Publish in Commentary - Wednesday, April 27, 2016
A Maersk ship waiting to enter the Panama Canal. The Danish shipping giant has its Latin America headquarters in Panama, as do other multinationals such as Adidas and Nestle. (Photo: Panama Economy Ministry)
Panama more than the Panama Papers and offshore business.
Thanks to the leaks known as the Panama Papers, Panama now finds itself in the middle of a global storm over revelations of famous politicians and business people that have used offshore companies both in Panama and other locations in what appears to be – in many cases, but not all -- efforts to evade taxes in their home countries.
However, Panama is more than an offshore company center. In fact, it is Latin America’s leading regional business hub. Companies such as Denmark-based Maersk (the world’s largest shipping company), Germany-based sportswear giant Adidas, US-food products company Mars and Switzerland-based packaged food company Nestle have set up Latin American headquarters there, while US-based Caterpillar (the world's largest manufacturer of construction and mining machinery) moved its regional training center from Miami to Panama to avoid the problems of delayed US visas for its clients in the region.
Panama is Latin America’s leader when it comes to foreign direct investment compared with GDP, according to a Latinvex analysis of FDI data from the United Nations Economic Commission for Latin America and the Caribbean (ECLAC) and GDP data from the International Monetary Fund (IMF).
Foreign multinationals have been attracted to a combination of factors, including Panama having Latin America’s second-most competitive economy behind Chile, according to the latest Global Competitiveness Index from the World Economic Forum and the best transport infrastructure, according to a Latinvex ranking of 19 countries based on 17 key factors.
It is also a regional leader in Latin American trade. It is the largest Latin American market for both Japan and Singapore and the third-largest market for South Korea. However, much of those exports are then re-exported to the rest of Latin America, using Panama as a transshipment hub.
And thanks to the Panama Canal – which links the Atlantic and Pacific Oceans – Panama has also become a major shipping center, with booming ports on each side of the waterway and a slew of companies servicing the sector. The canal is currently undergoing a historic, multi-billion expansion.
“Bolstered in part by the ongoing expansion of the Canal and other sizable infrastructure development investments, two domestic processes that have shielded it from the adverse effects of external shocks, Panama continues to post one of the highest growth rates in Latin America,” Franco Uccelli, Executive Director of Emerging Markets Research at JP Morgan, said in a commentary to clients on April 26. “For several years, strong growth has been one of Panama’s most important credit drivers, and the positive trend is likely to continue in the foreseeable future.”
In fact, Panama will be Latin America’s macro-economic star the next five years, according to a recent Latinvex analysis of new projections from the International Monetary Fund (IMF).
The country will have the region’s highest average GDP growth during the 2016-20 period and the second-lowest inflation.
Meanwhile, Panama also is home to Latin America’s largest international banking center and the world’s largest shipping registry.
In terms of its offshore company registry it is important to note that many individuals and foreign companies register offshore companies for perfectly legitimate purposes, including tax breaks offered by Panama (which only taxes local income and not revenues derived outside of its territory).
“Unless and until the sovereign nations of the world are able to agree on an internationally uniform tax system, offshore tax planning remains a common, legitimate and important part of any cross-border transaction or business plan,” James M. Meyer, a partner at the Harper Meyer law firm, told the Inter-American Dialogue’s bi-weekly Financial Services Advisor recently. “Much of the media coverage regarding the ‘Panama Papers’ has been either misinformed or has itself been misinforming regarding the international financial services industry. The press seems to have largely failed to mention the legitimate purposes of offshore planning, including security, country and political risk, which is something many who are safely tucked away in the United States have a hard time conceptualizing.”
We applaud efforts to crack down on tax evasion and fight criminals and corrupt politicians who use Panama shell companies to hide their assets, but those efforts should not hurt Panama’s legitimate businesses.
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