I always enjoy reading the newsletters from Simon Black’s group and he often passes through Panama giving his perspective on things. Here are two good articles he recently posted with balanced views on Panama. I encourage you to sign up for his newsletter and follow him around the world.
Sovereign Man
Notes from the Field
Date: March 12, 2012
Reporting From: Caracas, Venezuela
Panama has become a popular place for expats to plant flags and diversify internationally. And with good reason– the country has had a lot to offer. But quite a bit has changed over the years, and I thought it important to spend a few minutes today reviewing some of Panama’s most prominent international diversification options.
Banking: There are better options if you’re not living or doing business in Panama
Years ago, Panama was called the “Switzerland of the Americas” for its tight banking privacy; customer details were known only to bankers, and a breach of this commitment was a punishable offense.
In August 2009, Panama was put on the OECD’s “gray list” of countries deemed uncooperative with global tax standards. To get off the list, Panama entered into a number of international tax agreements with places like Singapore and Japan– ‘harmless’ countries where very few of its banking customers originated from.
After a few more years of intense pressure, though, the government of President Ricardo Martinelli capitulated to the United States and signed one of the most unilaterally disarming comprehensive tax treaties in history.
The 2011 agreement between the US and Panama effectively gives the US government carte blanche over any information it wants from Panamanian bank accounts. The agreement authorizes ‘fishing expeditions’, and it requires Panamanian authorities to cooperate with US investigations even when the charges are not criminal in nature or violate Panamanian law.
Many banks simply closed their doors to US taxpayers (though there are a number of banks like HSBC, Tower Bank, and Banvivienda that still open personal accounts for Americans).
With all semblance of privacy gone and the Panamanian banking system sitting firmly in the US government’s pocket, its single best feature had vanished practically overnight.
Devoid of its competitive advantage, the banking sector now has to stand on its own and compete head to head against Hong Kong, Singapore, Abu Dhabi, etc. And today, for someone who isn’t living in Panama or doing business in the country, there are far better homes (like the aforementioned) for your hard-earned savings.
Corporations: US taxpayers may want to consider other jurisdictions
Panama has also traditionally been a popular jurisdiction for corporate structures because of the country’s territorial tax system. Panama does not tax foreign-sourced income, so anyone who registers a corporation and does no business in Panama is not subject to Panamanian tax.
There is a problem with Panamanian corporations for US taxpayers, though. The IRS considers the standard Panamanian corporation (Sociedad Anonima) to be a ‘per se corporation’, which means that it will always be treated as a corporation for US tax purposes.
You cannot check the box on form 8832 and elect to treat a Panamanian corporation as a passthrough entity, and this opens up the business to problems like double taxation, extra filings, etc.
In the past when banking in Panama was a much better option, establishing a local company was an easy way to create an additional layer of protection for holding cash and other assets. Now that the banking sector has lost its key advantage, the advantages of establishing a local corporation have also diminished.
For operating businesses or holding companies, there are a lot of places in the world to structure a company that do not tax foreign-sourced income (or any income at all) and are still favorable for US tax treatment– Marshall Islands, British Virgin Islands, or Brunei.
Business Environment: Lots of opportunity, lots of labor challenges
The Panamanian economy is undoubtedly booming right now, and there is no shortage of opportunities for entrepreneurs. That’s the good news. The bad news is that you’ll need a high pain threshold to negotiate the labyrinth of labor regulations (which are not business-friendly), permits, and certifications.
Labor, by far, is the biggest challenge. Panama is very protective of its labor market, and the basic ratio of Panamanian to foreign workers that companies are authorized is about 10:1. Entrepreneurs are not able to bring in the best talent they can find for their business, and it’s extremely difficult to find skilled, reliable employees from the local pool.
Even if you do, the market is so competitive that they’ll likely jump ship within a few months and go work for someone else.
Healthcare: Good quality, reasonably priced
In the western hemisphere, Panama is still one of the better places to receive medical treatment, particularly if you’re hamstrung by the ridiculous cost and regulation in the United States.
Panamanian doctors at the country’s best hospitals are frequently trained abroad in the US or Europe, have international experience, and are fluent in English. Some of the hospitals are even internationally accredited (like Hospital Punta Pacifica).
Living: Panama is still a great place to spend time
At the end of the day, Panama is still a nice place to be. It’s getting much more expensive and the traffic is horrible in/around Panama City, but the overall quality of life is excellent. In comparison to its peers in Central America and the Latin-Caribbean basin, Panama still stands above the rest as a safe, modern, reasonably civilized place to live.
Until tomorrow,
Simon Black
Senior Editor, SovereignMan.com
Sovereign Man
Notes from the Field
Date: March 9, 2012
Reporting From: Panama City, Panama
I had dinner the other night with a bank executive in charge of government finance who told me that the aggregate spend of all the infrastructure projects in Panama totals more than $13 billion. This is roughly 50% of the entire Panamanian economy.
The equivalent in the United States would be the government announcing a ‘Rebuild America’ infrastructure spending initiative in the range of $8 TRILLION! No doubt, it’s a lot of money for this small country.
Panama (and particularly Panama City) has been in a seemingly perpetual state of construction for nearly 10-years. The long boom in residential construction created an impressive skyline of condo towers along the new Cinta Costera. But residential demand peaked and petered several years ago.
In an effort to keep the party going, the government has essentially swapped a residential construction boom for an infrastructure boom.
There are so many projects here, you’d think you were in Chonqing, China. And it’s made life miserable for anyone who has to get into an automobile– Panama City’s already dismal traffic has now become utterly hopeless.
The real issue is that Panama’s debt has been steadily rising to finance several projects. In many cases, the debt increase has outpaced the country’s dizzying GDP growth. For example, Panama’s debt rose 10.3% in 2010, while GDP only increased 7.5%.
According to some of my local attorneys who work on the deals, many of these infrastructure projects are now being creatively financed: selling bonds of off-the-books quasi-government entities that own securitized future cash flows.
It’s all an elaborate process to keep the debt from hitting the government balance sheet and obfuscating Panama’s true fiscal status. Official debt is now hovering near 50% of GDP, but the actual figure is much higher.
It’s possible that some of these projects will prove to be good investments– it’s not the same as Chinese ghost cities down here, Panama has legitimate infrastructure needs and is building accordingly.
What remains to be seen, though, is what happens after the infrastructure projects are complete in, say, another 5-years. The hope is that the real economy will have grown enough to absorb the loss of infrastructure spending. This supposition is not out of the question… but it’s definitely not guaranteed.
For now, nobody seems to mind. People are working, they’re making money, the country is improving… and except for the obvious and ridiculously high inflation rate, life is good.
To be clear, Panama is definitely a good news story. It has had one of the most resilient economies in Latin America over the past few years, and perhaps more than anywhere else in Central America, Panama has a very clear (and growing) middle class.
When you go out at night, you see Panamanians out on the town spending their discretionary income… and I mean regular Panamanians, not just the Porsche-driving 20-year olds who inherited papi’s business.
A strong middle class with disposable income is important in any healthy economy, and its emergence marks the transition from ‘developing’ to ‘developed’ nation. Panama still has a -long- way to go, but it’s moving in the right direction.
When I think back to how this place used to be 10-years ago (and all the years in between that I spent here) versus today, the positive change is overwhelming. When I think about how places like the US and Europe used to be 10-years ago, the change is resoundingly negative.
It’s this trend, by far, that’s most important.
Until tomorrow,
Simon Black
Senior Editor, SovereignMan.com