Panama Faces Up To OECD Test

Wednesday, October 6, 2010

The Global Forum on Transparency and Exchange of Information for Tax Purposes (the Forum) criticized Panama in its phase one peer review covering the legal and regulatory framework.

The peer review stated that Panama could not move to phase two until it had acted on recommendations that:

• Ownership and identity information was available, including on bearer shares and shares held by nominees;
• “Know your client” rules specify the need to identify owners of companies, founders, members of council, and beneficiaries of foundations. Penalties should apply for failure to keep up to date details on the stock register of any “sociedad anonima”;
• Reliable accounting records are kept; Commercial Code requirements should apply to all companies, partnerships and partnerships limited by Panama registered shares, irrespective of whether they carry on business in Panama or not. Record keeping requirements for trusts and foundations should be clarified to ensure accounting information is reliable and kept for at least five years;
• The statutory powers of the General Revenue Directorate (DGI) should include obtaining information for tax exchange purposes, not just where there is a domestic tax purpose as is presently the case; this power should be recognized as overriding any other obligations to secrecy. Penalties should apply under the fiscal code for failure to provide the necessary information;
• Panama bring into force the necessary tax information exchange agreements wherever relevant; and
• Professional secrecy rules should be amended so that they did not prevent the exchange of information for tax purposes, especially in respect of lawyers acting as resident agents.

In response, the present government of Panama reaffirmed its commitment made in 2002 to implement transparency and exchange of information for tax purposes based on its commitment letter, and to this end it is:

• Entering into double taxation conventions with mechanisms to exchange tax information based on international norms;
• Modifying legislation to enable tax information exchange; and
• Creating the necessary operational framework.

The Panama government added that Law 8 of March 2010 was enacted to provide the necessary powers to the DGI for tax information exchange. Law 33 of June 30, 2010 was further enacted to address OECD concerns regarding the scope of powers given to the DGI and also covered transfer pricing, permanent establishment and tax residency definition.

With regard to establishing an operating infrastructure, the Panamanian government said it had been taking advice from the United Nations Development Program since June 2010 to set up an international tax office within the DGI.

For early 2011, the government said further legislation was planned which would establish the obligation to maintain shareholder information, including on bearer shares, as part of “know your client” rules, with the competent authority to supervise the process and determine sanctions for non-compliance. It also expects to complete twelve double taxation treaties by the first quarter of 2011 and continue to negotiate more agreements for tax information exchange.

The government also hopes that the Forum’s peer review group will be in a position to provide a supplementary evaluation of its May 2010 report in the first quarter of 2011.