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Panama's Latest Tax Moves Way Off the Mark

Inside U.S. Trade recently reported that:

Panama is moving toward removing itself from a list of uncooperative tax haven countries compiled by the Organization for Economic Cooperation and Development (OECD), which requires the implementation of 12 Tax Information Exchange Agreements (TIEAs) or Double Taxation Treaties (DTT) with full tax information exchange provisions, an OECD official said this week.

Panama’s status as a tax haven has become a major stumbling block to congressional passage of the U.S.-Panama free trade agreement.

According to Jeffrey Owens, Director of the OECD’s Center for Tax Policy and Administration, Panama “has been making progress” toward removal from the OECD list by completing talks on DTTs that include model OECD information exchange commitments.

At a June 7 Washington event hosted by the U.S. Council for International Business (USCIB), Owens said that “the next stage for Panama is to actually implement those agreements and that is something we are going to be monitoring.”

Panama may have 13 DDTs in place in a matter of months and become a serious candidate for removal from the OECD list, according to the Panamanian Embassy.

An embassy official said Panama has now signed a double taxation treaty with Mexico and has completed but not signed double taxation treaties with Italy, Belgium, Barbados, Holland, Spain, Qatar and France. Negotiation meetings are scheduled “in the coming months” with Luxembourg, South Korea, Singapore, Ireland and the Czech Republic, according to an embassy official.

No one should be fooled about Panama's latest "non-response" to the criticisms of its tax haven practices: no bilateral trade agreement with Panama – a leading tax and regulatory haven – should be voted on until the country decisively addresses its financial secrecy practices, and the United States ensures that tax haven accountability mechanisms are fully insulated from trade pact challenge.

A few points are in order. First, the demand of tax justice groups is for Panama to agree to an automatic exchange of tax information. The reason for this is clear: it is widely recognized that, especially in secrecy jurisdictions like Panama, the old DTTs or TIEAs do not suffice. IRS Commissioner Douglas Shulman stated earlier this month with regard to U.S. TIEAs and DTTs:

“It often takes a long time to get the requested information from partners; and the information may also be incomplete. There are also very strict rules and you may have to jump through a lot of hoops to get the information you need."

Senator Carl Levin (D-Mich.) has also said that:

“the Administration may want to consider finalizing a regulation proposed by the Clinton Administration years ago. That regulation would allow the United States to engage in automatic information exchanges of account information with countries on a reciprocal basis for tax enforcement purposes. Right now, the only automatic tax information exchanges we engage in are with Canada. A lot more countries may be willing to participate. The resulting account data could produce new information identifying U.S. tax dodgers.”

Indeed, automatic exchange of info is the emerging norm and best practice in Europe, North America, and the Nordic countries. The UN Stiglitz Commission has called for it to be implemented, and the OECD has even helpfully laid out templates for how it can be enacted. (The Tax Justice Network has pretty good introductions to these issues here, here and here.)

And the OECD appears to recognize the inadequacy of its gray list mechanism, having recently launched a "peer review" process that looks not only at the formal agreements that tax havens like Panama are signing, but also at how the commitments to financial transparency are actually being regulated and implemented on the ground. How Panama rates in this process will be more interesting than whether it can find a "coalition of the willing" to sign weak DTTs.

Just how weak is the "Model Panama DTT"? As the text implementing the Panama-Mexico agreement shows (see the final pages of the PDF), there are a dozen additional conditions that must be met before Panama will give up the tax info. According to the implementing protocol for Article 25 (the info exchange provision), via Google Translate (with some tweaks by me):

A) It is understood that the exchange of information would only be asked for when each and every one of the sources of information available under its domestic tax laws have been used first.

B) It is understood that the mechanisms for administrative assistance provided in Article 25 do not contain measures (i) addressed to the simple collection of pieces of evidence, or (ii) where it is unlikely that the requested information is relevant to control or manage the tax affairs of a taxpayer in the Contracting State. 

C) It is understood that the tax administration of the Contracting State requesting information in accordance with Article 25 will, at the time of formulating its request, provide the other Contracting State the following information: 

a) name and address of attorney(s) of the person(s) under audit or investigation and, if available, other facts to facilitate identification of persons, such as dates of birth, marital status, tax identification number;
b) the time period over which the requested information is sought;
c) a detailed description of the requested information, including its nature and the manner in which the requesting State wishes to receive it;
d) the purpose or motive, and the legal basis for requesting the information, and
e) the name and exact address of the person which is believed to be in possession of the requested information.

D) It is understood that Article 25 does not require any Contracting State to exchange or provide information automatically or spontaneously, but that it must be by prior request.

E) It is understood that the exchange of information and administrative procedures established to safeguard the rights of taxpayers in the state from which the information is requested will remain in force and applicable before the information is transmitted to the requesting State. These procedures include notice to the taxpayer in relation to the request for information by the other Contracting State and the possibility that this taxpayers can be part of the process and present their position before the tax administration before it makes a determination. It is also understood that this requirement seeks to ensure a fair process for the taxpayer and not to establish barriers that prevent or delay the process of exchange of information.

What does all this mean? Setting aside the humor of the use of the noun "taxpayer" to refer to individuals or corporations dodging taxes in Panama, several things jump out. First, as the list of requirements in paragraph C indicates, authorities will have to have a ton of information about the tax dodger before an information request can even be made. After reading a few of the hurdles, I was half expecting to see a requirement to know where the tax dodger's first born had their last five birthday parties. In sum, you can only get Panama's cooperation when you no longer need it.

Second, the tax dodger actually gets advance notice of the proceeding, and gets to participate. Third, Panama explicitly refuses automaticity of exchange, and the underlying Article 25 already gives Panama any number of ways to refuse the request to grant the information. Here's that text, again via Google Translate with my tweaks:

Article 25
Information Exchange
1. The competent authorities of the Contracting States shall exchange the concrete information forseeably relevant to implementing the provisions of this Convention or of the administration or application of the domestic laws relating to taxes of every kind and description payable to the Contracting States, its political subdivisions or local entities, insofar as the taxation thereunder is not contrary to the present Convention. The exchange of information is not restricted by Articles 1 and 2.

2. The information received by a Contracting State under paragraph 1 shall be treated as secret in the same manner as information under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) responsible for the assessment or collection of taxes referred to in paragraph 1, for the processes and legal procedures for effective implementation of these taxes, or for the determination of appeals in connection therewith or the prosecution of tax crimes. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.

3. In no case shall the provisions of paragraphs 1 and 2 be construed so as to impose on a Contracting State the obligation:

a) to adopt administrative measures at variance with the laws or administrative practice of a Contracting State;
b) to supply information that is not obtainable under the laws or in the normal course of the administration of that or of the other;
c) to supply information that would disclose a business, industrial, trade or professional secret, or industrial process, or information the disclosure of which would be contrary to public order (ordre public).

4. If information is requested by a Contracting State in accordance with this Article, the other Contracting State will use the measures available to it under its own legislation in order to obtain the requested information, even if that other State may not need such information for its own tax purposes. This obligation is limited by the provisions of paragraph 3, provided that this paragraph shall not be construed to prevent a Contracting State from providing information solely by the absence of national interest in doing so.

5. In no case shall the provisions of paragraph 3 be construed in the sense of allowing a Contracting State to refuse to provide information solely because it is held by banks, other financial institutions, or any person acting in a representative or fiduciary capacity or because it related to property rights or participation in a person.

How does this language compare to other DTTs in existence? There are a few important differences from the U.S. Model DTT. First, the Panama DTT defines the scope of the info to be exchanged as "shall exchange the  concrete information forseeably relevant" to the DTT, while the U.S. DTT only says: "shall exchange such information as is relevant" full stop.

The U.S. Model DTT has specific language on how to deal with bearer shares, and actually requires the other state to make an effort to collect the tax that is owed to the U.S. The U.S. agreement also allows U.S. authorities to enter the other country to inspect books.

Spain and El Salvador recently signed a DTT. In that pact, the Article 25.2 equivalent (27.2) also states that:

"Notwithstanding the foregoing, information received by a Contracting State may be communicated to the authorities responsible for combating money laundering, where such use is permitted by the laws of the State receiving the information."

Basically, the Spain-ES DTT allows the governments to share information obtained through the DTT if this would help with money laundering goals. The Panama-Mexico Article 25 has no such language.

Moreover, as the Panama-Mexico deal states, the DTT is a ceiling, not a floor for information exchange ("to the extent that the information requests are not contrary to the present Agreement.") This was the argument used by multinational banks when the U.S. requested information from UBS in Switzerland: the banks argued that cooperation would be prohibited by the info exchange provisions of the US-Swiss DTT. In other words, DTTs are often considered just as important for the ways in which they allow states to NOT exchange info.

(FWIW, DTTs are usually reserved for countries that charge income taxes... the U.S. stopped signing DTTs with developing country tax havens in the 1980s under the Reagan administration out of concerns about their capacity or willingness to enforce the information exchange provisions, which are much more detailed in the TIEA models than in the DTTs (where it takes up but a few paragraphs.) See more on the history of these initiatives here and here.)

I've given a lot of detail on DTTs and TIEAs, and argued that automatic TIEAs are the way to go and emerging best practice. One final consideration is in order. If the FTA is signed as negotiated by Bush, Panama-domiciled investors could challenge U.S. anti-tax haven measures for cash compensation. We wrote a long report on this topic here.

It is just common sense that you wouldn't want to negotiate a tax agreement with Panama that was a floor rather than ceiling on tax info exchange, and that you wouldn't want investment provisions in the FTA that would give private investors the right to challenge your anti-tax haven measures.

And, as we hint at in this memo, the threat of Panama (the government) or Panama (the offshore investors) launching a case against anti-tax haven measures is not just hypothetical: the Panama government has already threatened it! Thus, the importance of getting this policy right.

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