IN THE MEDIA ~ Panama a 'tax haven': Opposition

October 6, 2010 -

Panama a 'tax haven': Opposition
By Carl Meyer

With the Canada-Colombia free trade deal now in force, many felt the government could expect relative quiet when it comes to other, less controversial trade pacts. Yet the proposed free trade agreement with Panama has some opposition members suggesting the government is again making deals with the devil, potentially setting the stage for another drawn-out battle.

On Sept. 23, the government introduced Bill C-46, implementing legislation for the free trade agreement the government signed with Panama in May. The bill is currently being debated at second reading.

Over the past week, the NDP and the Bloc Québécois have repeatedly raised concerns about Panama being a "tax haven," which is a country that levies little to no tax on foreign businesses, and which shares insufficient tax information with foreign governments hoping to track down tax-avoiding companies.

While a sovereign country can design any financial system it wishes, they argue Panama has a combination of weak taxes and weak financial transparency that deliberately attracts businesses that want to avoid public scrutiny. This in turn raises concerns about how these businesses will address elements like middle-class incomes, workers' rights, social programs and education.

That "tax haven" label was used dozens of times in House debates, typically in concert with accusations of Panama being a refuge for other shady attributes such as money laundering and drug proliferation. For example, on Sept. 30, NDP Trade critic Peter Julian called the bill a "drug-pusher, money-laundering, tax haven, fiscal paradise Act."

In an interview later with Embassy, Mr. Julian said his accusation stemmed from the government's "dysfunctional trade policy" that produces poor choices for Canadian trade partners. He said the US Internal Revenue Service, the American tax enforcement agency, "has more cases involving Panama than virtually any other country."

"The IRS is fuelling the investigations in the US, the relationship between the illegal dirty money going into Panama and the drug trade, and yet the Conservatives choose to sign an agreement with Panama that has no mention of money laundering or dirty drug money," he said.

"What it does is it basically rubber-stamps with approval the Panama government's approach to this dirty money."

The NDP and Bloc are presenting data to back up their concerns. The Organization for Economic Co-operation and Development, an international body that aims to promote democracy and market economies, and of which Canada is a founding member, has asked Panama for eight years to conform to more transparent rules and regulations, to no avail.

In a report issued Sept. 30, the OECD again blasted Panama for breaking its promises to adhere to financial transparency requests.

"Panama has committed to the international standards of transparency and effective exchange of information since 2002. Until very recently, however, it has had no involvement in international co-operation in tax matters and consequently its legal and regulatory framework has not been designed with such demands in mind," the OECD paper states.

"It is essential that additional steps are now taken to ensure that relevant information is available, that the appropriate authorities have access to it and that Panama can engage in effective exchange of information for tax purposes."

And concerns over Panama's tax regime are not unique to Canada. While the Bush administration signed an FTA with Panama in June 2007, Congress has been opposing it ever since over the tax status of Panama, and implementing legislation has not been introduced yet.

The Harper government argues the financial transparency of Panama has nothing to do with free trade. International Trade Minister Peter Van Loan said that while the government does have concerns about the tax issue with Panama, he has received commitments from the Latin American country that it will conform to Canadian requirements by July 2011.

Despite the Panamanian government's reneging on promises made to the OECD over the past eight years, he said he is still considering these new commitments to be genuine.

The government has the support of experts, a consensus of whom said the assertion that there was no connection between the financial transparency of Panama and the trade agreement is correct.

"Free trade has nothing to do with Panama being an offshore financial centre. In that case, we might as well not have free trade agreements with many parts of the world," said University of Ottawa international finance professor Patrick Leblond.

"I can't see that a free trade agreement with Panama would trigger much more use of Panama as a tax haven," echoed Sam Bucovetsky, an economist at York University.

An issue of engagement or trust?

American researchers have grappled for years with the problem of how trade agreements should deal with foreign tax issues. A widely-cited University of Michigan paper from 2001 acknowledges the relationship between tax and trade law, and a US Congressional research paper from February raises the concern in examining the US-Panama FTA.

Panama itself has recently given several indications that this time, with US and Canadian free trade agreements in the balance, it may finally begin to move to reform its system. It has been completing talks on taxation agreements with the OECD and with several countries, and in March it signed its first double taxation convention with Mexico.

Sensing this, the Liberals say they are in favour of a free trade agreement with Panama. Liberal MPs say they hope to move ahead with the bill and examine it in committee in order to work out any potential problems.

"Engagement is preferable to isolation" when it comes to setting up free trade agreements, said Liberal MP Bryon Wilfert. He said he thought that the appropriate place for debate over tax issues should be the committee, since its job is to examine the bill and recommend provisions that may need to be strengthened.

"Seventy-five to 80 per cent of this country is dependent on export markets. If you're looking for perfection, you're in the wrong business," he said.

Carlo Dade, executive director of the Canadian Foundation for the Americas, said the "tax haven" label has become "an issue with smaller economies that focus on financial services." Some countries in Latin America, he said, are in the business of supplying tax avoidance services because they are profitable.

"Were we a smaller economy that focused on financial services as a means for competitiveness, we would have a very different view of it," he said.

But he said the fact that Canada has had a foreign investment agreement with Panama in force since 1998 raises suspicions about the Panamanian government's insistence that it will commit to reforming its financial transparency.

Mr. Leblond said the issue now is whether Canada should use the "free-trade carrot" as a means to convince Panama and other tax avoidance services countries to conform with OECD standards.

Sam Boutziouvis, vice-president of economics and international trade at the Canadian Council of Chief Executives, said the organization has been involved in the Panama negotiations and has been in contact with businesses who wish the deal to be completed, but he declined to comment on the issue of Panama's tax status.

Panama's ambassador, Francisco Carlo Escobar Pedreschi, said he was looking into the issue, but did not respond in time for publication.