its behalf to mitigate any negative press This Comisin Presidencial de Alto Nivel para la Defensa de los Servicios Internacionales y Financieros (High Level Presidential Commission on the Protection of International and Fin ancial Services), was created to used for illicit activities. It was comprised of a state minister (designated by the President, the Vice Minister of Economy and Finance and the Superintendency of Banks), members of professional legal organizations, members of professional banking organizations and members from the private sector nominated by the aforementioned individuals (De Gracia, 2009) On e of my informants, Carlos Ernesto Gonzlez was a member of this Commission when the TIEA was negotiated. The government consulted on the OECD Gray List The Ministry of Finance and Economy (MEF) along with this Commission developed a strategy to mitigate the effects of the tax haven label and the OECD Gray List T his plan included the development of a strategy to negotiate tax treaties to fulfill OECD requirements to ob Gray List As mentioned in Chapter 3, the OECD required Panama to negotiate 12 tax treaties containing information exchange provisions with the countries of its choosing. The MEF publicly
96 stated that Panama would pursu e doubl e tax treaties that were economically business reputation promote it as a premier financial center and remove Panama from the OECD list (Martes Financiero, 2010) To achieve that end, it create d a negotiating team comprised of tax experts Two of my informants are members of the negotiation team, Luis Ocando (Ernst & Young) and Luis Laguerre (KPMG). Ocando explained that this team was established lack of experience in negotiating such treaties. These participants have been intimately involved in negotiating the terms of the TIEA and other tax treaties to which Panama has subscribed. A Shift in Strategy The U.S. Panama TIEA represent ed a shift in Panamanian policy regarding its ne gotiation of tax treaties because the pref erence for DTTs Alberto Vallarino, Minister of the Economy in 2010, confirmed this strategy to exclusively negotiate DTTs The first decision was that Panama was not g oing to enter into tax information exchange agreements (TIEAs) because they are basically one sided agreements that will bring no benefits to Panama, but rather that we (Snowdon, 2010) Oca ndo and Laguerre confirmed that the g overnment preferred DTTs because it considered them to be more beneficial to Panama. They, along with Bi e berach indicated that a TIEA was negotiated with the U.S. instead of a DTT for tax revenue and cost consideration s. Ocando and Laguerre pointed out that Panama would have lost significant tax revenues through a DTT with the U.S. (an estimated $50mn in tax receipts based on 2009 figures according to
97 Ocando) based on the different tax systems and tax policies. 1 However Carlos Ernesto Gonzlez disputed this reasoning, claiming this logic suggests that the DTT would have possible [negotiated] tax treaty in the world Rivera, Duarte and Figge Cerderkvist claimed that a DTT would have been a preferred agre ement with the U.S. rather than the resulting TIEA because it would have offere d Panama tangible benefits. Such tangible benefits include reducing tax implications (i.e. tax credits) for foreign investors and allowing Panama to clearly allocate tax rights over certain income sources (i.e., to explicitly avoid double taxation). Ocando claim ed that such an agreement was not economically feasible, acknowledging that opponents of the TIEA would have applauded a DTT in spite of the fact that Panama would have lo st substantial revenue through such an agreement. Although speculative, it appears that the U.S. intended to negotiate a TIEA with Panama, not a double tax treaty. C. Gonzlez Morgan, and E. Gonzlez disclosed that they were aware the U.S. sought a TIEA a nd had no interest in negotiating a DTT. E duardo Gonzlez that the U.S. promoted the negotiation of a TIEA because a DTT would impinge on American interests by reducing tax revenue receipts This was not the first U.S. attempt to negotiate a TIEA with Panama, according to Morgan, Laguerre, Turolla and Linares Morgan noted that the U.S. had proposed sharing tax information in 1986 87, in the early 90s under President Endara and most recently in 2002 03 to assist in its 1 The U.S. global tax system would have shifted tax receipts from Panama to the U.S., because according to Ocando, the U.S. does not allow for withholding taxes in their DTTs, which would have negatively
98 enforcement of U.S. tax laws. 2 Previous Panamanian leaders dismissed these U.S. attempts to exert unilateral political pressure citing that such agreements were counter to national interests despite promises of economic aid or other economic inducements according to Linares. 3 T he informants who mentioned this topic described the most recent attempt in 2002 03 as Panama dismissing a TIEA with the U.S. yet again; however, Laguerre suggested that these negotiations subsided due to a lack of interest on the part of the U.S. once it initiated military operations in the Middle East. These accounts reveal a sustained, continued effort on the part of the U.S. to obtain an information sharing agreement with Panama that would allow for the collection of confidential information for tax investigations. This current round of negotiations began in October 2010 and culminated with the signing of the TIEA on November 30, 2010 in Washington, D.C. The agreement was largely based on the TIEA model used by the U.S. according to Heather Coble However, review of the TIEA implies that it was substantively based on the OECD Model Agreement on Exchange of Information on Tax Matters (OECD, n.d.) Laguerre and Ocando asserted that the negotiation team collaborated with U.S. negotiators using electronic methods (computer, teleconference, etc.) rather than the traditional face to face approach and had amended the model interests. The Panamanian M EF, Vice President Varela and the U.S. Department of the 2 ial 1981 report on tax evasion recommended that TIEAs could help close the gap left by tax haven jurisdictions, in 1983 Congress passed legislation authorizing the U.S. Treasury Department to nego tiate bilateral or multilateral TIEAs with several countries in the Caribbean and Central America. Few offshore tax havens entered into a TIEA or a tax treaty requiring the exchange of tax information with the United States until the Bush Adm inistration Tr easury Department made a concerted effort to obtain TIEAs with known tax havens; this unilateral political p ressure from U.S. political pressure (Szarmach, 2010) 3 See Chapter 3 section : Panama Historically Resisted Full Disclosure.
99 Treasury, represented by Secretary of Treasury Timothy Geithner, negotiated the final details of the agreement. The symbolism of holding the signing in Washington, DC has been compared to the Bunau V arilla Treaty by some opponents of the agreement in Panama. They have used this symbolism to imply U.S. interests similarly to when control of the Canal was bequeathed to the U.S. along with the right to intervene direct ly in Panamanian affairs. Controversial Negotiations: Political Acumen or Acquiescence? reservations about the negotiation process. C. Gonzlez, E. Gonzlez, Morgan and Linares noted t hat the rapidity of the negotiations produced an agreement that was contrary to Panamanian law, unconstitutional and counter to Panamanian interests. Carlos Gonzlez as a member of the Presidential High Commission, explained that he was not notified that the agreement had been concluded until the document was ready for signature. His account of the process and the timeline suggest that it may have been agreed upon and presented at a time when minimal political backlash in Panama could undermine the treaty (i.e., similar to the way in which unpleasant news reports are timed to hit at low points in the news cycle in the U.S.). However, this also speaks to political decision to pursue a TIEA with the U.S. The neg otiation process with the U.S. has been a subject of criticism. The Commission of which Carlos Ernesto Gonzlez is a member had been created by the political issues unrel ated to the TIEA with the U S. Furthermore, it was evident that there was discontent with the Government of Panama for having acquiesced to the
100 U.S., a scenario that both Laguerre and Ocando disputed. Morgan, Linares, E. Gonzlez and C. Gonzlez proclaimed that the Panamanian Government failed to defend their position and interests during the negotiation process Two lawyers 4 noted more concessions during the negotiation process. Thi s is likely due to the fact that final and many stakeholders were excluded from the process until the document was ready for signature Ocando explained that the negotiating team w as asked to maintain a high level of confidentiality during the negotiation process. M organ and Linares believed that the outcome would have been different if the issue had been subjected to public debate, producing a n interests, or possibly, no agreement at all. This unlikely scenario treats the TIEA as an exception to other tax treaties negotiated by Panama because it does not appear that any other agreement has been publicly debated, raising the question as to why th e TIEA should have been treated differently. Despite claims by Ocando, Laguerre and Coble that the process was a legitimate negotiation representing the interests of both parties, many critics did not concur. Boutin provided clarification regarding some la He suggested that much of this criticism derives from the fact that Panama did not negotiate this agreement with the U.S. in the sense that the TIEA arose to accommodate U.S. interests and objectives. According to Boutin the perception that the 4 These lawyers, who I prefer not to identify directly in this context, have maintained high level contacts through the U.S. Embassy in Panama. The ir past diplomatic affiliations, either directly or through family members, afforded them special access to key information. However, it should be noted that these remarks are speculative.
101 TIEA fails to serve Panamanian interests or offer tangible benefits to compensate for its costs may explain this criticism Implementation The U.S. Panama TIEA entered into force on April 18, 2011 when the Panamanian Nat ional Assembly approved the agreement (U.S. Treasury Department, 2011) I t was published in the Gaceta Oficial as Law 40 (Gaceta Oficial No. 26767, 2011 ) Because the TIEA is not an international treaty or accord, it did not r equire U.S. congressional approval. In the U.S., TIEAs, contrary to DTTs, are considered to be executive agreements that go into effect once the required legislation and administrative structures are established by the respective parties to the agreement. 5 Although the agreement has technically entered into force, a number of administrative changes remain before the TIEA is likely to be applied. Analysis of the U.S. Panama Tax Information Exchange Agreement he TIEA The limited scope of the TIEA is described in Article 1 ( Appendix C ). It only 6 responsibl e d with administering this process are the U.S. Treasury Department and the Departamento 5 For a list of U.S. tax treaties and tax information exchange agre ements in force, see the U.S. Treasur y Department website : http://www.treasury.gov/resource center/tax policy/treaties/Pages/default.aspx?page=1 For a li st of tax treaties and agreements in force in Panama, see Appendix F. 6 Juridical persons means corporate entities or legal structures.
102 General de Ingresos (DGI) 7 or Department of Revenue of the MEF in Panama. I taxes in the U .S. and all national taxes in Panama. Greater specificity regarding the definitions of these taxes is detailed in the Joint Declaration 8 that was added to the TIEA after it was signed ( Appendix D ). Essentially, all national taxes are covered by the TIEA wi th the exception of customs duties and municipal taxes. The scope is narrow, yet it highlights its restricted usage from the Panamanian perspective. As previously discussed, tax evasion and other tax crimes are civil matters under Panamanian code. Thus, t he scope indirectly addresses U.S. tax law at the outset of the agreement. The bilateral nature of the agreement provides Panama with the right to request information from the U.S. regarding the administration of its tax laws. This issue has attracted crit based tax system. Given that Panama only taxes the economic activities that occur within its territory ; the assumption is that Panama would have little need to request information from the U.S. for the admi nistration of its tax laws. A number of promoted as a bilateral instrument for promotional purposes. Figge Cederkvist, Duarte, E. Gonzlez Morgan and Linares claimed that Panama had no need for the TIEA from this perspective. Laguerre countered this argument and stated that the bilateral nature 7 Departamento General de Ingresos (DGI) or Department of Revenue is a division of the Ministry of Economics and Finance in Panama. It is equivalent to the IRS in the U.S. 8 The Joint Declaration was an addendum to the TIEA issued on Dece mber 1, 2 010 to clarify the definition of the taxes covered in the agreement as well as the protocol for the exchange process. This docume nt was included in Panamanian legal code as a substantive part of this agreement.
103 of the TIEA should not be so heavily criticized because it established a mechanism to promote cooperation between the U.S. and Panama. He cited a few examples in which Panama may want to verify foreign tax credits taken by a Panamanian company claiming to have paid a U.S. supplier abroad. If that Panamanian company were audited, he said, Panama would proceed to request information from the U.S. to verif y the validity of the foreign payments. The extent to which Panama may rely upon the TIEA is subject to speculation and debate. The basis of the agreement outlined above carries substantial implications for the U.S. based on its global tax system. Although other international agreements and treaties provided for information exchange prior to the TIEA (MLAT, U.S. Patriot Act, etc.), the U.S. did not have the authority to request tax related information under these agreements due to the civil nature of tax cr imes in Panama. 9 There were also legal norms in place that impeded such requests because ownership information was not available for all legal instruments specifically for bearer shares If tax evasion or fraud were considered to be a predicate crime for money laundering or another criminal activity, the U.S. could have requested tax information without violating Panamanian laws by relying on the preexisting agreements Coble noted this issue was a primary motivator for the U.S. to obtain a TIEA with Panam a. She explained that prior to the TIEA, even if tax evasion had been discovered while investigating another crime, the U.S. had no legal claim to freeze or seize the assets in question without a criminal conviction From the U.S. perspective, the TIEA off ers more flexibility and utility for 9 Panama Historically Resist ed Full Disclosure
104 applying the MLAT in pursuing financial crimes. However, Coble stated its primary purpose was to go after tax evaders. The TIEA enables the U.S. to enforce its tax laws in Panamanian territory, provided that the informa tion sought falls within the limits established by the treaty. The extraterritorial principle embodied in the scope of the TIEA, although limited by subsequent provisions, changes the tenor of tax law enforcement. It is an example of soliciting foreign ass istance for the enforcement of a nationally based policy issue, indicative of a new trend in international taxation. This situation arises from the fundamentally different tax policies in Panama and in the U.S. It i s difficult to assess tangible b However, the difference in tax laws suggests that the U.S. may derive greater utility from the TIEA. Revising Domestic Law s to Pursue Tax Crimes The description of the information exchange proce ss and how it is to be administered under the TIEA is outlined in Article 5. Article 5.1 reconciles potential inconsistencies between the domestic laws of each jurisdiction by stating that ted Party needs such information for its own tax purposes or the conduct being investigated would constitute a crime under the laws of the requested Party if it had occurred in the territory grants the authority to c ircumvent domestic legal issues, such as tax evasion being a civil offence, to facilitate information exchange. It introduces extraterritoriality in tax law enforcement by allowing a foreign jurisdiction to request information in the enforcement of its own laws irrespective of the domestic laws of the requested Party. Conversely, Article 5.3 defers to the domestic laws of the
105 requested Party in the actual production of information. This section describes in detail the types of information that may be reques ted, how it should be verified, how it should be obtained and a number of other procedural issues. Article 5 lends credence to the complaint that this TIEA is merely a mechanism through which to enforce U.S. tax law. Article 5.4 requires the competent auth orities to ensure that they have the right to request the aforementioned tax information. This section and similar requirements under other tax treaties precipitated legislative changes in Panama resulting in the implementation of Law 33 (Gaceta Oficial No 26566 A 2010 ) and Law 2 (Gaceta Oficial No. 26713 C 2011 ) Under bank secrecy laws, bank personnel could only provide information to government authorities by judicial order as part of an ongoing criminal investigation. Since the TIEA expressl y allows the Parties to deviate from this norm, Panama was required to make its legislation conform so that financial, legal and other personnel in possession of financial data relevant to taxes could disclose this information without criminal consequences Law 33 (Gaceta Oficial No. 26566 A 2010 ) was implemented to reconcile these issues while Law 2 (Gaceta Oficial No. 26713 C 2011 ) established the requirement to identify the beneficiaries or owners of bearer shares. These revisions to e were necessary to conform to egally permit the exchange of information. Article 5.4 stipulates that competent authorities must have the ability to request this information from financial authorities and be able to identify t he owners of legal and business structures pursuant to that end. It specifically addresses the challenge of identifying the owners of financial instruments and complex legal instruments in Art.5.4 ( such persons in an
106 anonymous beneficiaries or those situations under which ownership has been obfuscated by legal or corporate structures specifically in the case of b earer shares Know Your Client (KYC) 10 requirement s did not apply to bearer shares prior to this agreement. These instruments have been linked t o the commission of such financial crimes as tax evasion and money laundering 11 (U.S. State Department, 2012) KYC policies were limited to banking and explicit financial transactions only. Law 2 (Gaceta Oficial No. 26713 C) published on February 1, 2011, extended the reach of KYC principles to financial instruments, often created by la wyers, to eliminate anonymous bearer share s The new law requir es resident agents 12 to document the chain of ownership by conducting due diligence and recording t personal data allowing government authorities access to this information by r equest (U.S. Treasury Department, 2011) This legislation was required to enact the TIEA. According to Coble obtaining ownership information for bearer shares was a key objective for the U.S. Compelling Panama to alter this l egal norm will contribute to increased transparency from the U.S. perspective and promote greater security in the financial sector 10 Know Your Client (KYC) or Know Your Customer is a requirement that places a burden on financial institutions to conduct due diligence on prospective clients to prevent money laundering or other abuse of their banking infrastructure. KYC requires banks and other financial professionals t o solicit substantial reporting norms to identify suspicious financial activity. KYC were substantially strengthened through the U.S. Patriot Act. See http://www.pwc.com/en_GX/gx/financial services/assets/pwc anti money laundering 2012.pdf 11 For a number of years, the State Department has expressed concern in the 2011 I nternational Narcotics Control Strategy Repor t about ciated with money laundering, and maintained that the government should take steps to eliminate or immobilize these financial instruments ( Sullivan, 2011, p. 18) 12 Resident agents are typic ally lawyers or those persons designated to administer and manage the trusts or other legal structure on behalf of the owner or beneficiary.
107 The Process: Restricting Effectiveness and Other Legal Obstacles Under the TIEA, information can only be sought through a f ormal request process limited to gathering data for tax enforcement or criminal issues arising from a failure to fulfill tax obligations. Article 5.5 subsections (a) through (i) detail a number of requirements that must be included in the petition for info rmation. Among such details required are the identity of the taxpayer under investigation, the nature of the information requested, the reason for the request and its relevance regarding tax administration. C riticized by scholars and advocacy groups as a s ignificant limitation t he degree of specificity required is designed to prevent fishing expeditions; however, the burden on the requestor is significant. T he requesting Party must have extensive knowledge regarding the information they seek, prior to obta ining it, which by some measure compromises the effectiveness of the TIEA. The rigid nature of this process has the potential to limit the effectiveness of the agreement in facilitating information exchange. Barrios and Ardilla underscored the importance of the limitations imposed by Article 5.5. Fishing expeditions are cases where foreign authorities request information without a great degree of detail in pursuit of an ongoing investigation, or in some cases, this information is sought to initiate a ca se. Ardilla posited that the TIEA may be negative for Panama depending on how information requests resembling fishing expeditions are managed. Figge Cederkvist no ted that during her tenure as F AU Director 13 she received a number of inquiries that resembled fis hing expeditions. She 13 The Financial Analysis Unit is the Financial Intelligence Unit central, national agency responsible for receiving (and, as permitted, requesting), analyzing and disseminating to the competent authorities, disclosures of financial information: (i) concerning suspected
108 explained that the U.S. authorities tried to exact tax related information indirectly through the application of the MLAT by attempting to conceal the purpose of the request. She explained that these attempts were rather insulting bec ause they implied that the U.S. authorities assumed the Panamanian authorities would willingly comply with such requests, not knowing what their substance really entailed, just because they she said the problem lay in framing the right questions to get the right answers This problem is reduced by the TIEA because the U.S. now has the authority to seek such information; however, Panama is unlikely to blindly comply with U.S. requests. Give n the polemic nature of the agreement, it is possible that there will be strict enforcement and interpretation of the TIEA clauses which may hinder U.S. Treasury investigations more than would be preferred. In fact, Laguerre explained that the U.S. wante d to include provisions allowing for foreign audits in Panama to the extent that the IRS wanted to establish an office in Panama (an office for criminal investigation purposes has been established). 14 This foreign audits provision was excluded by the Panama nian negotiating team according to Laguerre. Furthermore, information requests can be refused or rejected. Article 6 outlines the cases in which they have the right to proceeds of crime and potential financing of terrorism, or (ii) required by national legislation or regulation, http://www.egmontgroup.org/ 14 The IRS has e stablished offices abroad to facilitate tax filings for U.S. citizens residing abroad and to conduct criminal investigations in collaboration with local authorities. Offices for filing purposes are located in Frankfurt, London, Paris, and Beijing. Offices with a criminal investigation mandate include permanent posts in Frankfurt, Mexico City, Bogota, Hong Kong, Beijing, London, Bridgetown (Barbados), Ottawa, Panama City and Sydney. The Panama office was opened within the past two years (IRS, 2012b).
109 info rmation obtained under attorney client privilege 15 from being sub ject to exchange (Art.6.2(a)(i) tax liability (Art. 6.3). The evaluation of information requests will prove to be impor tant in with the TIEA. Morgan addressed an issue that could arise in the refusal of a request under Art. 6.5. This clause allows a party to reject an information request if the requesting party would be unable to obtain the same information under their own tax and domestic laws. Morgan and several other informants (Linares, C. Gonzlez and Figge Cederkvist ) consistently pointed to U S limited liability companies (LLCs) and bank information on foreign holders of U .S. accounts as problematic issues Their contention was that there is no regulation over the opening or establishment of LLCs in the U.S., which can be opened via internet or phone making it difficult to verify ownership Linares explained that U.S. crim inal investigations conducted by the FBI had been unsuccessful in producing ownership information for some of these entities, which are called sociedades anon mas (SA) 16 under Panamanian law. Coble countered this claim stating that ownership information can be provided for these corporate entities in the U.S. However, the U.S. did not previously require banks to collect information on interest earned on bank deposits made by foreigners if they were not subject to U.S. taxes. My informants suggested that thes e arguments could be grounds to dismiss a request under the TIEA. Figge Cederkvist, Morgan, C. Gonzlez E. Gonzlez and Linares conveyed frustration 15 This 16 Sociedades anonmas (SA), which literally translated means anonymous societies, are corporate entities in civil law countries that resemble public limited companies under the common law sy stem. SAs do not include partnerships or private corporations. SA is the corporate structure most commonly found in http://www.panamaniancorpor ations.com/
110 during our respective meetings regarding the pressure placed on Panama to disclose so much financial infor mation, while the U.S. continued to maintain its status quo. 17 The Cost of Compliance: A Concern for the Financial Community Regulation and compliance carry substantial cost burdens. This issue has been a concern for the financial community post 9/11 with t he implementation of the U.S. PATRIOT Act 18 which imposed a greater reporting burden and higher costs on banks Duarte, C. Gonzlez, and E. Gonzlez cited the cost of enforcing the TIEA as a point of controversy Art. 8 states that the requested party will bear ordinary costs for information production. The TIEA Joint Declaration clarified ordinary costs to include are considered extraordinary costs, including ordinary co sts expected to exceed $1,000, in which case the requesting party will bear the costs. Ocando explained that TDTs often do not detail or distribute the cost burden, making the TIEA more beneficial. However, there is concern from the Panamanian perspective that they could bear the cost of enforcing U.S. tax law. The bilateral nature of this agreement suggests that the cost is equitably distributed but this depends on the utility of the agreement and the frequency of its usage. Panama could incur greater co sts to administer requests if it has a disproportionally lower use of the TIEA. 17 Subsequent to my field research, the U.S. Treasury introduced a new directive: Nonresident Alien Deposit Interest Regulations. Starting January 1, 2013, banks must collect ownership information on non residents with U.S. bank deposit holdin gs if the U.S. has an information exchange agreement with that (Harrington, et al., 2012) This new norm, strongly criticized by Florida bankers in particular, may reflect U.S. changing norms t o comply with tax treaties and TIEAs. 18
111 Imposing administrative tax collection costs on a foreign authority introduces a new norm into an area of policy that has traditionally been considered a sovereign issue. The informants who cited this issue criticized the cost implications and explained nor in its interest to facilitate U.S. tax law enforcement. Duarte, Figge Cederkvist, and C. Gonzlez claimed these compliance costs as sociated with U.S. citizens would make it difficult for Americans to bank abroad using foreign banks. The implication was that certain institutions and professionals were becoming increasingly reluctant to work with American clients due to the TIEA and ris ing compliance costs associated with other reporting requirements for U.S. citizens (FATCA and the HIRE Act in particular). Laguerre offered a more neutral analysis suggesting that it would be a cost benefit decision made by each institution, implying that the market would decide whether the cost of serving American clients exceeds the benefit. requirements as the cost of operating and participating in a global economy that now requires ta x transparency. Retroactivity: Is the TIEA Unconstitutional? The terms in Art. 11 were controversial This provision stated that the TIEA would enter into force after the required legislation and administrative procedures had been implemented by both parti es which occurred on April 18, 2011 (Gaceta Oficial No. 26767) The point of contention has been the retroactive nature of this clause which years prior to the signature of Morgan, C. Gonzlez Boutin Ardilla, E. Gonzlez Linares and Bieberach highlighted this clause as being problematic from a legal and policy perspective.
112 clauses, they were not ch allenged on a constitutional basis because none of these agreements involved countries with a global tax system like that of the U.S a point raised by Morgan The retroactivity clause violates Article 4 6 h ave no retroactive effect, except those of public or social interest expressed (Gaceta Oficial No. 25176 2004 ) The National Bar Association asserted that the TIEA is unconstitutional because it, fundamental guarantees, threatens legal certainty 19 and sends a negative message to (Colegio Nacional de Abogados, 2011) The concern is that the TIEA does not allow Panamanian citizens or foreign nationals to adapt their behavior to avoid facing leg al consequences. 20 Based on this logic, a precedent that allows for retroactive punishment could be bad for business an observation that Bieber a imposing, granting governments the right to revie Rivera clients, lawyers or other service providers in Panama could be subject to investigation or legal repercussions despite the fact that their acti ons were legal at the time they were 19 Legal certainty is the principle that suggests that those governed by the law need to be able to regulate or alter their behavior to comply with the law. A retroactive law does not allow for any corrections or changes in behavior to avoid punishment (Raban, 2010) 20 The U .S. under investigation from disputing tax collection inquiries (Art. 6.3). This model is more stringent than previous U.S. TIEA Models because judicial appeals unduly complicated the information exchange process from the U.S. perspective in the past. Szarmach discus ses the use of the U.S. Tax Treaty with Switzerland to prosecute individuals suspected to have committed tax evasion with the help of UBS. account holders who are notified by UBS that their accounts meet the agreed criteria (Szarmach, 2010, p. 434) One individual under investigation successfully appealed the U .S. request for information in the 9 was not sufficient to breach bank secrecy under the information disclosure provisions of the 1996 Switzerland (Szarmach, 2010, p. 435)
113 performed. C arlos Ernesto Gonzlez claim ed that this could have been avoided if constitutional review had been sought prior to signature Following the approval of the TIEA in April 2011, the National Bar Association of Panama 21 brought a claim before the Supreme Court of Panama to challenge its constitutionalit y Eduardo Gonzlez interest or public policy exception, making its retroactiv e clause unconstitutional. I f the Supreme Court rules the TIEA unconstitutional this may provide the opportunity to renegotiate an agreement that provides for greater protection to Panamanian citizens according to my informants. To date, th e Supreme Court has yet to render a decision on this claim Ocando and Laguerre explained that retroactivity is a standard principle in international tax policy and tax treaties Boutin commented that retroactivity, although a more common principle in international tax policy, is unconventional because it undermines legal certainty and investor confidence. Laguerre and Ocando countered this opinion claiming that the TIEA actually offers more legal protection to investors by having a fixed date, noting that some tax treat ies included no time limit on information requests. Turolla asserted that a retroactive clause makes sense because when government authorities are trying to re construct a financial scheme they require historical data to build a case. Obtaining information enactment going forward would not serve their objectives Turolla noted Regarding the 21 association that serves as a link that seeks to unit e all the lawyers in the country, whose purpose, in addition to the struggle for the rule of law, is to heighten, strengthen and protect the free and full exercise of the legal profession in Panama. The Association studies, analyzes and presents solutions for problems and situations of a legal nature that arise in national events issuing opinions and declarations within technical and legal parameters, seeking to guide national authorities, legal practitioners, and the general public contributing to the for http://cnapanama.com/misvis.htm
114 legal conflict with the constitution, Boutin explained that international treaties legally supersede domestic law in Panama because they are acts of state. Thus, he considered it unlikely that the Supreme Court would rule the TIEA unconstitutional, for both legal and political reasons. The TIEA with the U.S. was highly politicized when compared with other tax agreements that Panama has negotiat ed. It is conceivable that because the agreement was entered into with the U.S. that there would have been substantial criticism, technical and otherwise, regardless of any difference in content. However, the fact that s negotiation strategy as well as the fact that final negotiations were kept private undermined its credibility in the eyes of public opinion. Morgan, Figge Cederkvist, C. Gonzlez E. Gonzlez and Linares expressed disappoint ment with the Panamanian gover nment reluctance to negotiate a mutually beneficial agreement with the U.S. The linkage of the TIEA, as a precondition for congressional approval of the U.S. Panama FTA, appears to have influenced the Panamanian government. Obtaining approva l of the FTA was one of President important role in this regard since the FTA was passed in October 2011. However, the perception as to whether these sacrifices and co sts outweigh ed the benefits varied by informant depending on their overall opinion of the TIEA and whether their profession was directly affected by its implementation. Enforcement and Implementation The TIEA contains provisions allowing each party to impl ement its own process or procedures for administering information requests (Art. 9). To facilitate this process, the Panamanian MEF established two new subdirectorates within the DGI of the MEF to
115 respond to information requests received under the TIEA and other tax treaties (Art.1, Res. No. 88 Gaceta Oficial No. 26679 A 2010 ). The International Tax Subdirectorate interprets the tax treaties and TIEAs to which Panama is a party (Art. 2, Res. No. 88 Gaceta Oficial No.26679 A 2010 ). The Subdirectorate of Information Exchange manages the administrative process to facilitate these exchanges such as verifying the requests for compliance with the TIEA and executing retrieval of the information (Art.3, Res. No. 88 Gaceta Oficial No.26679 A 2010 ). Resolution No. 253 (Gaceta Oficial No. 26697 2011 ) officially named the Director General of the DGI as the competent authority assigned to manage these solicitations and named the Deputy Director General to act in his absence (DGI, 2010) Panama has established procedures to administer information requests made under the TIEA and other tax treaties Panama enacted an information exchange protocol through Executive Decree No. 85 adopted in June 2011 (Gaceta Oficial No. 26824 2011 ) Outli ning the process may reassure those with concerns about the scope and profundity of the information exchange process. According to Laguerre, the MEF has decided to notify any taxpayer whose is under investigation. Whether these taxpayers will have recourse is unclear. Under past TIEAs, individuals have challenged such requests grounding their claim in the domestic laws of the country required to produce the information. Th agreements to avoid the po ssibility that requests could be challenged by the courts of either country. If the information sought falls under the scope of the TIEA, Panamanian privacy for regulation h as generated significant debate, and how this information is
116 handled under TIEAs, provokes concerns about confidentiality despite explicit terms included in Art. 7 of the TIEA. How the TIEA is implemented will be instructive in its ultimate scope and pow er to produce tax information. As of yet, there is no public information available to whether it has be en exercised to obtain such data. However, the broad nature of the language contained in certain sections of the TIEA could be problematic. Carlos Ernest o Gonzlez identified Art. 4.3 as potential ly being unfavorable for Panama depending on how the agreement is enacted. This paragraph addresses any terms that are not defined within the text of the TIEA or those that do not have an agreed upon meaning estab have the meaning which it has under the laws of the Party applying this Agreement, any meaning under the applicable tax laws of that Party prevailing over a meaning given t o Carlos Ernesto Gonzlez this language leaves room for interpretation which could be problematic based on different legal interpretations and tax codes. Objectives & Intentions: Conflicting National Interests The explicit objective of the TIEA is to facilitate the exchange of tax related information between governments in the promotion of tax cooperation and transparency. The U.S. and Panama fulfilled different objectives through the negotiation of t his treaty. From the U.S. perspective, it obtained the legal authority to solicit Panamanian assistance regarding the enforcement of its global tax system and obtain evidence for use to prosecute criminal tax cases (IRS, 2012) The intent was to more effectively administer U.S. t ax laws. Heather Coble further elaborated that the
117 U.S. sought to use this agreement to prosecute financial crimes li nked to money laundering through tax evasion, an area of evidence that was not accessible under the MLAT or the PATRIOT Act. T he U.S. was able to eliminate anonymous bearer shares in Panama through the requirements set forth in the TIEA, which Coble noted as a source of illicit financial activity in many criminal cases, particularly related to drug trafficking. The U.S. was able to indirectly influence and effect legislative changes through the Although a topic of speculation, Coble p rovided insight into how the U.S. intends to apply the TIEA with Panama. It appears to serve as an additional tool or legal instrument to acquire evidence needed to prosecute tax crimes, and possibly, crimes in relation with money laundering. nts implied that it will be used to iden tify, locate and freeze assets connected to such investigations. 22 The contemporary nature of the TIEA makes it difficult to assess its future application T he U.S. Department of Justice (DOJ) has an entire program de dicate d to the pursuit of tax evaders the Offshore Compliance Initiative O nly a few public cases brought by the U.S. Government (DOJ or Treasury) have mentioned such instruments. A majority of those that have mentioned their use do not involve the recent ly negotiated tax treaties and TIEAs which contain stronger provisions than previous models of these agreements One c ase ( U.S. v. Bill Melot ) 23 effectively used the TIEA with the Bahamas to elicit 22 Although explicit use of the TIEA has not been documented, a number of criminal tax cases and indictments in progress in the U .S. cite the use of Panamanian banks and corporate entities to move assets across jurisdictions in attempt to shield them from the IRS. The TIEA may allow U.S. authorities to obtain information that may prove useful in these cases. For links to these cases see the DOJ Offshore Compliance Initiative website: http://www.justice.gov/tax/offshore_compliance_intiative.htm 23 filed in the trial of Bill Melot, a farmer and gas station owner, reveal that the US federal authorities and Internal Revenue Service (IRS) obtained
118 s ets. A nother case ( SEC v. Stanford International Bank Ltd. et al. ) mentioned the inability to use the TIEA with Barbados Antigua specifically because the IRS lacked the information required to initiate an information request, indicative of the limitations of suc h agreements. 24 As Coble mentioned, the TIEA may serve more as a deterrent rather than an active policy instrument in the movement to reduce tax evasion. 25 This speculation was shared by Barrios, Rivera, and Boutin who claim ed that it undermines legal certa inty for those who had used Panama to evade taxes and offers legal certainty for investors searching for a legitimate business opportunity. The Panamanian objectives behind signing this treaty were to protect the integrity of its service sector by improv ing its international reputation and ensuring that it is willing to comply with established international norms The decree that established the oversight bodies to administer these treaties included language alluding to the legislation authored to impleme nt these tax treaties and TIEAs. It states that their the state policy of the Republic of Panama to stop being considered internationally as a low tax jurisdiction and uncooperative in the fight against international tax Gaceta Ofi cial No. 26679 A 2010 ). To eliminate the information on his Bahamian bank account at Union Banc Privee (formerly Nordfinanz) via the TIEA that the ( IFC Review, 2010) 24 S ecurities and Exchange Commission v. Stanford International Bank Ltd. et al.), U.S. attorneys noted the TIEA with Barbados Antigua failed to cover the information sought (Tax Analysts, 2009) 25 According to the Offshore Compli ance Initiative, this pressure has forced a number of behavior changes, such as over 18,000 people disclosing their hidden assets and paying back taxes within an 18 mply, the word is out that placing assets in foreign accounts no longer provides the protection from disclosure it http://www.justice.gov/tax/offshore_compliance_intia tive.htm
119 stigma associated with the tax haven label, the Government complied with O ECD standards and requirements. It sought removal from discriminatory lists that could negatively influence the economic activity generated by the financial and legal service sectors. Reports also suggest that the Government was indirectly motivated by the prospect of obtaining congressional approval of the U.S. Panama free trade agreement. Other countries, particularly in Europe, are actively pursuing tax evaders but it is difficult to evaluate the role of tax treaties in these endeavors In a search of tax treaty case law in the International Bureau of Fiscal Documentation database (IBFD) 26 recent cases appeared to rely o n such treaties to resolve disputes over the allocation of tax rights rather than enacting information exchange provisions to prosecute tax evaders. The U.S. approach may differ from that of other countries, but clearly, the practice of tax evasion is no l onger tolerated at the global and institutional level, a reality that is confirmed daily by press releases in major financial news sources and government policy sources primarily, although not limited to, the U.S. and Europe 27 Operating in a continues to change legal norms and legislati on across jurisdiction s as government authorities aggressively pursue tax evaders Interview Results: Opinions about the TIEA & its Effects The opinions and perceptions about the TIEA varied dependin g on the professional vocation of the interviewee; however, there are several shared themes which I have described below. Their assessment yields interesting insights into the 26 border taxation. Tax practitioners from all over the world rely on its high (IBFD, 2012) 27 Since the UBS Scandal in 2008, a numbe r of headlines, special reports and press releases have appeared in connection with tax crimes, tax evasion and policies implemented to reduce the ability of evaders to avoid tax laws (such as the elimination of bank secrecy). See generally, The Wall Stree t Journal, Financial Times, UK Telegraph, T he Economist and other financial news sources.
120 TIEA for Panama tial implications Why Sign the TIEA? When asked why Panama signed the TIEA, I received a number of responses All interviewed participants identified the OECD Gray List as having prompted the Government to negotiate the T IEA and they noted that the agreement from the Gray List Turolla and Ocando tax havens, such as that of France 28 and stressed the importa nce for Panama to be removed from these lists for economic reasons As Figge Cederkvist noted, the transactional relationship in banking is based on trust. Following this logic, any doubt tive effects. The consistently cited This was the primary objective of the Government, according to the MEF, in neg otiating the TIEA. clear motivator. The second motivating factor was the indirect linkage of the TIEA to the passage of the U.S. Panama FTA. All informants except for Ocando, asserted that the TIEA evolved into a prerequisite for FTA approval from a political perspective Of these 28 France p laced Panama on a national black list of tax havens after the OECD placed the country on its gray list in 2009. BNP Paribas, a French bank, subsequently clo sed its operations in Panama in response based on national laws that prohibit French financial institutions from dealing with tax havens. France only recently removed Panama from its national blacklist (2012). This illustrates the potential consequences fo r tax haven jurisdictions that are considered to be non compliant. See Chapter 3, foot note s 18 and 19 for reference.
121 individuals, a few considered this U.S. tactic to be inappropriate and manipulative. Linares described this political maneuver as being out of line because the FTA had been negotiated. That agreement was done. Attaching another prerequisite to the trade agreement after the fact was poor policy, and as Figge Cederkvist noted, yet another excuse for the U.S. to avoid implementing the agreement. I initially thought that this motive was the predominant factor prompting Panama to sign the TIEA M y findings reputation in the global business community which directly impact s foreign investment inflows and future economic development opportunities Bu siness versus Legal Perspective There was a distinction between responses given by business professionals/economists and legal professionals, although there were a few crossover s. Business professionals and economists viewed the outcome produced by the TIEA as positive. Using a business frame of reference, they considered the TIEA to be favorabl e because it sent a positive signal to the international community, particularly forei gn investors. Turolla highlighted that participation in the global economy required the sacrifice of some sovereignty to promot e international norms. Business professionals acknowledged that the TIEA was necessary for Panama to maintain its competitive eco nomic position. Other informants, although they noted the validity of international norms, were more reluctant to acknowledge such benefits. They articulated the need to agree to the TIEA to obtain removal from the OECD Gray List but considered this act to be an Panama undermined international standing and they appeared skeptical
122 over whether the TIEA would provide any relief. These informants tended to use langu age which alluded to the power differential between the U.S. and Panama in terms of negotiating power, implying that the agreement was thrust upon the country. Although much of this criticism can be explained by national pride my informants implied that t here may have been other contributing factors. Part of this distinction may be explained by the consequences the TIEA may have on these respective professions. Turolla, Rivera, Jorge Boutin Molina and Ardilla cited the power of certain lawyers and law fi rms in Panama as a significant factor in evaluating this criticism because their professional interests were intimately affected Rivera described this group of elites within the legal profession, who in his opinion, considered the TIEA to threaten their p a great deal of income from establishing trusts, Panama corporations ( sociedades anonmas ), and other legal instruments frequently sold to foreign investors. The perception is strict provi sions, by requiring more transparency and a clear chain of ownership, will diminish the attractiveness of such instruments to foreigners This issue has generated concern regarding the income potential associated with constructing trusts, offshore corporat ions and similar legal vehicles ( i.e. there may such service offerings) Although these costs may be substantial for some political and professional interests, Turolla clearly articulated this domestic controversy by explaining that to participate in the global economy, one often has to sacrifice, and she stated that this was clearly the issue with the U.S. Panama TIEA.
123 OECD Campaign & U.S. Attacks on Tax H avens, Damage d National Pride The way in which the OECD and U.S. have promoted tax transparency appears to have insulted Panamanian national pride. The language used by my informants to describe the OECD campaign described it as a rich club/cartel that was unfairly ta rgeting and ganging up against offshore financial centers This description conveys that smaller countries see this movement as discriminatory and an attempt to pursue G20/d eveloped economies in opposition against smaller, developing economies from this perspective. Figge Cederkvist and Duarte claimed that Panama has complied with international norms and remains willing to do so, but they implied that this public campaign was manipulative. Duarte, Figge Cederkvist and E. Gonzlez noted the political power distance between the U.S and Panama, alluding to the manner in which on Panama. Ot hers, such as Ocando, Bieberach and Barrios, noted the need to domestic response elicited but such policy changes Tax Treaty Movement Perceived as Attack on Competitive Advantage This contentious duality suggests that this may not be the best manner in which to promote international transparency. It promotes asymmetric bargaining and a host of potential problems for international relations jeopardizing the collective, multilateral dynamic needed for such a project to be effective. This movement appears to have undermined the initiative to promote transparency, if that is the ultimate objective. Morgan, Linares and C. Gonzlez perceived that Panama was being attacked for its source o f comparative advantage. These informants implied that this was a tactic to
124 from the financial crisis. Participants conveyed the sentiment that Panama was being attacked for i ts business practices in an unproductive and offensive manner. Having implemented international financial practices and regulations to target financial crimes they did not understand why the OECD continued to target Panama as a financial miscreant except to facilitate the repatriation of tax revenues. According to this perspective, t national brand in an endeavor to rectify the budget problems of rich, OECD countries. Panama is NOT a Tax Haven One message was generally consistent amongst informants : the erroneous international level for many informants. The fact that the U.S. had been complicit in this ed the concepts of coercion and duplicity into the discourse related to the TIEA. Several informants acknowledged the was reinforced by these campaigns. In fact, Morgan and Linares pointed to the OECD tax haven definition to suggest that the U.S. fit s this description. These informants, along with Figge Cederkvist, conveyed the feeling that regardless of the regulation and standards by which they abide, OECD member states and other developed economies refused to acknowledge any changes or distance its name from the tax haven label The tax have n label is controversial because no standard definition exists and its meaning shift s based on p erspective haven, Duarte and Ardilla explained that Panamanians paid taxes and complied with
125 their fiscal responsibility. For that reason, Panama should not be considered a tax haven. This response highlights misperceptions about the tax haven label and demonstrates that its definition may shift between cultures and legal systems. From the U.S., European, and international perspective, Panama has historically been a fiscal paradise because it provides shelter t o citizens evading the taxes of their home jurisdictions. This was not perceived to be a problem on the Panamanian front, because as Morgan explained their system does not discriminate between citizens and non citizens ; everyone was subject to the same tax obligations. Essentially, the fact the foreigners exploited Panamanian laws to evade national taxes did not qualify the country as a tax haven according to some informants. While this was highly problematic from the U.S. perspective, the Panamanians, with reason, did not consider it their responsibility to deter tax evaders. However, this view fails to consider the political and economic consequences of adopting this attitude, especially for a financial center that is positioning itself at the global level Stigma Associated with Banking Center Persists The acknowledgment of the need to sign the TIEA confirmed an awareness of the lingering image of Noriega era financial practices. All of my informants described and compliant with international norms and intentionally corruption The extensive legislation that Panama implemented combined with its participation in international efforts to detect mone y laundering were noted by Figge Cederkvist as clear examples of the new, post invasion Pan ama. Duarte, Figg e Cederkvist and others described the stringent nature of banking practices related to KYC (Know your client) and the extensive documentation and pr otocol required to open
126 a bank account. They explained the need to distinguish between the consequences of being a transit economy and the failure to acknowledge these problems. Despite negative press, they considered the financial sector to maintain high levels of transparency and regulation They agreed that there was a discrepancy between this tax policies. Jorge countered this depiction by describing the bribery accepted by smaller banks and engaged in to explain that the rules did not apply to some individuals (specifically citing lawyers and some bankers as the perpetrators). From his perspective, questiona ble ethic al and moral standards continue d Cederkvist also We have the right laws in the right place. to be so And law firms work with different jurisdictions. They treat them all the same, but the others (unethical lawyers, practicing across jurisdictions who are willing to enga ge in grey, black, green whatever business) hose are the ones that tarnish the transparency that the law requires because they will say, ok, if you want to have a corporation in the Bahamas, you require this. But if you want to hide you can do it this wa y and you can go to that jurisdiction. effect on the country. Without effective regulatory bodies to punish and deter such behavior, it will likely persist despite firm regulations. The institutional weakness Panama struggles against affects the country at multiple levels, ultimately affecting its international reputation. Rivera suggested that the TIEA offers Panama the chance to
127 strengthen its own institutions through i ts relationship with the U.S., a very positive outcome in his opinion. Is the TIEA Lifting the Veil of Secrecy? B ank secrecy has evolved and does not offer the same level of protection that it once did. Ardil l a distinguished between Panama and tax havens in the Caribbean that allow shelf corporations by explaining that Panama has strict banking regulations in place that require extensive documentation to conduct business Anonymity is no longer available for c orporation directors because their names must b e registered in the Public Registry. Figge Cederkvist asserted that bank secrecy no longer existed, referring to the information exchange required under the MLAT and PATRIOT Act Most of the interview participants did not expect the TIEA to increase transp arency because the banking sector is highly regulated Such progress has emerged as a result of the dedication to make Panama a premier financial center. Bieberach suggested that opening the country to more investment has increased transparency and will co ntinue to do so Benefits of the TIEA: A One Sided Bilateral Agreement Many informants believed that the agreement lacked reciprocity Because both countries have different tax structures, Morgan, C. Gonzlez E. Gonzlez Linares Duarte and Figge Cederk vist the U.S. Most could not identify or describe a situation under which Panama would invoke the TIEA. Laguerre described situations where Panama could request information and suggested that discount ing the bilateral nature of the agreement implied an oversight of key tax benefits. The perceived lack of benefits was attributed to the by C. Gonzlez Morgan, Linares, E. Gonzl ez and Boutin Rivera and Duarte implied that a
128 TDT would have been preferable over a TIEA because it would have offered more benefits by stimulating cross border investment opportunities. The Panamanian Government had publicly committed to a strategy of n egotiating TDTs because they were considered to be more beneficial to Panama. Criticism and opposition to the TIEA was grounded in this issue. Many felt that because the TIEA diverged from this strategy that the Government had compromised Panamanian nation al interests by acquiescing to U.S. preferences, an emotional and political issue given historical relations. Thus, the characterization of the TIEA as being one sided stems from the fact that Panama did not receive the perceived benefits associated with T DTs. Some of this criticism can be attributed to historical U S Panamanian relations as well as a lack of understanding the technical implications of signing a TDT with the U.S. This was a subjective, emotional response to technical differences ; however, the TIEA extend ed beyond the scope of information exchang e provisions contained in other tax treaties by imposing legislative changes. Double Standard s Many participants viewed the TIEA as discriminatory. The inability of U.S. authorities to identify the o wners of LLCs and the lack of information requested regarding foreign deposits in U.S. banks were frequently cited as points of contention because the TIEA required Panama to adopt legislation for its enactment. Morgan, Linares and C. Gonzlez questioned w hether Panama would have to produce such information in the case that the U.S. could not produce similar information by their laws. Figge many informants took regarding the norms introduced by the TIEA. According to Linares to ask me to do something, the least you can do is commit to the same Figge
129 Cederkvist contrast to the U.S. U.S. in this regard detracted from the TIEA and encouraged the idea that Panama was being held to a different set of standards. The example that Delaware and Nevada offer tax incentives to corporations in contrast to other states, which is a domestic sourc e of tax competition was frequently cited This has generated a sentiment that the U.S. has been disingenuous in its attempts to facilitate tax transparency and fair tax competition, especially according to OECD s used in many cases to describe the TIEA and the legal norms it introduced. Dual Nationality The TIEA failed to acknowledge the special relationship between the U.S. and Panama creating a potential problem for dual nationals. Several informants (Morgan, C. Gonzlez and Linares) cited that Panamanians were not protected under the TIEA. The global tax system enforced by the U.S. means that all citizen s ha ve a federal tax liability ted to economic activities within its borders. The problem arising under the TIEA is that any Panamanian with U.S. citizenship incurs a U.S. tax liability which is now enforceable. claim was that Panamanians do not require protection, and any Panamanian required to pay U.S. taxes would have the ability to claim their Panamanian taxes as a deduction. This response clarifies the technical aspects of this issue, but it does not address the policy issue.
130 Morgan and Linares explained that many of these affected persons had never lived in the U.S. and had no relationship with the U.S. whatsoever. Others had been born abroad while their parents were fulfilling diplomatic roles 29 or were born 30 in the Panama Canal Zone, which was considered U.S. territory until 2000. These individuals, involvement in Panama, these informants believe that the TIEA should have incl uded a clause to address this problem. Morgan note d that dual citizens were not given the right to renounce their citizenship in a timely manner given the retroactive nature of the TIEA. Again, a failure to acknowledge the historic relationship between Pan ama and the US was mentioned as a factor. The U.S. does not consider this issue to be problematic since dual citizens can deduct Panamanian taxes from their U.S. taxes Coble explained. However, the matter is not simply a technical tax issue but related to past U.S. influence in Panama. Using this shared history, Panamanians could rely on Art. 6.1(c) to claim a tax information is sought under the TIEA Whether this issue emerges as a signifi cant challenge will depend on how the TIEA is used and enforced. 29 It should be noted that several of the individuals interviewed were children of former diplomats or had acted in a diplomatic capacity th emselves; therefore this likely heightened their sensitivity to this issue. 30 A special provision was added to U.S. code to clarify the citizenship of those born in the Panama Canal Zone: Persons born in the Canal Zone or Republic of Panama on or after Fe bruary 26, 1904: (a) Any person born in the Canal Zone on or after February 26, 1904, and whether before or after the effective date of this chapter, whose father or mother or both at the time of the birth of such person was or is a citizen of the United S tates, is declared to be a citizen of the United States. (b) Any person born in the Republic of Panama on or after February 26, 1904, and whether before or after the effective date of this chapter, whose father or mother or both at the time of the birth o f such person was or is a citizen of the United States employed by the Government of the United States or by the Panama Railroad Company, or its successor in title, is declared to be a citizen of the United States 8 USC Â§ 1403) Subsection (a) applied to anyone born in the Canal Zone before its return to Panama on December 31, 1999.
131 Strong Public Reaction Compared to Other Tax Treaties When compared to other international tax treaties, participants Boutin Turolla and Ocando agreed that the strong domestic reaction to th e U.S. TIEA in Panama stemmed intervention and occupation in Panama affected the Panamanian pe rception of the TIEA Consequently, the themes of asymmetric bargaining po wer and coercion were raised. Despite any benefits related to the TIEA, some believed that the U.S. manipulated Panama and influenced it to act against its national interest. Others blamed the Government of Panama for capitulating to the U.S. and cited thi s agreement as decisions required to protect Panamanians. The belief that the Government had relinquished a degree of sovereignty and protection of its citizens in exch ange for promises of passing the U.S. Panama FTA were prevalent. Apart from the political reaction to the TIEA, its technical implications contributed to this negative public reaction. The fundamental distinction between the U.S. and Panamanian tax systems inherently made the TIEA more pervasive than other tax treaties that Panama had negotiated with similar exchange of information clauses. Under U.S. tax laws, U.S. citizens are liable to pay federal taxes regardless of their country of residence a system that is broader than most countries that rely on a worldwide tax system Because Panama only tax es income earned within its borders (territorial system), it does not levy taxes on its citizens abroad. This significant difference contributed to the negative perception of the TIEA because it enforces a tax code that is at odds with the Panamanian system Laguerre confirmed that there was a
132 provoked by politics and policy iss ues. Difference s in tax principles affected public perception of the U.S. TIEA in Panama. Effect o n the Panama nian Economy Informants from the business sector claimed that the TIEA was a positive move for Panama. Its willingness to comply with i nternational standards conveys its commitment and dedication to becoming a world class financial center. Figge Cederkvist, Rivera and Ardilla confirmed that some investors or capital might leave Panama initially. The y considered this to be a positive outco not the investment or business that Panama seeks in their point of view, thus, its departure is welcome. Bieberach, Molina, Rivera, Turolla, Figge Cederkvist, Ocando and Laguerre believe d the TIEA may lea d to an increase in investment levels. In their opinion, the TIEA offers the legal certainty sought by foreign investors, especially those rights. Turolla indicated that such lacked. In her opinion, the TIEA and the U.S. FTA would create a stronger investment climate, increasing the levels of foreign direct investment and portfolio flows into the country. New Legal Practices Force Cultural Norms to Shift A fundamental discrepancy highlighted by this agreement is the divergence between U.S. and Panamanian tax laws and their cultural underpinn ings. Laws embody cultural values and perceptions, and the TIEA provoked an emotional response Bout in made the point that changes to tax laws require a change in cultural perception. In spite
133 first world economic forecast culturally speaking, Bout in explained that Panama still at is a product of its history, tradition, Spanish colonization, [and] a lack of method He claimed that these attitudes encou raged the rejection of multinational rules that would force Panama to change. Rivera also spoke of the Resistance to change and divergent cultural perceptions affected the public response t o the TIEA. Changing rules and business practices, whether beneficial or not, can elicit resistance. This is clearly demonstrated in the Panamanian view of the TIEA with the U.S Coble confirmed this by explaining that the TIEA introduced new concepts to t he country, provoking discomfort and concern about the protection of national inter e st. Despite the fact that Panama had negotiated other tax treaties, this agreement prompted internal changes and forcefully altered accepted practices. The counterarguments and criticisms of the TIEA, although valid in many respects, highlight the resistance to embracing Changing the Rules of the Game The TIEA represents the new, evolving standards in international taxation and Panama was forced to comply with these new rules. Although critics conveyed resistance and skepticism, a number of informants considered the TIEA to be an opportunity to promote the Panamanian economy and further distance its image from that which existed under Noriega. Rivera If one wants to improve their reputation as if it were a risk rating, there need to be businesses that are taxpayers s whether or not to invest i n the country practices or favorable tax rates, but should adapt and embrace the new rules of the
134 global economy to attract sizeable investments. Laguerre, Ocando, Ardilla, Barrios, Bieberach Molina and R ivera all acknowledged that the rules of the game had changed. As a global business participant, Turolla asserted that Panama was obliged to comply. By choosing to negotiate the TIEA along with other tax treaties, Panama has begun to position itself at the global business level by agreeing to change its standard operating procedures. General Observations There was a genuine frustration demonstrated by several informants with the outcome of the TIEA and the reluctance of the global community to accept Panam a as a legitimate financial service center. Although some were more moderate than others, the TIEA elicited a response that was somewhat emotional and related to national pride and dignity. From their point of view, Panama has been compliant and cognizant of the need to conduct due diligence. Its geographic position and transit economy make it more susceptible to money laundering which is why the country has implemented a number of ty was clearly a source of irritation for some. The very public efforts by the OECD and other countries in brandishing damaging labels has event prompted some to call for the application of the Law of Retaliation 31 There was a distinct, ethical element u n derlying criticism of the TIEA which resulted in divergent views of the same issues from the U.S. and Panamanian perspectives Fostering a legal environment that enabled U.S. tax law violations e U.S. perspective. The 31 For an explanation of the Law of Retaliation, see Chapter 3 footnote 24.
135 TIEA provides insight into what Jorge implication is that as long as an action is not expressly illegal based on a code of law suggests that it is permissible (or even if the action is margin al, rules and consequences can be avoided) Panamanian laws, allowing for anonymous bearer shares and the preservation of bank secrecy, established a legal argument to counter the tax haven debate because Panama was not explicitly breaking any laws. Howeve r, they were violating the unspoken international operating standards required to coexist in the global economic community (Summers, 2012) This is the crux of the international tax policy debate, that enabling and facilitating illegal activity in the form of tax evasion has become synonymous with breaking the law E ndorsing such activity has become equivalent to committing crimes against the nation whose tax law is violated Summary This study provides insight into the implications arising from the implementation of international tax agreements. These agreements address sensitive political issues and policies, most of which have remained under sovereign contro l despite globalization. Furthermore, the OECD campaign, blacklisting, and discriminatory labels have prompted debate over the legitimacy of these agreements in their stated objective to promote transparency and tax cooperation. This complicated policy is sue is even more complex in the case of Panama for several reasons. The difference in tax regimes, global versus territorial, established a fundamental conflict over the need or right to facilitate the exchange of this information. Some failed to see the b enefit of this agreement for Panama and consider ed it to be mechanism purely for U.S. tax enforcement. Consequently, financial information
136 collection requirements differ considerably in Panama. From this perspective the bilateral nature of the TIEA does n ot appear to provide Panama with tangible benefits. The TIEA introduced new legal norms and principles in to Panama in the area of tax enforcement. The interpretation of certain terms within the agreement appears to reflect U.S. norms and reporting requirem ents. This is further demonstrated by the fact that Panama had to implement new laws to abide by the terms of the TIEA. The negative view of the TIEA held by some Panamanians reflects a resistance to changing rules and norms that was imposed from without. Because tax transparency was not a national priority for Panama, the perception conveyed by some is that Panama was forced into submission. This sentiment heightened criti ci sm of the TIEA since it was introduced by the U.S. U.S. Panama relations are based on a unique history which introduced an expectation of preferential treatment that was not accorded from a Panamanian perspective. Instead, issues relating to asymmetric bargaining power, such as the gotiations suggested a U.S. advantage, since the agreement was signed in Washington, D.C. and the final negotiations were kept out of the Panamanian press until their completion. The pressure tributed to sentiments of frustration, mild resentment, and the need to challenge the persistent stigma that is consistently attached to Panama. For a service based economy, this stigma can carry grave financial consequences and diminish competitiveness T hus, this political attack and insulted national pride simultaneously
137 Differences in legal norms and national interests cause d the U.S. and Panama to view the TIEA from different perspectives The U.S. appears to believe that the TIEA promotes transparency and reduces the ability of U.S. citizens to engage in tax evasion. However, the interpretation is quite different in Panama. The agreement requires Panama to cooperate and enforce extraterritorial tax laws. Panama agreed to the TIEA because it signals greater compliance and cooperation with international standards from a business perspective; however, some Panamanians do not believe that the TIEA The national inter pretation of tax treaties and TIEAs gives rise to important consequences of these agreements. Their purported objectives are to enhance tax cooperation and transparency by facilitating information exchange. To achieve this, however, significant legislative reform may be required which can be at odds with domestic legal norms, business practices or the promotion of national interests. In the case of Panama, amendments to its legal code were implemented. The definition and structure of tax policy is designed to promote national objectives. By introducing the tax laws of another country, possibly with different objectives or goals contrary to the national interest of another, these agreements are slowly changing tax policy and tax law enforcement. Whether this is contrary to international law has been debated and will continue to be debated based on principles of sovereignty, and ultimately, who has the right to tax mobile capital in a global economy. The U.S. Panama TIEA offers an example of the changed approa ch to international taxation and tax law enforcement. As large economies aggressively pursue tax evaders, they are changing the dynamics of international tax policy. T his case
138 demonstrates that countries are willing to comply whether or not it directly co ntributes to their national welfare, to ensure a number of intangible or indirectly linked benefits. business timate service offerings continued to enable the practice of tax evasion from the U.S. perspective prompting political pressure to change the laws allowing this behavior The U.S. leveraged its unique shared history and economic relationship with Panama t o induce compliance Although skepticism remains about the impact the TIEA will have, it investors and is likely to produce long term economic gains
139 CHAPTER 5 CONCLUSION This study was designed to address why Panama agreed to sign a TIEA with the U.S. that conflicted with its bank secrecy laws and other legal principles political history and its past relationship with the U.S. to contextualize the Panamania n response to the TIEA. I also discussed establish the importance of its service sector, particularly the banking and financial service industries. I studied tax haven and evaluate its regulatory environment within the greater context of international financial regulation. Drawing on this foundation, I analyzed the text of the U.S. Panama TIEA to highlight inconsistencies that arose as a result of different tax laws and different legal systems. I conducted open ended interviews with Panamanian professionals, primarily from the legal and business sectors, t o determine why Panama agreed to the TIEA and to acquire deeper insight into its implications for Panama. Th is chapter discusses my findings It also addresses the limitations of this study and proposes questions for future research endeavors. Research Findings Political Pressure Successfully Results in Tax Treaties Panama signed the TIEA to protect the reputati on of its financial service center and its global competitiveness The combined efforts of the G20 and the OECD to pressure tax havens into compliance appear to be successful in establishing new information exchange standards in tax policy The strategy of blacklisting has given these organizations an effective tool to induce compliance despite the lack of a legitimate enforcement mechanism and no official international mandate. Targeting the competitiveness of non cooperative jurisdictions, as occurred in the case of Panama,
140 succeeded in prompting Panama to negotiate tax treaties. The U.S. strengthened its bargaining position by using the FTA as political leverage B y making the TIEA a prerequisite for Congressional approval of the U.S. Panama FTA the U.S. pressured Panama into signing the TIEA Panama sign the TIEA was to add to the agreements required to achieve removal from the OECD Gray List ; however, Panama also viewed it as a way to obta in FTA approval. The disparity in bargai ning positions between the U.S. and Panama suggests that Brooks is correct to lobby in favor of multilateral tax treaties (2010) By making increased transparency and the TIEA prerequisites for passage of the U.S. Pana ma FTA, the U.S. is broadening the application of FTAs as policy instruments that extend beyond free trade. This particular extension represents a new avenue for imposing U.S. legal norms on a developing economy. It has altered Panamanian laws and signific antly affected the domestic business environment. Bilateral Treaties Should Not Encourage Double Standards and tax treaties demonstrates its willingness to embrace international norms and regulations despite some reservations The political nature of this issue has generated considerable polemic debate in Panama and many were disappointed with the However, the TIEA, along with the other tax treaties, signifies that Panama is becoming a world cla ss financial center. Operating outside of international norms is also costly. Had Panama decided not to sign the TIEA, the political and economic consequences could have been significant. The pursuit of a level playing field in international taxation requ ires a meaningful bilateral effort. A significant issue analyzed in this study has been that of requiring Panama to implement and adhere to new legal norms. Yet, from the Panamanian
141 perspective, the U.S. has been unwilling to do the same. This is not an is sue that is limited to coercion or politics between the U.S. and Panama as other advocacy groups have noted similar concerns in the promotion of tax transparency. To legitimize such agreements, the U.S. must be willing to abide by the same standards of pra ctice. To some degree, this has be en acknowledged in that the IRS recently announced that U.S. banks would be required to report on interest earned on foreign bank deposits in the U.S. This proclamation has been resisted by U.S. bankers, particularly in Fl orida, as they claim it will im pose significant costs as account holders transfer their funds to other jurisdictions. Barring any negative economic implications, this policy change reflects a greater movement towards a true level playing field. Tax Treatie s as Tools to Promote Transparency Touted as cracking Panamanian bank secrecy, this study suggests that this claim about the TIEA is an over exaggeration and a mischaracterization of financial regulations in Panama. Similar to Switzerland, bank secrecy has diminish ed in the quest to prosecute financial crimes. Suggesting that the TIEA and other tax treaties are compromising bank secrecy in Panama overstates their utility because such confidentiality laws remain unchanged While there are aspects of these ag reements that promote transparency by minimizing tax evasion, this agreement address es U.S. tax law enforcement. Panamanian banks provided information in connection with criminal investigations before the TIEA, and because tax infractions did not qualify, they would not comply with such requests in cases where tax evasion was claim ed to have occurred The TIEA and tax treaties in general, establish a formal mechanism between governments to overcome difference s in legal code and tax policies. It does not y ield
142 newspaper headlines and congressional testimony but rather these agreements are reducing anonymity in the global financial system. In the case of Panama, bank sec recy has been significantly diminished to comply with international financial practices. The role of the legal profession in providing financial instruments became the primary issue with the Panama TIEA, since the U.S. considered bearer shares and other or ganizational business structures to lack transparency by preserving anonymity Tax treaties address enforceability issue s between fundamentally different tax systems, principles and laws. Providing a protocol to enforce tax laws internationally has diminis hed the value of anonymity in the financial world as its existence is no longer accepted globally. Tax Treaties Address a Number of Issues Beyond Taxation The study of tax treaties to date has focus ed on the technical tax implications that arise This stu dy demonstrate s that the ir implications extend beyond the scope of taxation. T he dynamics of U.S. Panamanian relations clearly produced a number of unanticipated issues that were not explicitly included in the TIEA. The debate that emerged regarding the TI dual nationality serves to show that tax treaties inherently address cultural and political issues. The issue of constitutionality proved to be another source of unanticipated controversy because the cultural basis of the P anamanian legal code differs from that of the U.S. Challenges can arise from the implementation of tax treaties that were unanticipated or not a substantive component of the negotiation process. Evaluating tax treaties using a multidisciplinary approach is important to understand the broad nature of their implications.
143 Panamanian reception of the TIEA reflected past tensions with the U.S. The U.S. has a tendency to enact policies using historical blinders, and often fails to acknowledge sensitive domestic i ssues for the parties involved This is clearly evident in the case of Panama where many viewed the TIEA, not only as an instrument to promote tax enforcement but as a policy reminiscent of U S involvement in Panamanian affairs. This visceral reaction is understandable when assessed in the appropriate context. The U.S. failure to acknowledge this historical relationship offended Panamanian pride, a particularly poor policy oversight in a culture that place s a premium on relationships in conduct ing busines s. Panama wants its sovereignty to be recognized and respected and this issue remains prevalent today. Some of these subjects are unique to this case study of Panama. However, these issues are instructive in demonstrating that tax treaties may carry effe cts beyond the technical realm of taxation. They are prompting substantive changes by imposing a new regulatory standard in tax policy that can affect key national and political interests as well as change existing business practices. A greater understandi ng of these country specific issues may enable policymakers to better address them in future negotiations Different Laws Reflect Different Cultural Norms The literature about tax treaties and TIEAs generally discusses their ability to enhance tax law en forcement. Although a few scholars addressed their economic effects, they have failed to address the challenges to implementing these agreements in countries with different tax principles and tax laws This study highlighted the fundamentally different leg al norms between Panamanian legal code and U.S. laws. These discrepancies were also evident in the TIEA which was predisposed to enforce U.S. tax laws. Because countries adopt tax policies to further their respective national
144 objectives, tax treaties inevi tably require countries to compromise on issues intricately tied to national welfare. T here is a deeper cultural and political dimension to these treaties that the literature has failed to address beyond the explicit differences in tax regimes. Understandi ng these differences, as well as the legislative reforms required to bridge the gap in tax laws may produce more beneficial and effective tax policies for all those involved. Financial Effects of the TIEA The TIEA has the potential to produce economic ra mifications in the Panamanian financial sector. This agreement has been touted as a beacon of transparency that will demonstrate to investors that Panama is open for business and has moved beyond its past. There is an expectation that foreign held account deposits may initially decline as investors transfer their assets in response to the new policies of information exchange. Due to its status as a regional ban king center, it would seem likely that Panama would lose clientele who consistently engage in illi cit activities. As money launderers and traffickers look to safer havens, the question will be whethe r those who look at Panama as a legal investment opportunity will counteract this capital flight. There is optimism that this agreement, combined with the approval of the FTA and the Canal expansion, will contribute substantially future economic performance T ax treaties are expected to facilitate economic opportunities between countries because they offer a standardized set of rules and regulat ions to guide investors. Their symbolic representation may be as effective, if not more so, that the standardized set of guidelines they impose. The action of complying with international standards often exceeds the value imparted by the tax treaties thems elves. For Panama, the TIEA and
145 its other tax treaties are expected to encourage an inflow of capital that would have been deterred without their implementation. TIEAs Challenge Existing Laws and Force Reforms The literature indicated that the proliferatio n of tax treaties is designed to combat inconsistencies between the tax policies of different jurisdictions; however, t he U.S. TIEA appears to extraterritorialize U.S. tax laws. Although the U.S. has always relied on a global tax system, enforcement was co ntingent upon citizens complying. U.S. tax investigators had no way to compel citizens to cooperate if they resided in another jurisdiction in most cases. In this study, the U.S. place d the burden of enforcing U.S. tax laws on Panamanian administrative age ncies It does not appear that Panama receives tangible benefits from this arrangement as the U.S. seeks to increase its tax revenues. This study illustrates that the cost of compliance with financial regulations continues to increase. The TIEA, in effect shares the burden of U.S. tax law enforcement with Panama causing many to question its value from that perspective. This analysis is not applicable to all tax treaties because their implications vary based on the parties involved. However, it is clear t hat they are increasing the cost of regulatory compliance, which may not directly benefit those citizens bearing the costs. The Role of Sovereignty in Evolving International Tax Policy The U.S. Panama TIEA brings up broader questions about tax jurisdiction s in a global economy. Traditionally, international law has discouraged the enforcement of domestic tax law outside of the jurisdiction where those laws apply. This TIEA continues to add to the trend of reversing this concept, wherein all global parties mu st cooperate in the enforcement of tax regulations. To what degree does the U.S. have the right to pursue taxes on these funds, especially if the citizen is a resident of the foreign
146 jurisdiction? The question of who gets the money is becoming increasingly complex as a transnational world has rapidly eroded the concept of national borders. However, the U.S. Panama TIEA has already succeeded by obligating Panama to reform its domestic legislation in favor of a more open transparent business environment. Hop efully, these reforms will enable Panama to elim inate the perception of the existence of rampant financial corruption and finally eradicate its reputation as a tax haven. Ultimately, the question remains as to how to effectively structure national tax pol icy in an era of highly mobile capital. The U.S. and some European countries have decided to enforce existing laws through tax treaties and other enforcement mechanisms to expand tax revenues. However, this may not be the best long term approach, for both political and economic reasons. The implementation of tax treaties and their effectiveness in achieving their objectives will determine whether this shift in international tax policy has promoted tax transparency and enhanced tax receipts, or whether more profound global tax reforms are required. Significance Governments have confronted the challenge of how best to structure their tax policy and exact revenues from its citizens throughout history. This case study is part of a larger movement to adapt intern ational tax policy to the new global economy that has emerged over the past 50 years. The describe the dynamics of this global tax policy debate. Tax treaties and TIEAs appear to promote tax transparency to reduce financial crimes, such as tax evasion and even money laundering, on a global scale. However, these instruments are inherently political as they are ultimately designed to protect the national welfare of those pursuing them. Their effectiveness
147 continues to be questioned since their utility is restricted by a highly formalized information exchange process. However, their economic and political power to deter tax evaders may increase their value simply through their implementation. My research found that Pana ma agreed to sign a TIEA with the U.S. for economic and financial preservation. The negative against tax havens had the potential to diminish financial activity in international financial center. The import ance of trust and transparency in banking encouraged the Panamanian Government to confront this campaign with a tax treaty The case study of the TIEA highlights the need for a multilate ral approach to tax competition and international transparency because tax treaties are changing the rules and accepted operating principles in international tax policy. The disparity in bargaining position s between developed and developing countries is co unterproductive. It feeds into the criticism that the OECD initiative is an attack on smaller countries whose financial infrastructure threaten s the tax revenue streams of wealthy, developed countries. Increased involvement by the U N or an other appropria tely designated international organization would increase the legitimacy, and potentially the effectiveness, of this international campaign. Moving from a bilateral to a multilateral negotiating framework would enhance the promotion of the international ex change of tax related information. Creating an environment of mutual cooperation, rather than one of antagonism and intimidation, would prove beneficial in identifying solutions to promote effective tax collection on an international level contributing to a more effective framework to promote these new standards of international tax policy.
148 Issues for Further Study The recent emergence of tax treaties and TIEAs that apply stricter terms in an effort to overcome conflicting domestic laws makes it difficult to predict how they will be used and to what extent. Studying the frequency with which information exchange is relied upon to enforce tax collection or pursue criminal tax investigations addressed by future studies could yield insight as to whether these agreements are fulfilling their objective to promote tax law enforcement. Cross referencing these requests with U.S. criminal prosecution of tax crimes would also facilitate a cost benefit comparison to determine if the administrative costs of enforcement are exceed ed by the tax revenue recovered. Furthermore, it would offer insight about the strength of these agreements to determine if new legal precedents are established through their enforcement and implementation, particularly regarding international ta xation. The contemporary nature of this study makes it difficult to determine whether tax treaties will deter or attract additional investment, especially to jurisdictions that have been labeled as tax havens. A limited number of studies have begun to ana lyze the financial and economic impacts of these agreements. While my informants offered speculative insight regarding such outcomes from a Panamanian perspective, future research comparing a number of similar agreements would be informative as to whether they influence foreign investment, diminish foreign account holders bank deposits and a myriad of other issues. Finally, the degree to which these agreements improve transparency offers another area of inquiry. Developing a study to assess the effectivene ss of these agreements in promot ing transparency by reducing financial opacity would prove beneficial.
149 A PPENDIX A INTERVIEW GUIDE 1. What is your occupation/post within your firm? 2. Could you explain the responsibilities required by your position in relatio n to Panama business sector? 3. How many years have you worked in this industry? Please elaborate on this experience. 4. H ave you dealt with or do you deal directly with business transactions subject to confidentiality by law? 5. Have these transactions been subje ct to domestic or foreign taxation? 6. What is your opinion of the overall level of business transparency in your sector/industry? 7. and corruption? What does the global community think of the Panamanian business environment? 8. Do you think the TIEA will encourage a more transparent business environment? Questions Related to Tax Information Exchange Agreement General Questions 9. What is your understanding of the recently signed U.S. Panama Tax Information Exchange Agreement? 10. What is the objective of an agreement such as this? 11. What is your opinion of the agreement? W hy? 12. Do you anticipate that the TIEA will affect your business/sector? 13. If you have dealt with tra nsactions subject to confidentiality by law, will these transactions now be subject to disclosure upon request from a government authority? 14. What effects do you think this agreement will have on your business in general? 15. (If not directly affiliated with the banking industry) How do you anticipate this agreement will affect the Panamanian banking sector and the financial service industry in general (economy)? 16. Are there implications for your business, industry, clients? Could you lose business as a result? 17. C ou ld you speculate as to whether the possibility exists to bring legal action against business interests in your industry according to the terms of the U.S. Panama TIEA? 18. Do you anticipate a loss of clientele in your sector or in other sectors of the Panamani an economy as a result of this agreement? 19. 20. Do you think this agreement will affect the level of financial transparency in Panama? 21. Do you believe this agreement will affe 22. Are there consequences for investors and people looking to bring business to Panama? Enforcement General Questions 23. In your opinion, do you think Panamanian authorities will honor this agreement? T o wha t degree? 24. Will there be consequences for not complying with TIEA requirements/requests ? 25. How do you think this agreement will be administered or enforced in Panama? 26. Who will pay for administering the TIEA, the party soliciting the information ? 27. What do you think about the retroactive nature of the agreement and how will this clause be administered/enforced? Will leniency be granted? 28. Do you think the Panamanian authorities or the judicial system will limit or obstruct investigations initiated as a result of the TIEA ? Are there specific factors that may promote /inhibit compliance ?
150 Emergence of the U.S. Panama Tax Information Exchange Agreement 29. Why do you think this agreement emerged or what prompted its emergence? 30. What do you think the U.S. objectives were beh ind the negoti ation of this agreement? 31. How was this agreement presented to the public? When do you recall it first being mentioned ? 32. Was the content made available to the public before it was signed or after? 33. e TIEA ? 34. Do you believe this agreement emerged as a result of the pending U.S. Panama TPA ? 35. Do you believe this agreement bec a me a prerequisite for U.S. approval of Panama TPA ? If so, why? Consequences General Questions 36. What are the concerns related to this agre ement for: Citizens, Banking Professionals, Lawyers? 37. Do you expect that this agreement will be a problem or threaten business in the financial sector ? 38. What does this mean for citizens with dual nationality? 39. Overall, what effects do you anticipate from this agreement in addition to those already discussed? 40. Are there unforeseen negative consequences, from either a Panamanian or foreign perspective? 41. Do you have any additional comments or opinions you wish to provide related to this agreement? Questions Used f or Tax Specialists 42. What is the difference between a double tax treaty and an agreement for tax information Exchange? 43. What are the reasons for negotiating one over the other? Are there advantages/disadvantages? 44. Are there terms of this TIEA that differ from other tax treaties ? 45. Since the U.S. and Panama have different tax laws, will this complicate administration of the TIEA? 46. Could you describe the negotiation process in general? 47. Was the negotiation process for the TIEA distinct from the other tax treaty ne gotiations? Questions Used for Lawyers 48. Could you discuss the terms and structure of the TIEA? 49. How are you advising your clients in regards to this agreement? Its retroactivity? 50. Has Panama had to reform domestic laws to implement this agreement? 51. Have banki ng laws changed as a result? 52. What are the implications for lawyers who deal with international commercial transactions? 53. What do you think about the scope of the TIEA as a legal agreement? 54. What are the tax implications for Panama corporations/sociedades ano nimas? 55. If a U.S. citizen is part of a Panama corporation (S.A.) what course of action could the U.S. take to obtain information? a. Would this be possible based on the legal structure of an S.A. in Panama, or based on international law, would the TIEA super sede this? Financial Crimes / Transparency / Corruption General Questions 56. In terms of transparency, will this agreement encourage a more transparent business environment? 57. Do you think the TIEA has anything to do with financial crimes, such as money laun dering, or is its purpose strictly related to tax matters? 58. Do you think this agreement is an indirect way of combating financial crimes and money laundering ? 59. By initiating a TIEA with the US, do you think this will discourage/prevent financial crimes in P anama? 60. Do you think the US will use this agreement to investigate money laundering cases or charges?
151 A PPENDIX B PARTICIPANT GUIDE Name Profession Position Organization Special Posts Adolfo Linares Lawyer & Law Firm Partner Tapia, Linares & Alfaro Past President, American Chamber of Commerce, Panama Ariosto Ardil l a Lawyer Attorney at Law Carlos Ernesto Gonzlez Lawyer Partner Morgan & Morgan, Law Firm High Presidential Commission Carlos Klaus Bieberach Senior Consultant Tax & Legal Team PriceWaterhouse Coopers Edith Castillo Duarte Journalist Financial & Economic Reporting La Prensa Eduardo Gonzlez Lawyer Partner Morgan & Morgan, Attorneys at Law Francisco Barrios Tax Specialist Partner Pricewaterhouse Coopers Frank DeLima** Vice Minister Ministry of Economics & Finance Gilberto Boutin I. Lawyer Boutin Law Firm Heather Coble Foreign Service Officer Economic Affairs Officer U.S. State Department U.S. Embassy in Panama Jorge Molina Lawyer Icaza, Gon zlez Ruiz & Alemn Jorge* Economist Jos Javier Rivera Lawyer Partner & Founder Rivera, Castaedas & Bolivar Luis Laguerre Tax Consultant / Treaty Negotiator Partner KPMG / Ministry of Economics & Finance Member, Tax Treaty Negotiating Te am Ministry of Economy and Finance President, American Chamber of Commerce, Panama Luis Ocando International Tax Partner Partner Ernst & Young / Ministry of Economics & Finance Member, Tax Treaty Negotiating Team Ministry of Economy and Fi nance Luisa Turolla Economist President Proyectos Inteligentes Consulting Firm Eduardo Morgan, Jr. Lawyer Partner Morgan & Morgan, Attorneys at Law Diplomatic Posts Victoria Figge Cederkvist Fraud & Money Laundering Prevention Consultant CEO & CFO, Owner BERG Associates (Latin America) Inc. Former Director, Financial Analysis Unit, Panama 1997 99 *Pseudonym to maintain confidentiality **I attended a press briefing during which he discussed the Government's tax treaty negotiation efforts
152 APPENDIX C TIMELINE OF KEY HIST ORICAL & POLITICAL E VENTS
153 A PPENDIX D THE U.S. PANAMA TAX INFORMATI ON EXCHANGE AGREEMEN T The text of this document is the version presented for signature in Washington, DC, on November 30, 2010.
163 APPENDIX E U.S. PANAM A TIEA JOINT DECLARATI ON
166 APPENDIX F PANAMA: TAX TREATIES & TIEAS NEGOTIATED A ND IN FORCE Agreements to Avoid Double Taxation Ratified by Panamanian National Assembly Country Law No. Date Ratifi ed Official Gazette Entry Date Published Official Gazette Date of Entry into Force 1 Mexico Law 24 5/31/2011 26,548 6/4/2010 1/1/2011 2 Barbados Law 5 2/8/2011 26,720 B 2/10/2011 1/1/2012 3 Portugal* Law 7 2/8/2011 26,720 C 2/10/2011 4 Qatar L aw 20 3/29/2011 26,754 A 3/31/2011 1/1/2012 5 Luxembourg Law 21 3/29/2011 26,754 A 3/31/2011 1/1/2012 6 Spain Law 22 3/30/2011 26,754 B 3/31/2011 7/25/2011 7 Hol l and Law 23 3/30/2011 26,754 B 3/31/2011 1/1/2012 8 Singapor e Law 24 3/30/2011 26, 755 4/1/2011 1/1/2012 9 Korea Law 25 3/30/2011 26,755 4/1/2011 1/1/2013 10 Italy* Law 78 5/10/2011 26,784 B 5/13/2011 11 France Law 50 10/18/2011 26,896 B 10/19/2011 1/1/2013 *Indicates that the Law is not yet in effect. Tax Informatio n Exchange Agreements Ratified by Panamanian National Assembly Country Law No. Date Ratified Official Gazette Entry Date Published Official Gazette Date of Entry into Force 1 United States 40 4/18/2011 26,767 4/18/2011 4/18/2011 Source: Panama Min istry of Economics and Finance, Directorate of General Income, (April 13, 2012)
167 LIST OF REFERENCES Alfaro, J. (2011, April 15). Abogados D emandan A cuerdo F iscal La Estrella Retrieved October 15, 2011, from http://www.laestrella.com.pa/online/impreso/2011/04/15/ abogados demandan acuerdo fiscal.asp Antoine, R. M. B. (2010). egitimacy of the O ffshore F inancial S ector: A L egal P erspective I n : Morriss A. P. ( E d.) Offshore F inancial C enters and R egulatory C ompetition Washington, D C: American Enterprise Institute Arce, B. S. (2009). T aken to the C leaners: Panama's F inancial S ecrecy L aws Facilitate the L aundering of E vaded U.S. T axes Brooklyn Journal of International Law, Vol. 34 pp. 465 490 Autoridad del Canal de Panam. (2011). 2011 Annual Report: Canal de Panam. Panama City Panama : Autoridad del Canal de Panam. Retrieved April 28, 2012 from http://www.pancanal.com/eng/general/reporte anual/2011/flash.html Bachman, H. (2012, March 15). Why U.S. Tax Evaders Can No Longer Count on Swiss Se c recy TIME Magazine Retrieved June 8, 2012 from www.time.com/time/ world/article/0,8599,2109183,00.html Barletta, N. A. (2004). El S istema M onetario y la B anca en Panam I n : Castillero Calvo A. ( E d.) Historia G eneral de Panam: El S iglo X X (Volume III, Book II ) Panama City : Comit Nacional del Centenario Barthel, F., Busse, M., Krever, R., and Neumayer, E. (2010). The R elationship B etween D ouble T axation T reaties and F oreign D i rect I nvestment I n : Lang, M. Pistone, P., Sch uch, J., Staringer, C., Storck, A., and Zagler M. (E ds.) Tax T reaties: Building B ridges B etween L aw and E conomics Amsterdam: International Bureau of Fiscal Documentation Batker, D., and Celt, S. (2009, May 26). Panama W rong C F irst T rade D eal The Seattle Times Retrieved February 15, 2011 from http://seattletimes.nwsource.com/html/opinion/2009264965_opinb27batker.html Bernal, M. A. (2004). Evolucin C onstitucional d esde la S eparacin de Panam. In : Castillero Calvo A. (Ed.) Historia G eneral de Panam: El S iglo XX ( Vo ume III, Book I ). Panama City : Comit Nacional del Centenario. Bureau of National Affairs ( BNA ) (2010, April 13). Belize on the V erge of ray L ist Bsquez, E. (2004). El Tratado Hay Bunau Varilla. In : Castillero Calvo A. (Ed.) Historia G eneral de Panam: El S iglo X X (Vol ume III, Book I) Panam a City : Comit Nacional del Centenario.
168 Brand, E., Kuleta, G., and Sadon, R. (2010, December 7). Is the U.S. Panama F ree T rade A greement N ow a D one D eal? The Latin America Advisor Washington, DC: Inter American Dialogue. Brannan, B. (2012, March 12). eto d el La Prensa Retrieved March 20, 2012 from http://www.prensa.com/impreso/panorama/ %C2%B4corrupcion reto del pais%C2%B4 powers/74656. Brechbhl, R. (2007, September 10). Panama C anal E xpansion to D rive F urther G rowth Credit Suisse: Market News & Expertise Retrieved March 5, 2011 from https://infocus.credit suisse.com/app /article/index.cfm?fuseaction=OpenArticle&aoid=198176&lang=E N. Brooks, K. (2010). The P otential of M ultilateral T ax T reaties. In: Lang, M., Pistone, P., Schuch, J., Staringer, C., Storck, A., and Zagler, M. (Eds.), Tax Treaties: Building Bridges Betwe en Law and Economics Amsterdam: International Bureau of Fiscal Documentation. Browning, L. (2009, September 7 ). Swiss D e al with IRS M ay H ide S ome T ax C heats The New York Times. Retrieved April 10, 2011 from www.nytimes.com/2009/09/ 08/business/global/08ubs.html. Burn, G. (2006). The R e E mergence of G lobal F inance. New York: Palgrave Macmillan. CentralAmericaData. (2010, September 30). Socit Genrale C ierra O peraciones e n Panam CentralAmericaData. Retrieved October 21, 2011, from http://www. centralamericadata.com/es/article/home/Societe_Generale_cierra_operaciones_ en_Panama Channel 4 News. (2012, February 28). Tax A voidance or T ax E vasion? London : Channel 4 News. Retrieved April 20, 2012 from http://www.channel4.com/news/tax avoidance or tax evasion Christian Science Monitor. (1986, March 20). Banking's a S ecret in Panama Christi an Science Monitor Retrieved February 25, 2012 from http://www.lexisnexis.com Ciudad de Panam. ibre de Coln A lcanzara los $31mil M illones este La Prensa Retrieved April 15, 2012 from http://www.prensa.com/impreso/economia/zona libre de colon alcanzaria los 31 mil millones este ano/77627
169 Colegio Nacional de A bogados. (2011, April 18). Interponen D emanda de I nconstitucionalidad contra A cuerdo T ributario. Panama City: Lpez, Morales and Chiari, Attorneys at Law. Retrieved April 30, 2012, from http://www.lopezmoralesychiari.com/detalle_noticia+M5e626f2cf56.0.html Cryer, R., Friman, H., Robinson, D., and Wilmshurst, E. (2010). An I ntroduction to I nternational C riminal L aw and P rocedure ( 2nd ed.). Cambridge: Cambridge University P ress. De Gracia, M. (2009, May 7). Defensa T arda del S ector de S ervicios C ausa P olmica Panam Am rica Retrieved April 15, 2012 from http://www.panamaamerica.com.pa/ Delaware Corporation and Business Entity Laws. (2012 ). Delaware C orporation and B usiness E ntity L aws In: Department of State: Division of Corporations Retrieved April 27, 2012 from http://www.corp.delaware.gov/DElaw.shtml Direcc in General de Ingresos ( DGI ) (2010, December 28). Normativa Resolucin esigna la A utoridad C ompetente para S olicitar, R ecibir y C ontestar S olicitudes de I ntercambio de I nformacin en M ateria de T ributaria In: Direccin Gen eral de Ingresos: Tributacin Internacional Retrieved April 20, 2012 from http://www.dgi.gob.pa/documentos/doble_tributacion/Resolucion_253_%20DSAL .pdf Diaz Esp ino, O. (2001). How Wall Street Created a Nation: J.P. Morgan, Teddy Roosevelt, and the Panama Canal. New York: Four Walls Eight Windows. Dionne, A. M., and Macey, J. R. (2010). Offshore F inance and O nshore M arkets: Racing to the B ottom, or M oving T oward E fficient? In : Morriss A. P. (Ed.), Offshore F inancial C enters and R egulatory C ompetition Washington, DC: American Enterprise Institute. Duarte, E. C. (2008, October 23). Panam est en la M ira de la OCDE La Prensa Retrieved October 10, 2012 from http://mensual.prensa.com/mensual/contenido/ 2008/10/23/hoy/negocios/156619 4.html. ( -----.). (2009, June 10). SWOT A nalysis of P anamanian B anking Martes Fin anciero R etrieved January 28, 2011 from http://www.martesfinanciero.com/mensual.html Ducros, A., and McFarlane, A. (2010, April). PLN Banknote: France C reates Tax H a ven B lack L ist. Sydney: PLN L awyers. Retrieved April 30, 2012, from http://www.pln.com.au/index.php?option=com_content&task=view&id=197
170 Economic Commission for Latin America and the Caribbean (ECLAC) (2011). Statistical Yearkbook for Latin America and the Caribbean Santiago : ECLAC. Retrieved from http://www.eclac.org/publicaciones/default.asp?idioma=IN Economic Intelligence Unit. (2011, September 8). Panama E conomy: Planning a S overeign W ealth F und. ViewsWire. Retrieved from http://viewswire.eiu.com. The Economist. (1999, December 16). Panama's B ig D ay The Economist Retrieved March 27, 2012 from www.economist.com/node/26 8057 ( -----. ). (2009 a October 29). The Economist. Retrieved F ebruary 24, 2011 from www.economist.com/node/ 14745043 ( -----. ). (2009 b December 3). A P lan to U nlock P rosperity The Economist Retri e ved April 10, 2011 from www.economist.com/node/15014282 ( -----. ) (2012, February 11). Don't A sk, W on't T ell: Amid a G lobal S queeze on T ax E vasion Switzerland is the P rime T arget The Economist Retrieved June 8, 2012 from www.economist.com/node/21547229 Elsayyad, M. (2012). Bargaining O ver T ax I nformation E xchange. Munich: Max Planck Institu te for Tax Law and Public Finance. Ernst & Young. (2011). Panama's N ew A genda: Transparency & T ax P olicy as D rivers of G rowth and E quality. Panama City: Ernst & Young. Retrieved June 10, 2012, from http://www.ey.com/Publication/vwLUAssets/ Panama_new_agenda_April2011/$FI LE/Panama_new_agenda_April2011.pdf Ernst & Young. (2010). Tax Havens Under Fire T Magazine: Tax Insights for Busine ss Leaders Vol. 2, pp. 44 47. Financial Action Task Force ( FATF ) (2002). Review to I dentify N on C ooperative C ou ntries or T erritories: Increasing t he W orld W ide E f fectiveness of A nti M oney L aundering M easures. Paris: FATF Retrieved February 18, 2011 fr om http://www.oecd.org/dataoecd/4/32/33922320.pdf FinCEN. (2000). F inCEN Advisory: Transactions I nvolving Panama, I ssue 23. Financial Crimes Enf orcement Network. Washington, D C: U.S. Department of the Treasury. Retrieved February 25, 2011 from http://www.fincen.gov/news_room/ rp/advisory/pdf/advis23.pdf
171 Frantz, C., and Ramirez, S. (2011, November 15). A M ajor W in" fo r P anamanian Corruption: Free T rade A greement D estined to B enefit T ainted E xecutive, L egislative and J udicial B ranches. Council on Hemispheric Affairs Retrieved March 20, 2012 from http://www.coha.org/a major win for panamanian corruption/ Fuentes, A. ( 2011, November 25). Patria, o A varicia y E ngao La Prensa Retrieved November 30, 2011, from http://www.prensa.com/impreso/opinion/patria o avaricia y engano abdel fuentes/42380 Gaceta Oficial. Retrieved June 10, 2012 from http://vlex.com.pa Gaceta Oficial No. 12995 (1956 June 29). Law 8, Gaceta Oficial. Retrieved June 10, 2012 from http://vlex.com.pa Gaceta Oficial. Ret rieved June 10, 2012 from http://vlex.com.pa Gaceta Oficial. Retrieved June 10, 2012 from http://vlex.com.pa Gaceta Oficial No 16640 (1970 July 6). Cabinet Decree 238 Gaceta Oficial. Retrieved June 10, 2012 from http://vlex.com.pa Gaceta Oficial 24152 Gaceta Oficial. Retrieved June 10, 2012 from http://vlex.com.pa Gaceta Oficial. Retrieved June 10, 2012 from http://vlex.com.pa Gaceta Oficial No. 25176 (2004). Constitucion Po litica de Panama [Constitution] art. 46 In: Gaceta Oficial. Retrieved June 10, 2012 from http://vlex.com.pa Gaceta Oficial No. 26035 (2008, April 30). Executive Decree 52 In: Gaceta Oficial. Retrieved June 10, 2012 f rom http://vlex.com.pa Gaceta Oficial No. 26566 Gaceta Oficial. Retrieved June 10, 2012 from http://vlex.com.pa Gaceta Oficial No. 26679 A (2010, Septemb er 30 ). Resolution No. 88 DS/AL, In: Gaceta Oficial. Retrieved June 10, 2012 from http://vlex.com.pa Gaceta Oficial No. 26697 (2011, January 7). In: Gaceta Oficial. Retrieved June 10, 2012 fr om http://vlex.com.pa
172 Gaceta Oficial No. 26713 Gaceta Oficial. Retrieved June 10, 2012 from http://vlex.com.pa Gaceta Oficial No. 26767 (2011, April 18 Gaceta Oficial. Retrieved June 10, 2012 from http://vlex.com.pa Gaceta Oficial No. 26824 (2011, July 8). Executive Decree 85 In: Gaceta Oficial. Retrieved June 10, 2012 from http://vlex.com.pa Gaceta Oficial. (2012). Gaceta Oficial Digital G obierno Nacional de la Repblica de Panam Retrieved April 25, 2012, from http://www.gacetaoficial.gob.pa/ Global Financial Integr ity ( GFI ) (2011). Illicit Financial Flows from Developing Countries: 2000 2009. Washington, D.C.: GFI Retrieved from http://iff update.gfintegrity.org/ Global Studies Law Review. (2006). Washington Univ ersity M anual of I nternational L egal C itation: Republic of Panama Washington University Global Studies Law Review. Retrieved from: http://law.wustl.edu/WUGSLR/CitationMan ual/ countries/panama.pdf Gmez Arbelez, F. (2010 a November 26). A l a S ombra de B unau V arilla La Prensa Retrieved September 12, 2011, from http://mensual.p rensa.com/mensual/ contenido/2010/11/26/hoy/opinion/2414018. asp ( -----.) (2010 b Ju ly 15). Convenios en Letra Muerte La Prensa Retrieved February 20, 2011, from http://prensa.com ( -----.) (2011, December 3). Ret orciendo Retorsiones La Prensa Retrieved December 5, 2011, from http://www.prensa.com/impreso/opinion/retorciendo r etorsiones fernando gomez arbelae z/44553 Gonzalez, M., and Schipke, A. (2011, June). Bankers on the b each. Finance & Development Vol. 48, Issue 2, pp. 42 45. Retrieved from www.imf.org/external/ pubs/ft/fa ndd/2011/06/pdf/Gonzalez.pdf Gordon, R. A. (1981). Tax H avens and T heir U se by United States C itizens An O verview. Washington, DC: U.S. Department of Treasury. Gravelle, J. G. (2010). Tax H avens: International T ax A voidance and E vasion. Washington, D C : Congressional Research Service. Retrieved from http://www.fas.org/ sgp/crs/misc/R40623.pdf Grosse, R. E. (2001). Drugs and M C ocaine D ollars. Wesport CT : Praeger Publishers.
173 Hamill, H. M. (1992). Caudillos: Dictators in Spanish America. Norman OK : University of Oklahoma Press. Harrington, J. L., Koppele, J. H., and Te, M. D. (2012, April 25). United States: US Treasury Department I ssues F inal B ank D eposit" I nter est R eporting R egulations. Mondaq. Retrieved June 9, 2012, from http://www.mondaq.com/unitedstates/x/174614/IR S+HRMC/US+Treasury+Depar tment+Issues+Final+Bank+Deposit+Interest+Reporting+Regulations Heritage Foundation. (2012). 2012 Index of Economic Freedom Heritage Foundation. Retrieved March 15, 2012 from http://www.heritage.org/ i ndex/country/panama#rule of law Hines, J. J. (2004). Do T ax H avens F lourish? Cambridge: National Bureau of Economic Research. Hines, J. J., and Rice, E. M. (1990). Fiscal P aradise: Foreign T ax H avens and American B usiness. Cambridge: National Bureau of Economic Research. Hollingshead, A. (2012, May 30). A S ea C hange in S witzerland Task Force on Financial Integrity and Economic Development Retrieved from www.financialtaskforce.org/2012/05/30/a sea change in switzerland/ Hornbeck, J. F. (201 2, April 26) The U.S. Panama Free Trade Agreement. Washington DC : Congressional Research Servic e. Retrieved from http://www.fas.org/sgp/ crs/row/RL32540.pdf International Bureau of Fiscal Documentation ( IBFD ) (2012 ). About IBFD International Bureau of Fiscal Documentation Retrieved J une 12, 2012, from http://www.ibfd.org/About IBFD Illueca, E. M. (1990). Actualidad del S ecreto B ancario en Panam Panama City : Universidad de Panam I nternational Financial Center (IFC) Review. (2010, Apri l 28). Bahamian TIEA K ey E vidence in U.S. T ax E vasion T rial In: International Financial Center Review: Bahamas Retrieved June 10, 2012, from http://www.ifcreview.com/viewar ticle.aspx?articleId=1250&areaId=17 International Monetary Fund (IMF) (2007 a ). Panama: Assessment of F inancial S ector S upervision and R egulation. Washington, D C: International Monetary Fund. Retrieved from www.imf.org/external/pubs/ft/scr/2007/cr0766.pdf
174 ( -----.) (2007b). Working T ogether: Improving R egulatory C ooperation and I nformation E xchange. Monetary and Financial Sy stems Department. Washington, D C: International Monetary Fund. Retrieved from www.imf.org/external/pubs/ft/books/ 2007/working/0607.pdf ( -----.). (2012a). IMF World Economic Outlook Database April 2012 Edition Monetary and Finan cial Surveys. Washington, DC: Internatio nal Monetary Fund. Retrieved from http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/index.aspx ( -----.). (2012 b ). Panama: Staf f R eport for the A rticle IV C onsul t ation. Washington, D C: International Monetary Fund. Retrieved from www.imf.org/external/pubs/ft/scr/2012/cr1283.pdf Inter American Development Bank ( IADB) (2005, May). Country P rogram E valuation: Panama 1991 2003 Washington, D C : IADB Retrieved from http://idbdocs.iadb.org/wsdocs/getdocument.aspx?docnum=502399 Internal Reve nue Service ( IRS ) (2012 a April 15). I nternal Revenue Service: Criminal Investigation Annual Business Plan Retrieved May 28, 2012, from h ttp://www.irs.gov/compliance/enforcement/article/0,,id=180283,00.html ( -----Part 4. Examining Process, Section 3. Overseas Posts Internal Revenue Service: Internal Revenue Manual Retrieved April 27, 2012, from http://www. irs.gov/irm/part4/irm_04 030 003.html#d0e10 Jackson, J. K. (2010 July 29 ). The OECD I nitiative on T ax H avens. Washington, D C: Congressional Research Service. Retrieved from http://assets .opencrs.com/rpts/ R40114_20100729.pdf Johnson, J., and Holub, M. (2003). Corporate F light: 'Moving' O ffshore to A void US T axes Journal of Financial Crime, Vol. 10 No. 3, pp. 246 254. Keen, M., and Ligthart, J. E. (2004 November 16 ). Information S h aring and I nternational T axation. The N etherlands: Tilburg University Center for Economic Research. Retrieved from http://arno.uvt.nl/show.cgi?fid=12179 Kem conomic P r inciples S upport an O rigin and I mport N eutrality B ased o ver a R esidence and E xport N eutrality B ased T ax T reaty P olicy. In: Lang, M., Pistone, P., Schuch, J., Staringer, C., Storck, A., and Zagler, M. (Eds.), Tax Treaties: Building Bridges Between Law and Economics Amsterdam: International Bureau of Fiscal Documentation. Labaton, S. (1990 a February 19). INTERNATIONAL REPORT: Fine T uning Panama's B ank P olicy The New York Times Retrieved February 25, 2012, from h ttp://www.lexisnexis.com
175 Labaton, S. (1990 b, February 6). Panama i s R esisting U.S. P ressure to A lter I nadequate' B ank The New York Times Retrieved February 25, 2012, from http://www.lexisnexis.com Lang, M., Pistone, P., Schuch, J., Stainger, C., Storck, A., and Zagler, M. (Eds.). (2010). Tax T reaties: Building B ridges B etween L aw and E conomics. Amsterdam: International Bureau of Fiscal Documentation. Martes Financiero. (2010, September 21). Gobierno A s pira a S alir de la L ista G ris de la OCDE en 2011 Martes Financiero Retrieved October 18, 2011 from http://www.martesfinanciero.com/mensual.html McIntyre, M. J. (2009). How to E nd the C hara de of I nformation E xchange Tax Notes International, Vol. 56 No. 4, pp. 255 268. ( -----.) (2011). Indentifying the N ew I nternational E xchange S tandard for E ffective I nformation E xchange. In: Lang, M., Pistone, P., Schuch, J., Staringer, C., Storck, A., and Zagler, M. (Eds.), Tax Treaties: Building Bridges Between Law and Economics Amsterdam: International Bureau of Fiscal Documentation. Michaels, M. J., and Yates, M. T. (2009). eath of I nformation E xchange, Journal of International T axation, Vol. 20, No. 4, pp. 56 62. Mizrachi Angel, F. (2011, December 22). La Ley de Transparencia, Una D cada La Prensa Retrieved January 10, 2012, from http://www.prensa.com/ impreso/panorama/la ley de transparencia una decada despues/58853 Morales Gil, E. (2008, 25 May). 'Panam T iene M uchas La Prensa Retrieved March 30, 2012, from http://mensual.prensa.com/mensual/ contenido/2008/05/25/hoy/panorama/13588 51.html Moreno Vil lalaz, J. L. (2005). Financial I ntegration and D ollarization: The C ase of Panama Cato Jour nal Vol. 25 No. 1, pp. 127 140. Morgan, E. (2011, June 1). Ante l os A taques de la OCDE In: Eduardo Morgan Jr. Blog Retrieved July 25 2011, from http://www.eduardomorgan.com/blog/ ?p=1 762&lang=es Morriss, A. P. (Ed.). (2010). Offshore F inancial C enters and R egulatory C ompetition. Washington, D C: The American Enterprise Institute Press.
176 Nash, M. (2012, June 7). FATCA T argets U.S. F at C ats A broad NOW Lebanon Retrieved June 7, 20 12, from http://www.nowlebanon.com/ NewsArticleDetails.aspx?ID=406531&MID=0&PID= 0 OECD. (1987). International Tax avoidance and E vasion: Four R elated S tudies. Paris : OECD. ( -----.). (1998). Harmful Tax C ompetition: An E merging G lobal I ssue. Paris : OECD. ( -----.) (2009). A P rogress R eport on the J urisdictions S urveyed by the OECD G lobal F orum in I mplementing the I nternationally A greed T ax S tandard. Paris: OECD Ret rieved June 11, 20 12, from www.oecd.org/dataoecd/38/14/42497950.pdf ( -----.). (2011, February 10). Harmful T ax P ractices In: Organization for Economic Cooperation and Development Retrie ved February 25, 2011, from: http://www.oecd.org/topic/0,3699,en_2649_33745_1_1_1_1_37427,00.html ( -----.). (2012a). OECD Centre for Tax Po licy and Administration Retrieved June 9, 2012, from http://www.oecd.org/document/21/ 0,3746,en_2649_33745_42344853_1_1_1_1, 00.html ( -----.) (2012b ). Global Forum on Transparency & Exchange of Information for Tax Purposes In: Organization for Economic Cooperation and Development Retrieved April 15, 2012, from http://www. oecd.org/site/ 0,3407,en_21571361_43854757_1_1_1_1_1,00.html ( -----.). (2012c). A Progress Report on the Jurisdictions Surveyed by the OECD Global Forum in Implementing the Internationally Agreed Tax Standard. Paris: OECD. Retrieved June 11, 20 12, from www.oecd.org/dataoecd/50/0/43606256.pdf ( -----.) (n.d.). Model A greement on E xchange of I nformation on Tax M atters In: OECD Center for Tax Policy and Administration: Tax Information Exch ange Agreements (TIEAs) Retrieved April 30, 2012, from http://www.oecd.org/ document/7/0,3746,en_2649_33745_38312839_1_1_1_1,0 0.html O'Hare, S. (2011, October 1 9). Tax I nformation E xchange A greements D on't W ork TheTelegraph Retrieved October 22, 2011, from http://www. telegraph.co.uk/ finance/personalfinance/offshorefinance/8836321/Tax Information Exchange Agreements dont work.html Oppenheimer, A. (2011, April 13). Panama's E conomy is B ooming, b ut I nstitutions The Miami Herald Retrieved April 20, 2011, from http://www.miamiherald.com /
177 ( -----.). (2012, January 18). Panama's P aradox: A B oom with G loom The Miami Herald Retrieved January 22, 2012, from http://www.miamiherald.com/2012/01/18/2596211/panamas paradox a boom with gloom.html Pacenti, J. (2008, November 13). DOJ A ccuses UBS E xec of H elping C onceal B illions from IRS The Daily Business Review Retriev ed June 11, 2012, from http://www.law.com/jsp/cc/PubArticleCC.jsp?id=1202425981179 Palan, R., Murphy, R., and Chavagneux, C. (2010). Tax H avens: How G lobalization R eally W orks. Ithaca: Cornell University Press. Prez, O. J. (2011). Political C ulture in P anama: Democracy A fter I nvasion. New York: Palgrave Macmillan. Pistone, P. (2010). Tax T reaties with D eveloping C ountries: A P lea for N ew A llocation R ules and a C ombined L egal and E conomic A pproach. In: Lang, M., Pistone, P., Schuch, J., Staringer, C., Storck, A., and Zagler, M. (Eds.), Tax Treaties: Building Bridges Between Law and Economics Amsterdam: International Bureau of Fiscal Documentation. Preston, E. (2002). The U SA PATROT Act: New A dventures in American E xtraterritoriality Journal of Financial Crime, Vol. 10, No. 2, pp. 104 116. Ra egal Certainty: Why V ague L egal S tandards m ay b e B etter for C apitalism and L iberalism Boston Univ ersity Public Interest Law Journal, Vol. 19 No. 2, pp. 175 191 Rawlings, G. (2007). Taxes and T ransnational T reaties: Responsive R egulation and the R eassertion of O ffshore S ovreignty Law & Policy, Vol. 29 No. 1, p p. 51 66. Rodrigue z, C. F. (1990, Ma rch 7). Bank L aw R efor m for Panama and for US; Money L aundering W ar The New York Times Retrieved February 25, 2012, from http://www.lexisnexis.com Rodrguez, I. (2011, December 1). Aumenta Imagen de C orrupcin La Prensa Retrieved December 7, 2011, from http://www.prensa.com/impreso/panorama/ aumenta imagen de corrupcion/44206 Rojas Acosta, E. (2004). La E conoma P ana mea: 1903 2003. In : Castillero Calvo A. (Ed.) Historia G eneral de Panam: El S iglo XX Vol ume 3, Book 1 Panama City : Comit Nacional del Centenario.
178 Sabo, E. (2011, September 1). Panama's F inance M inister R esigns a fter R ul ing C oalition S plits Bl oomberg Retrieved June 5, 2012, from http://www.bloomberg.com/news/2011 09 01/panama s finance minister resigns after ruling coal ition splits.html Saunders, L. (2011, December 10). What's N ext for Of fshore A ccounts The Wall Street Journal Retrieved December 15, 2011, from http://on line.wsj.com/article/ SB1000142405297020431900457708644147582230 0.html Serra, L. imita A ctividad L ocal La Estrella Retrieved October 21, 2011, from http://www.laestrella.com.pa/mensual/2009/ 09/30/contenido/152509.asp Sharman, J. C. (2009). The B ark is the B ite: International O rganizations & B lacklisting Review of International Political Economy, Vol. 16, No. 4, pp. 573 596. Shaxso n, N. (2011). Treasure I slands: Uncovering the D amage of O ffshore B anking and T ax H avens. New York: Palgrave Macmillan. Simonian, H., and Houlder, V. (2009, March 12). Lichtenstein Eases B ank S ecrecy Financial Time s Retrieved June 13, 2012, from http://www.ft.com/intl/ cms/s/0/b85d298a 0ed9 11de ba10 0000779fd2ac.html Snowdon, C. (2010, May 1 ). Panama M akes P rogress on T ax I nformation R equirements Intern ational Tax Review Retrieved June 13, 2012, from http://www.internationaltaxreview.com/Article/2606307/Panama makes progress o n tax information requirements.html Sullivan, M. A. (2007, June 25). Ah, Panama Tax Notes Retrieved March 5, 2011, from http://www.tax analysts.com/www/features.nsf/Articles/ AC40BDCBDF2CC513852 57307007746A3?OpenDocument Sullivan, M. P. (2011, M ay 11). Panama: Political and E conomic C onditions and U.S. R elations. Washington DC : Congressional Research Services. Retrieved from http://www.fas.org/sgp/crs/row/RL30981.pdf Summers, M. (2012, May) Life A fter the C lean U p STEP Journal Retrieved June 3, 2012, from http://www.stepjournal.org/journal_archive/2012/ step_journal_may_2012/life_afte r_the_clean up.aspx Superintendency of Banks. (2012). About the SGP: General I nformation In: Superintendency of Banks of P anama Retrieved April 5, 2012, from http://www.superbancos.gob.pa/es/sobre sbp
179 ( -----.). (2008, April 30). Executive D ecree N o. 52 In: Republic of Panama Ministry of Economy and Finance Ret rieved March 27, 2011, from http://www.superbancos.gob.pa/aspec_leyes/documentos/Law/blaw.pdf ( -----.). (2012 ). Norms in F orce Superintendency of Banks of Panama Retrieved April 15, 2012, from http://www.superbancos.gob.pa/ aspec_prevencion/documentos/english/Legislati on_Norms_in_Force.pdf Sza rmach, L. (2010). Piercing the V eil of B ank S S ettlement in the U BS C ase Cornell International Law Journal, Vol. 43, No. 2, pp. 409 438. Tax Analysts. (2009, May 11). Securities and E xchange C ommission v. Stanford I nternatio nal B ank L td. et al. In: Tax Analysts Worldwide Tax Treaties: Court Opinions Retrieved June 6, 2012, from: http://services.taxanalysts.com Tax Justice Network. (2012 ). Tax Justice Network Retrieved Mar ch 28, 2012, from http://www.taxjustice.net/cms/front_content.php?idcatart=2&lang=1 ( -----.) (2007). Identifying T ax h avens and O ffshore F inance C Tax Justi ce Network Retrieved from http://www.taxjustice.net/cms/upload/ pdf/Identifying_Tax_Havens_Jul_07.pdf Thuronyi, V. (2010). Tax T reaties and D eveloping C ountries. In: Lang, M., Pistone, P., Schuch, J., Staringer, C., Storck, A., and Zagler, M. (Eds.), Tax Treaties: Building Bridges Between Law and Economics Amsterdam: International Bureau of Fiscal Documentation. Toronto Star. (1990, February 1). U.S., Panama W rangle o ver B ank S ecrecy Toronto Star Retrieved February 25, 2012, from http://www.lexisnexis.com Transparency International. (2011). Corruption P erceptions I ndex 2011. Transparency International. Retrieved Feb ruary 16, 2012, from http://cpi.transparency.org/ cpi2011/ U.N. Office on Drugs and Crime. (2011, June 30). UNODC and Panama I naugurate A nti C orruption A cademy Vienna : UNODC. Retrieved March 21, 2012, from http://www.unodc.org/unodc/en/frontpage/2011/June/unodc and panama inaugurate anti corruption academy.html U.S. Commercial Serv ice. (2012). Investment C limate in Panama U.S. Department of Commerce Retrieved February 20, 2012, from http://buyusainfo.net/docs/ x_2289056.pdf
180 U.S. Department of Justice. (2008). 2008 U. S. C riminal T ax M anual. Washington, D C: U.S. Department of Justice. Retrieved from http://www.justice.gov/tax/ readingroom/2008ctm/CTM%20TOC.htm U.S. Government Accountability O ffice (GAO) (2006). International F inancial C rime: T reasury's R oles and R esponsibilities R elating to S elected P rovisions of the USA PATRIOT Act. Washington, DC : U.S. GAO Retrieved from http://www.ga o.gov/ new.items/d06483.pdf ( -----.) (2011). Tax A dministration: IRS's Information E xchanges with O ther C ountries C ould B e I mproved T hrough B etter P erformance I nformation. Washington, DC: U.S. GAO Retrieved from www.gao.gov/new.items/ d11730.pdf ( -----.). (2007). Tax C ompliance: C hallenges in E nsuring O ffshore T ax C ompliance. Washington, DC.: U.S. General Accounting Office. Retrieved from ht tp://www.gao.gov/assets/120/116495.pdf U.S. House Joint Committee on Taxation. (2009). Tax C ompliance and E nforcement I ssues with R espect to O ffshore A ccounts and E ntities. Washington, DC: U.S. Ho use Joint Committee on Taxation. Retrieved from https://www.jct.gov/ publications.html?func=startdown&id=3520 U.S. Senate Committee on Finance. (2007). Hearing on O ffshore T ax E vasion: Stashing C ash O verseas. Washington, D C: U.S. Gove rnment Printing Office. Retrieved from http://www.finance.senate.gov/hearings/hearing/?id=e1f5f3eb c76b 6516 53fe c82e289d853b U.S. State Department. (2001). In: U.S. Department of State. Retrieved April 11, 2011, from http://www.state.gov/outofdate/bgn/ panama/9694.htm ( -----.). (2012). 2012 International N arcotics C ontrol S trategy R eport V olume II: M oney L aundering and F inancial C rimes: Panama. Washington, DC: U.S. Department of State. Retrieved from http://www.state.gov/j/inl/rls/nrcr pt/2012/vol2/index.htm U.S. Treasury Department. (2011, April 18). Treasury: U.S. Panama T ax I nformation E xchange A greement N ow i n E ffect In: U.S. Treasury Department. Retrieved October 15, 2011 from www.treasury.gov/press center/press releases/Pages/ tg1144.aspx Vlcek, W. (2008). Offshore F inance and S mall S tates: Sovreignty, S ize and M oney. New York: Palgrave Macmillan. Warf, B. (2002). Tailored for P anama: Off shore B anking at the C rossroads of the Americas Geografiska Annaler: Series B, Human Geography, Vol. 84, No. 1, pp. 33 47.
181 With nternational F inancial Standards in the O ffshore F inancial C entres Journal of Financial Crim e, Vol. 9, No. 4, pp. 326 329. WorldTrade Executive. (2002, May 9). Panama E conomy: New E conomy E merging In: EIU Viewswire. Retr ieved January 15, 20 12, from http://viewswire.eiu.com.lp.hscl.ufl.edu/index.asp?layout=VWArticleVW3&article_ id=815352081®ion_id=&country_id=440000044&channel_id=190004 019&cat egory_id=&refm=vwCh&page_title=Channel+Latest Yates, M. T., Hoffman, A., Bishop, K., and Michaels, M. J. (2011). The D eath of I nformati on E xchange A greements? Part T hree Journal of International Taxation, Vol. 22, No. 4, pp. 48 62. Zagaris, B. (2011, November 28). International T ax E nforcement C ontinues to R i se Tax Analysts pp. 653 672. Retrieved June 13, 2012, from http://taxprof.typepad.com/files/64tni.pdf Zimbalist, A., and We eks, J. (1991). Panama at the C rossroads: Economic D evelopment and P olitical C hange in the T wentieth C entury. Berkeley: University of California Press.
182 BIOGRAPHICAL SKETCH Lindsay Elise Barnes was born and raised in Lafayette Louisiana She became fasc inated with Latin America after a high school mission trip to Cuba which initiated her intrigue with the region. Lindsay s tudied International Business and Economics at the Leonard N. Stern School of Business at New York University. During this time, she completed an internship with the U.S. Department of State at the Foreign Service Institute. She a lso completed an internship with the U.S. Senate Foreign Relations Committee while studying at the Georgetown University School of Foreign Service during a n ac ademic semester in Washington, DC. After receiving her Bachelor of Science in 2006, Lindsay moved to Costa Rica to acquire Spanish proficiency and developed cultural expertise on Central America working in ecotourism. After returning to the U.S. in 2008, she worked as an administrative assistant for several companies and agencies on a temporary basis in Washington, DC. She s imultaneously developed her consultancy Empresa Solutions, LLC, for federal grant writing and deliverable preparation s for Federal Go vernment contractors and private sector clients seeking Federal funding. In 2010, Lindsay enrolled in the Master of Arts in Latin American Studies (MALAS) program at the University of Florida. She specialized in Latin American Business Environment and w ork ed as a Graduate Assistant to Dr. Terry McCoy. During her studies, she t ravelled to Cuba, Costa Rica and Panama. Lindsay returns to Costa Rica annually to visit family and friends along with her Tico husband. She p lans to attend law school at Florida St ate University in the fall with the future goal of practicing in the areas of International Business Law or Corporate Law related to Latin America