Executive Summary in two lines: Panama has announced plans to to sign a tax information exchange treaty with the USA next week. Should you be worried? If you’ve followed our advice in the past – no. If you’ve set up a non-compliant Panama offshore structure, then it’s time to review it – start here. But Panama remains an excellent place to incorporate your Foundation or IBC.

Here’s my view of TIEAs. Tax information exchange agreements (TIEAs) are usually printed in black and white, and they nominally promote transparency. However, those are about the only aspects of these treaties that are black and white, or transparent. They are more about show. Politicians want to show they have achieved something. In reality, as I’ve said before,  most exchange of information takes place informally.

With the recent news that Panama has agreed to sign a tax information exchange agreement with the USA, I received, as usual, a flood of e-mails from worried clients asking “what should I do?” or “what do you think of such and such?”

Panamanian President Ricardo Martinelli is a smart guy, and in my opinion he knows what he’s doing. Don’t worry. He is not going to destroy the Panama financial services and banking industry, on which much of the Central American country’s economy is based.

I’ve already written a detailed article on this subject for the next Q Wealth Report that is due out shortly.

Those of us who grew up in major economies like the US or the UK tend to think that everything is black and white. However, most of the world doesn’t think quite like that – and neither do politicians anywhere. Politics is about horse trading. You give up something here, you gain something there. Perception by third parties (like voters) is more highly prized than substance.  And that is exactly what is going on here.

The reason for signing this particular treaty is to appease US left-wingers like Senator Carl Levin, who were threatening to block the US – Panama free trade treaty that was already approved some years back but has never entered into force. Obama can now claim credit for getting Panama to cave in on bank secrecy, even though they are doing nothing of the sort. On their side Panama, to quote verbatim their announcement, get to say:  “Panama has already reached 13 separate taxation accords with other nations. By signing those deals and the one with the US, we’re going to get the certification of the world that Panama’s banks are trustworthy.”

Panama and the US need this free trade agreement. Both governments agree. Panama, whose economy is anchored by the Panama Canal, has a service-based economy and is one of the few nations that run a trade deficit with the US. This in itself demonstrates Panama’s strength. It is very different from the other economies in the region who are dependent on the US. American companies shipped $4.3 billion in goods and agriculture products to Panama last year and imported $302 million.

This Free Trade Agreement is going to make it much easier to operate internationally with Panama companies. Once it is signed, the US can no longer discriminate against transactions with Panama companies. In this regard it is excellent news.

But the most obvious benefit of all: Panama won’t be blacklisted. It will have the full ‘certification of the world’ as they call it. This can only be good for the long term future of the offshore finance industry in Panama.

But what about information exchange on beneficial owners who don’t want to be identified?

First of all, this mainly affects Panama banks. We’ve always been careful to advise clients, especially Americans, against banking in Panama. We always said, take your Panama corporation and foundation and bank elsewhere, like in Europe or Asia. Similarly, Panamanian banks have always been notoriously reluctant to do business with Americans.

Even in light of that, Panamanian corporations with accounts at Panamanian banks are domestic, resident Panama business as far as the law is concerned. Nobody is suggesting revealing this information to the United States or any other country.

Secondly, we’ve always advised readers and clients not to do business directly with law firms in Panama, but rather to buy a Panama company or Foundation through a law office in another jurisdiction. Panama has never required us to pass beneficial owner information, so nobody in Panama knows anything about the beneficial ownership of Panama companies set up through my firm, for example. There is no information to exchange. We particularly like Panama because most offshore jurisdictions do require beneficial ownership information. Panama doesn’t. Panama still allows bearer shares.

Panama is apparently attempting to pass legislation, again to please the gringos, that will require identification of beneficial ownership of corporations. This will be practically impossible.

First of all, Foundations do not have owners according to Panama law. Corporations of course do. However, the companies register in Panama goes back to the 1920s. Unlike other jurisdictions, companies are never struck off the register for non-payment of annual dues. It is a practical impossibility for anyone in Panama to identify beneficial owners of companies that technically exist but might have disappeared or stopped trading decades ago.

Well, there will be much more information in my article for members: there are a few other tips and tricks that I don’t want to publish on the public internet for obvious reasons. I’m reminded if the French proverb plus ça change, plus c’est la même chose. The more things change, the more they stay the same. That is the case here. There will be some minor positive changes we as offshore planners can take advantage of. There will be some minor negative changes we can easily get around. Nothing significant is changing, but the politicians on both sides can hail a victory. Perhaps the perfect political deal?

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