• Double Taxation Treaties and Tax Information Exchange Agreements
  • February 28, 2011
  • Law Firm: Morgan Morgan - Panamá Office
  • I.        INTRODUCTION - PANAMA:  AN EXAMPLE TO THE WORLD

    During the lengthy negotiations with the United States, which culminated in the Panama Canal Treaty and the recovery of our great source of wealth, our geographical position, all Panamanians, took advantage of international forums to create awareness of our country’s colonial situation and criticize the US for perpetuating it well into the XXth Century.

    In those days, I used to attend the INTELSAT meetings and much to the disappointment of the representatives of Comsat, the U.S. signatory, I never missed the opportunity.    We all did this in every international forum.  We were a constant thorn in the side of the American colossus.  It was a statement such as Gandhi’s peaceful struggle for his people’s liberation, as well as a sign of a people’s unity to achieve their liberation from the yoke of colonialism.

    To this day, the colonial spirit of wealthy nations still prevails towards the so-called emerging countries.   Panama is an example of this. While, theoretically, we freed ourselves from colonial rule as we improve our independence, we are still subjected to pressure from a rich-country cartel under the veil of the Organization for Economic Cooperation and Development (OECD).   The infamous black and gray lists constitute nothing less than a flagrant discrimination against our countries to prevent them from competing in this globalized world, particularly in the financial businesses including corporate vehicles.

    What are we accused of, and what do they want from us?

    Of being uncooperative tax havens, and in order to redeem ourselves, we must be transparent and open up our financial system to the scrutiny of them all.

    I have spent the last 10 years exposing the OECD and its main engine, the U.S., demonstrating that Panama,   as well as its financial and corporations systems are indeed a model for the rest of the world.  We are the opposite of those who accuse of being a tax haven, since they do not even practice what they preach and seek to impose on us.

    In my writings, I have shown that our tax laws do not differentiate between nationals and foreigners, and that our banking system does not protect those who break the law; that our legal vehicles are no refuge for criminals, and that those who have facilitated this have been identified and judged by our justice system. On the contrary, the OECD’s most conspicuous member attracts foreign investment by exempting it from taxes and providing investors with total anonymity, assuring them it will not provide information about their bank accounts, to their country of citizenship or residence.   The U.S. openly and publicly admitted this in recent days by proposing an amendment to authorize the practice.  Let’s see if it will be approve this time, because in 2002 the same proposal was defeated.   But all these things are ignored by the OECD.

    With regard to legal vehicles, for several years the Senate has been trying unsuccessfully to pass the so-called Levin Bill, S569, to force U.S. states to identify their customers.    The bill has raised great opposition, notably among others, from the State of Delaware, which sells the highest number of legal vehicles for foreigners, accounting for 25% of its budget.   Panama passed this law in 1994.

    We are also a model in other areas, such as the registration of ships, in which we are the global leader with over 20% of the world’s merchant fleet, due to the trust in the efficiency of our registry and the security that our laws provide the entities that finance shipping.   And, of course, our Canal, a model of good management, 100% Panamanian management, as well as our ports, the leader in Latin America in container transshipment. There are many things of which Panamanians are proud of, such as the Colon Free Zone, the Tocumen Airport, our digital communications, and our electoral system, which in the last 4 elections has declared the political opposition victorious, with its results being immediately accepted by the ruling party. This, coupled with the good management of our public finances, resulted in all three international credit rating agencies granting Panama investment grade this past year.

    From being a poor country deprived of our wealth, geographical position and our Canal, in the year 2000 we started becoming a rich country, with the potential to become the richest country in the Americas. If our Governments do a good job of managing this great wealth, in a few years there will be not be  Panamanian children walking barefoot or going to bed on an empty stomachs, and they will have a proper  education that will enable them to compete in this globalized world.

     II.      THE OCDE

    It is important that we clear up some misconceptions about this organization. It is not a true international organization, such as the UN and the IMF, since it is limited to 34 rich countries, mainly EU members, the U.S., Canada, Japan, Korea and Australia. Its first Latin American partner was Mexico, accepted in 1994, and later Chile in 2010.

    The Economist magazine calls it a club of rich countries, and Paul Krugman, the noted New York Times columnist and Nobel Prize winner, calls it a think tank. I have labeled it a cartel, since one of its objectives is to protect its partners from the economic and financial competition they may face from non-members.

    The OECD is dominated by the United States, accounting for 25% of its budget and setting the agenda, which can never be contrary to its own interests. The OECD is the author of the war against so-called tax havens and the black, grey, and white lists. It opposes any country that competes with its partners in the financial arena signing DTAAs, for these can be used for tax purposes.

    From my perspective, our recent Administrations (though perhaps to a lower extent in the case of the Mireya Moscoso Administration), have not taken a stand as a sovereign nation before the OECD.  This became evident in Panama’s presentation before the Global Forum, the Cartel’s latest invention.  This Global Forum judges countries on the issues of TRANSPARENCY AND EFFECTIVE EXCHANGE OF INFORMATION, AND ITS BODY OF REGULATION.    We bowed before the OECD without demonstrating the superiority of our financial system and corporations, over those of OECD countries.  There was no retort or disdain from our leaders regarding the claim that we are reluctant to sign Information Exchange Agreements (TIEA), and  we should with countries that so request it,   something no sovereign nation would  accept.    We did not remind them that Panama’s commitment to the OECD in the 2002 was conditioned on a Level Playing Field, which is still not a reality even among OECD members.   There was no mention that we are not a tax haven or that the OECD members, including its principal partner, the United States, are themselves nontransparent tax havens which provide no tax information to third countries.   We did not point out the existence of the Qualified Intermediary Agreements, by which the U.S. shields foreign investors, making it impossible for their respective countries of residence or citizenship to identify them.  We did not say that Panama since 1994 has legislation requiring a resident agent to know their clients and to duly document the related legal entities.   There was no mention of the so-called Levin Bill or the terrible US Government Accountability Reports on the shortcomings of U.S. legal persons and how they lend themselves to all kinds of crimes, including money laundering by foreign mafias through U.S. banks.   We did not make reference to the statement of our Attorney General, that “the Panamanian system, which publishes the directors and officers and resident agent of any corporation through its Public Registry, provides the authorities  with  avenues to investigate who is the ultimate beneficiary of a Panamanian corporation, even if it has issued bearer shares.  As an example,  the cases in which, through the resident agent, we were able to locate the ultimate beneficiary of these companies, due to his obligation  to “know his client”, as per Executive Decree No. 468 of September 8, 1994.”

    Undoubtedly, our country lost a golden opportunity to not only defend itself against the unfair qualifications stated by the OECD, but to also to make known in its public document how our country is a model for the world in everything regarding the good management of banking systems, tax laws, and incorporation regimes. There is nothing stopping us from making a new presentation, instead of expecting the forthcoming judgment of the next Global Forum. These are the rights of sovereign nations.

    I cannot end this part of my speech without a brief reference to the black lists in which some countries have included Panama, based on the tax haven status assigned by the OECD.    The scant visible effect of this discrimination, overshadowed by our economic growth and the foreign investment we have attracted, making Panama a leading country in Latin America, has brought as a result, that our Governments, ever since the year 2000 have been unwilling to use the tools provided by our laws to counteract  such discrimination.    So far we have not applied our retaliation law, enacted with the specific purpose of discriminating against those who discriminate against us, preventing foreign companies from those discriminating countries to participate in our public works, or to give them reciprocal treatment.   Nor have we utilized the World Trade Organization (WTO), even though studies by experts state such discrimination is a violation of this Treaty.   The current Government made the implementation of “retaliation” a campaign promise, and it would be advisable to make a final diplomatic effort, with the support of the treaties to which we are a party in order to avoid double taxation, to set a deadline for the end of this discrimination, with the threat of retaliation or of taking the case before the WTO. These actions would increase respect of the international community for our country.

     III.    TAX LAW

    The power to tax is an inalienable part of the sovereignty of a State. There is no such thing as international tax law, and all attempts so far to universalize tax matters have failed. What we call international taxation is nothing more than the international aspects of a particular country’s tax laws, such as tax treaties, including those to avoid double taxation, and the domestic laws that deal with the extraterritorial aspects of a country’s tax regime. A State relies on its fiscal sovereignty, like its other sovereign powers, to promote the welfare of its citizens. In an increasingly interconnected world, promoting national interests must necessarily take into account international relations, especially commercial ones. There are countries, such as The Bahamas, that have a very sui generis tax regime because its economy depends on tourism.

    Panama, like many other countries, only taxes territorial income.   To avoid confusion, territorial income, or income from territorial source, which is the standard exercise of fiscal sovereignty, is taxed by all countries; developed countries also tax what we may call universal or global income, which is based on the residence and/or citizenship of the taxpayer.  With the exception of the U.S. and the Philippines, universal income is based on residence. Therefore, a British citizen will only be subject to tax on its universal income if he or she lives in the UK, the same way as the foreigner that legally resides there.     In contrast, a U.S. taxpayer (which may or may not be a citizen) is subject to taxation on their universal income regardless of whether or not he or she resides in the U.S.    We emphasize that the term “taxpayer” in the United States encompasses anyone who under U.S. law is required to pay taxes (on income and others source) even if he or she actually resides in another country. This distinction is very important when we refer to the TIEA that Panama recently signed with U.S.

    A State exercises fiscal sovereignty not only to raise the money needed to fulfill its tasks, but it is also an important instrument of economic policy to promote exports and attract foreign direct investment.

    Hence the unilateral standards by which States provide tax credits to their companies on the taxes they are levied by other countries on the income they generate within these countries’ borders.   Failure to do so would affect the competitiveness of their countries.    States also have laws that encourage foreign investors to deposit savings in their banks, where the interests they generate are untaxed.   In addition, almost every country in the world provides incentives for passive investments, exempting capital gains from taxes, including the U.S.

    Perhaps no other instrument is most frequently used in the global competition for markets than tax exemptions, to the point that, in some cases, countries promoting them have been accused before the WTO of unfair competition, having used tax subsidies to make their companies more competitive. The U.S. Congress passed a law for companies like Boeing to be able to establish a subsidiary in another jurisdiction and, from there, declare to tax authorities the sale of its aircraft manufactured in the U.S. This income was taxed in the U.S. at a considerably lower rate than if taxes would have been filed stateside. Undoubtedly, the United States is properly exercising its fiscal sovereignty to help its companies compete; however, they lost sight of the fact that this policy violated WTO agreements against unfair competition. The European Union won the case and proved that the annual subsidy was in the order of 4 billion dollars.

    This case also demonstrates how domestic tax legislation may conflict with international agreements or may be subject to retaliatory measures. These realities, increasingly evident in a world where globalization affects trade more than anything else, gave rise to tax treaties in which States protect their citizens from double taxation, share the income derived from the transnational activities of their taxpayers, and protect their revenues, making tax evasion more difficult. 

    According to scholars, the first treaty that contained provisions for avoiding double taxation was signed by the Austro-Hungarian Empire and Prussia in 1899, which led to several studies by a committee of tax experts of the League of Nations in 1925. These treaties proliferated after the 1960’s with the rise of global trade and now total several thousand. They are bilateral treaties, since so far no State has been willing to give up its fiscal sovereignty, and they are often conditioned by the special relations of the States that negotiate them.

    The U.N., the OECD, and the U.S. have all developed models that facilitate treaty negotiations between countries, encompassing the various aspects of trade. The U.N. model takes greater account of the interests of territorial-source countries, which are usually developing countries, whereas the OECD’s emphasizes the interest of developed countries, as it was elaborated primarily to help its partners, which have similar economies. Clearly, States may or may not follow these models, depending on their interests and the interests of their counterparts, and on whether they apply a global or territorial tax regime.

    All these treaties seek to define the concepts and cases that arise due to overlapping jurisdictions. The one we signed with Mexico, which is already Panamanian law, contains rules for determining the concepts of RESIDENCE, PERMANENT ESTABLISHMENT, and the different TYPES OF INCOME and how these are allocated on the basis of their taxes and contributions. This includes income from property, business profits, operation of ships and aircraft, incorporated companies, dividends, interest, royalties, capital gains, services, salaries, allowances for directors and other executives, remuneration for artists and athletes, pensions or disability payments, civil service, students’ expenses, and other income.

    Other important points are the AVOIDANCE OF DOUBLE TAXATION and the EXCHANGE OF INFORMATION, which, for obvious reasons, are the ones that interest us. Additionally, the treaty contains provisions that are standard in any international treaty, such as a chapter to define concepts, a mutual agreement procedure to enable interested parties to seek redress of grievances when they are dissatisfied with the interpretation or action undertaken by the other party in a particular case, as well as for different interpretations that may arise from treaty provisions. The treaty also contains provisions on its validity and complaints. In the case of the treaty with Mexico, a complaint may only be made after it has been in force for 5 years.

    These treaties also contain a Protocol that serves to interpret, a priori, certain provisions. This Protocol has more force than the treaty itself, allowing States to follow the provisions of the Models, but to also oppose exemptions on them, which must be mandatorily accepted by both parties.

     IV.    PANAMA AND DOUBLE TAXATION AVOIDANCE AGREEMENTS

    During the 1980’s, following OECD policies against tax evasion and so-called tax havens, the U.S. decided to end the Double Taxation Avoidance Agreements (DTAAs) with Caribbean countries and jurisdictions, and instead, force them to sign Tax Information Exchange Agreements (TIEAs).   The argument was that the DTAA treaties were used by their taxpayers to avoid taxes.   At this time, the U.S. made the first attempt to have Panama sign a TIEA, which was rejected.    The U.S. insisted during the Endara Administration and, even though Panama was occupied by U.S. military forces at the time,  he refused to even talk about it, or about an extension for its military bases.  The U.S. tried once again, during Mireya Moscoso’s administration, to negotiate a TIEA.  The Foreign Minister at the time, Jose Miguel Aleman circulated the draft agreement among the institutions that might be affected, among them, the National Bar Association.  I was commissioned by the Bar to study the draft and make recommendations. The conclusion was that the agreement contained an unjustified surrender of our fiscal sovereignty, which would put our financial system at a disadvantage compared to the U.S., who did not provide information on foreign deposits domiciled in their banks to any other country, except Canada, whose interests were also tax-free.   A delegation of lawyers attended the U.S. Embassy to argue that the U.S. could not ask us to do something they would not be willing to do themselves. Coincidentally, at the time, due to strong opposition from public opinion, political groups from both parties, and bank associations, the U.S. Government failed to approve a measure to please the OECD,  that would require  banks to report their foreign clients.    The arguments used by them to oppose the measure, was adopted as our own.    Incidentally, a few days ago we learned that the bill to provide bank information has been revived and hearings are scheduled next April for its consideration.    Naturally, the attacks against it have already begun, which in turn attack the OECD, since the justification for adopting the measure is again to comply with it.    We will return to this point later.

    The Bar Association’s General Assembly decided to oppose the agreement and urge the Panamanian Government to reject it.   The U.S. pressure on Panama to sign dropped significantly, because of domestic issues and its interest in changing the focus of the OECD away from so-called tax havens, which directly affected its status as such.   We must also recognize the proper handling of the issue by our foreign ministers at the time, Jose Miguel Aleman and Harmodio Arias, who made public the draft agreement, which certainly became a counterweight against U.S. pressure.

     The interest of the OECD, following the lead of the United States, main partner and contributor, changed from “Harmful Tax Competition” to the newly minted “Transparency and Effective Exchange of Information”.

    During the previous administration, the OECD took the lead again and forced smaller countries and jurisdictions to sign TIEAs, taking advantage of the crisis at UBS, which had breached its agreement as Qualified Intermediary with the U.S., making it easier for U.S. citizens to evade taxes. The U.S. used this case to pressure Switzerland into reforming its tax treaties in order to provide information beyond that limited to fraud, as was the case beforehand. Otherwise, its flagship bank would be in danger of disappearing, with the consequent damage to its economy.

    At this point I would like to highlight just how hypocritical the U.S. and OECD are on the issue of tax havens, by explaining what a QUALIFIED INTERMEDIARY AGREEMENT is.   It is a contract between the IRS and foreign financial intermediaries that makes it more attractive for the former to invest in the United States. It allows them to make passive investments in the U.S. economy that, as we know, are not taxed and, furthermore, does not require them to disclose the identity of their foreign clients, not even to the IRS.  This way they guarantee them that their U.S. competitors will not take away their clients and, moreover, that their governments will not have access to their account information and investments in the U.S.   This makes the United States the largest tax haven in the world, and above all, the most opaque or secretive.   And what about the OECD?    In return, the financial intermediary agrees to not include U.S. citizens among its customers and allow the IRS to check compliance via independent audits.   UBS violated this agreement, bringing on itself its well-publicized problems with the U.S. Government, problems that eventually affected many other countries after Switzerland, as pressure was exerted to force smaller jurisdictions into signing TIEAs, or to include Tax Exchange information provisions in Double Taxation Avoidance Agreements, as per the OECD model.

    During the final months of Martin Torrijos´ Administration, he was subjected to strong OECD pressure, under threats of including Panama in its blacklist. We were and currently are in the gray list, which as per OECD nomenclature is composed of countries that have committed themselves to transparency and information exchange but have yet to implement such measures. Hence, the infamous 12 treaties to provide tax information and the avalanche of countries and jurisdictions on the OECD’s gray list that have signed them. Previous administrations had renewed their commitment to comply with the OECD, but none signed a TIEA with the U.S. or any other country.

    The current Panamanian Government started off with a strong position.   Our Finance Minister stated that our country would only sign DTAAs, which actually benefit Panama, and no TIEAs, which offer no benefits for a territorial-source country like ours.   Also, in a gesture of dignity and independence towards the OECD, Panama stated it would only sign treaties with countries with which it sought to begin or promote economic relations.   A very professional team was put together, which initiated contact with other countries, leading to treaties with them, including the one with Mexico that has already been signed into law.   According to the Minister, these treaties would make foreign investment in Panama more attractive, since investors would know where they stand on the issue of taxes, reaffirming before the international community that we are a serious country that does not lend itself to tax evasion.

    One of the great achievements of the treaty with Mexico, as well as the other tax treaties, as I have been told, is the protocol that interprets and conditions the clause relating to information exchange. As we know, this information exchange clause does not really affect our counterparts, as it is unlikely that we would request tax information from another country, simply because Panama does not tax foreign income. Effective implementation of the Protocol protects our financial center and our legitimate customers.

    Our Government must take into account the letter of these treaties and provide legal content to facilitate their proper compliance.   It should also be aware that in our legal system, any administrative measure, including those taken to enforce such treaties, is subject of review by the Supreme Court. It is constitutional and consistent with the contents of these treaties.  In addition, judicial review of domestic acts of treaty implementation is also part of the legal systems of Singapore and Switzerland, among others, i.e., it is not a Panamanian novelty.

    Because of its importance, I will summarize the Protocol’s main points regarding the exchange of information provided in Article 25 of the Treaty:

    a) It may only be applied after all other sources of information available under domestic law have been used.

    b) It must be relevant and not simply for information-gathering purposes (fishing expedition).

    c) Its application must be strictly detailed and include names, addresses, dates, nature, purpose, and legal basis.

    d) It should always be subject to summons.

    Because of its importance, I quote in full the due process clause:

    E) It is understood that the exchange of information and administrative procedures to safeguard the rights of taxpayers of the State on which information is sought shall remain in force and applicable before the information is transmitted to the requesting State. These procedures include notice to the taxpayer regarding the information request by the other Contracting State and the possibility that said taxpayer be a participant in the process and able to present his or her position to the tax authority before it makes a decision. It is understood that this requirement seeks to ensure fair process to taxpayers and not to establish barriers to prevent or delay the information exchange process.

     Well-managed DTAAs should not harm but rather benefit our country. They will help erase the “perception” that we are a non-transparent tax haven, which we are not, and create a range of possibilities to remain an important factor in globalization.  Just as The Regional Headquarters Law has enabled leading global companies to establish their regional offices in Panama, these tax agreements may serve to make Panama the fiscal headquarters for these and other companies.  The Regional Headquarters Law contains a provision which allows companies with operations outside Panama to negotiate their tax issues with the DGI (our internal revenue service), and these agreements provide content to said provision.  This generates more work for our attorneys, bankers, accountants, and other finance professionals, who will undoubtedly serve the fiscal architecture required by multinational corporations.

     V.      U.S.- PANAMA TAX INFORMATION EXCHANGE AGREEMENT - NOVEMBER 2010.

    Before addressing the TIEA and to better understand it, we need to clarify some elements of the U.S. tax regime and its fundamental differences with that of Panama and other OECD countries.

    The United States has a global or universal tax regime, but unlike other OECD countries, which apply it to its residents, the U.S. applies it to all its taxpayers, domestic or foreign, regardless of whether they reside in the U.S. To understand this difference and, especially, the impact of this agreement, consider the following example: A British citizen residing in Panama is not required to file or pay taxes in the UK on the income he or she makes in Panama or elsewhere. In contrast, a U.S. citizen, or someone who is not a citizen but is considered a taxpayer under U.S. law, must file and pay taxes on the income obtained in Panama or elsewhere.

    Consider as well that Panama has a territorial system. Therefore, on rare occasions will Panama need to request information from the U.S., making this a one-way treaty, meaning that its major beneficiary is the U.S. As discussed below, this should have been taken into account by Panamanian negotiators to condition U.S. access to our tax system, which was, inexplicably, not done.

    We don’t understand the sudden change of our Ministry of Economy and Finance’s  stated policy of no TIEAs with any country, much less with the U.S., nor why he ended a tradition based on extensive analysis  by previous Governments which justify rejection.   Not even during the US invasion to Panama, was the U.S. able to impose a TIEA on former President Guillermo Endara, which makes the current argument of compelling U.S. pressure for a deal, totally unacceptable.

    When the subject was first brought up, we thought, as in previous occasions, that the draft agreement would be presented for the scrutiny of the public and stakeholders.   Surprisingly, in late November it was announced that the agreement would be signed on November 30, a Tuesday following a holiday.  The Government officials called a meeting with lawyers and bankers to explain what it was going to sign, yet no one had seen the content.   The President of the National Bar Association requested a copy of the draft agreement before the meeting, which took place Friday, November 26. It was received one day prior to the meeting.   The same day of the meeting, the Minister was given a letter with the Association’s observations, which concluded: “Finally, dear Mr. Minister, we believe that this Agreement, due to its importance for the present and future of our national economy, and also for the dignity and respect we deserve as a free, independent, and sovereign country, should be widely discussed in all forums”.

    Unfortunately, the expected dialogue did not take place, and we missed the opportunity to analyze in depth the Agreement.  Given the evidence of flaws arising from a joint analysis, we believe that, the Government would have been able to review it with its counterpart.    It was not bad faith from our negotiators, but the rush and perhaps lack of importance and awareness attributed to the issue, lead Panamanians officials to overlook the clauses and provisions that make it the worst agreement ever signed by Panama, as we shall see from the following analysis of the most outstanding points:

    1)      It allows the request of information on Panamanians which the U.S. considers citizens or residents, and therefore, taxpayers.

    Our negotiators did not take into account that there are many Panamanians with U.S. citizenship (i.e. dual citizenship) because of the existence of the Canal Zone for over a century.  There are also many Panamanians with legal residence in the U.S., but who actually reside in Panama, due to the political crisis during the Noriega dictatorship.   The U.S. considers these Panamanians, even if they reside in Panama, taxpayers. Panama should have excluded from the Agreement any information on Panamanians; by not doing so, it is violating Article 17 of our Constitution, which stipulates the duty of the authorities to protect our nationals wherever they may be.

    2)      It allows the request of information from what in Panama would be considered a criminal act, such as the theft by an employee of confidential information from a bank.

    Panama should have asked that this be excluded. It is a dangerous open door, especially if one takes into account that the Americans offer rewards for whistle blowers associated to tax issues.

    3)      They completely ignored the Level Playing Field on issues as important to us as banks and corporations. I cannot imagine that our negotiators and officials are not aware that the U.S. does not provide information to any country regarding  bank deposits of its nationals, and has yet to pass the “know your client” law, known in Washington as the Levin Bill.

    Most distressing is the so-called complementary note to the agreement, where Panama foolishly commits to adopting a rule, which already exists, requiring it to know a corporation’s clients, without at least demanding in return that the U.S. commit to passing the Levin bill and provide bank information as a condition to ratify the Treaty.

    4)      It includes inheritance and gift taxes, which is unacceptable because Panama has neither.  It has a rather territorial character.

     This means that a person with dual U.S.-Panamanian citizenship will be subject to pay these taxes to the U.S. Government.

    5)      It leaves both the client and the bank defenseless against U.S. information requests.

    It seems that our negotiators forgot that all administrative acts, as mandated by our Constitution, may be appealed before the Supreme Court. At least they should have adopted the clause found in the Protocol of our treaty with Mexico, and transcribed above which protects taxpayers. 

    6)      The most serious part, which will have a catastrophic impact, is that the treaty is retroactive for 3 years from the day it was signed. (Article 11) This means that from November 30, 2007, U.S. taxpayers with residence in Panama or with bank accounts or interests in Panamanian corporations, including dual citizens of Panama and the U.S., are subject to legal action by the  IRS  for events that occurred in Panama prior to the signing of the Agreement. This means that a U.S. or dual U.S.-Panamanian citizen who has an account in a Panamanian bank and has not declared taxes before the U.S. Treasury, which is a fiscal crime in that country, will not have the opportunity to make proper arrangements to normalize his situation, as is the case in other similar agreements signed by the U.S.    Take as an example, the BVI, among many others, in which the treaty implementation takes place between 2 to 4 years after the day of signing. This provision is a violation not only of our Constitution, which prohibits the retroactivity of laws, but also of the most elementary principles of international law and, seriously damages Panama’s standing regarding international law.

    When we confronted officials from the Ministry of Economy and Finances with the fact that a similar U.S. agreement with BVI was not retroactive and was not enforced until two or four years after its signing, the answer they gave us was the that the agreement with Mexico also was retroactive for three years, and that we hadn’t raised the issue then. This response reveals that our negotiators failed to do their homework on a subject as sensitive as an agreement with United States. They did not take into account that in Panama there are thousands of retired Americans with permanent residency and hundreds of Panamanians with dual U.S. citizenship and that, unlike the U.S., Mexico applies its global tax regime only on its residents. This means that a Mexican residing in Panama may have investments here, including bank accounts, but for Mexico, UNLIKE the U.S., he or she would not be taxed or considered a criminal.

    This Agreement is so out of place for  its disregard  of  our Constitution and principles that should govern any agreement between two sovereign states, that I am confident that it will not be approved by the Cabinet, and if it is, that the National Assembly will reject it.

    If the desirability of an agreement limited to tax information with the United States persists, we should bear in mind that the sole beneficiary of such an agreement would be the U.S., and as such, this allows us   to establish provisions for the protection of our citizens, residents, and our economy. Therefore, the information must be limited to U.S. citizens residing in the U.S., and not include those considered by Panama as residents here. The conflicts over residency and other interpretations of the Agreement should be resolved unilaterally by Panama, and the treaty should include the protection provisions set forth out in the Protocol of the treaty with Mexico. Of course, it should also be consistent with the concept of a LEVEL PLAYING FIELD, and conditioned to an agreement on the U.S. sharing bank information and the adoption of a law, “Know Your Client”, as we have done in Panama.

    With such an agreement, we would be acting as the sovereign, independent, and dignified country that we are, a country that cannot accept the draconian and unjust obligations contained in the Agreement signed, and that all Panamanians should object.