Panama, a land bridge between north and south, and a portal for west and east, is without a doubt one of most important countries in the world. The Panama Canal, one of the modern wonders of the world, is the main artery of trade on the American continent.With such high volumes of trade in such a centrally located country, it comes as no surprise that Panama is also one of the biggest banking jurisdictions on the western hemisphere. Yet this is one of many reasons why Panama has become the ultimate tax haven.

No central bank
Panama has never had a central bank. In theory, central banks should provide for more stability. Almost a hundred years of experience in central banking has shown the opposite to be true: privately owned central banks that can print money without restrain have inflated currencies,  diminishing the purchasing power of the consumer. By lending money to  irresponsible governments at interest they have put entire countries like  for instance Greece, in great jeopardy. Their practices of artificial low interest rates have disturbed free market mechanisms essential for a healthy investment climate. By bailing out failing banks and insurance companies they have fuelled the excessive irresponsible banking practices that led to the credit crisis. It comes as no surprise that the average taxpayer in a western nations often ‘contributes’ more than 50% of their income to the treasury. Panamanians don’t have to carry such a burden.

A dollarized economy
For over a hundred years, Panama has been using the dollar as its currency. More specifically, they have been using the fictional Balboa, tied one on one to the dollar. The use of the dollar has kept Panama’s government limited. Unable to monetize debt on a large scale or inflate the currency, the nations’ government has to live within its means. After all, they can only spend their dollar once.
Panama is free to use any currency, or even start their own. But the dollar has served well over the past 100 years, and even though it is being inflated by the Federal Reserve Bank of the United States, there is no immediate need for concern or change.

No military
Panama has no military, no navy and no air force. The country has learned the hard way that armies are mostly used to oppress their own population rather than to defend against foreign invaders. No military means no expenses on the latest fighter jets, missile defence systems or ‘peace keeping missions’ in foreign territories.
To protect its borders, Panama has a well equipped coast and border guard, plus a well armed civilian population. It also enjoys the protection of the United States owing to its strategic importance.

Clear company law
Panama’s corporate law system is based on that of the US state of Delaware. The clear model, over 80 years old, has proven to be highly successful. More about Panama Corporations later on in this newsletter.

A territorial tax system
Panama has a territorial taxation system whereby it only taxes income generated within its borders, as opposed to most western countries that tax world-wide income of its citizens and businesses. Territorial taxation used to be the norm half a century ago; nowadays Panama is quite unique to hold on to this practice. As a result, Panama has no need for any agreements to avoid double taxation (DTA) nor does it need any information about the foreign activities of its residents and resident companies. Although recently the country did sign some DTA’s this should be seen merely as a move to improve the international image without any impact on confidentiality.

In practice it means that any foreigner can register a Panamanian company and use it abroad without being liable for any Panamanian taxation. Since Panamanians enjoy the same privileges as do foreigners, Panama cannot be considered a tax haven by definition.
Strict banking secrecy
Panama has the toughest bank secrecy laws in today’s post 9/11-world. The statutory banking secrecy law is not being disputed and banks that violate it do get prosecuted (unlike in for instance Switzerland). Panama has no civil judgement collection treaties or any child support, spouse support or alimony collection treaties. Bank secrecy can only be lifted in case of serious crime:  child pornography, narcotics trafficking, (real) terrorism, large scale money laundering and Bernie Madoff type fiduciary fraud. Foreign tax offences or civil court cases do not qualify, simply because they are not considered a crime within Panama’s borders.

For a foreign nation to request bank account information a crime first has to be proven in the requesting country, before it can be presented to a Panamanian judge. This judge has the liberty to refuse such requests or ask for more substantial evidence. It is their job to prevent big brother government intrusions into the private sphere and human rights violations in countries like Venezuela and the United States.

Low crime rate
Panama enjoys the lowest crime rate in all of Central America. Although the rate for violent crime is certainly higher than in any Western nation, most of these crimes are drug related. For a country on the front line of the ‘war on drugs’ that should hardly come as a surprise.  Other than that, Panama is very safe, and named ‘the safest tourist destination in Central America’ by Lonely Planet.
In recent years, Panama has started to take over Costa Rica as Central America’s main tourist and retirement destination. Panama is cheaper (less taxed), safer, more cosmopolitan, has a more advanced infrastructure and equally impressive natural wonders.

No left leaning government
Although Panama has been through rough times, its leaders have always respected fundamental economic principles and never succumb to the leftism that has impoverished so many other Latin-American countries.
Panama is a stable, open and growing economy with a bright future ahead. The 2009 election that saw businessman and multimillionaire Ricardo Martinelli win illustrates that this understanding flows through all levels  of society. At present, Martinelli still enjoys one of the highest approval rates of any current president worldwide.

So far Martinelli has:

• lowered corporate taxes with 10% and abolished  it for small businesses; though increased VAT with 2%
• started the expansion of the Panama Canal
• launched plans for a second mayor free zone in addition to Colon Free Zone
• plans to build a metro system for Panama City and clean up its heavily polluted bay
• not caved in to demands from the OECD and Obama administration to lift banking secrecy
• retreated from Parlacen, Central America’s equivalent of the European Union.
• announced plans to relax immigration requirements

Among Central and South-American countries, Panama enjoys a reputation as a safe haven for capital. Wealthy individuals from all over the continent come to Panama for their banking needs. (Economical) refugees from politically unstable countries like Venezuela and Colombia are giving the Panamanian economy a significant impulse.

The Panama Canal
Built by the United States in 1914, and handed over to Panama in 1999, the Panama Canal is the main pillar of the Panamanian economy. It gives the Panamanian government a guaranteed source of income outside of regular channels, and has put Panama on the map for trade, banking and tourism. The canal is currently expended to accommodate the worlds’ biggest vessels for the next 100 years.
The government has established free zones on both ends of the canal.  On the Atlantic side, the Colon Free zone is the largest free trade zone on the Western hemisphere.  On the pacific side, the newly opened Howard Airbase Free Zone offers far reaching tax incentives for a wide array of companies.

The canal has given Panama strategic importance and more weight in free trade and tax treaty negotiations. It has allowed the government to stand up for the countries’ sovereignty. Two recent examples: Panama’s refusal to lift banking secrecy (a request from the Obama administration), and Panama’s retreat from Parlacen, Central America’s equivalent of the European Union.

Panama is a lone giant in a world filled with intrusive governments, where privacy is no longer a right, but the reward of those who seek it. Panama is one of the places where one can get it. Its unique features have truly made Panama the ultimate tax haven.