U.S.-Panama trade deal may test Obama goals

PANAMA CITY -- The month-old government here is expected to announce as soon as next week the first steps toward breaking with decades of banking secrecy that have drawn both tax-allergic customers and global rebukes.

Panamanian officials insist that their limited financial unveiling is motivated solely by a desire to retool the economy for the post-financial crisis era, but the initiative's more immediate impact may be felt in the halls of the U.S. Congress. That's because Panama's image as a leading offshore financial center conducive to hiding profits from the tax man has become the latest hurdle for a pending U.S. trade deal, which has languished since its 2007 signing during the Bush administration.

Congressional Democrats, skeptical of the accord's promised benefits after years of what they say are trade-related job losses, insist that Panama must resolve lingering doubts about its willingness to cooperate on international tax probes before Congress will consider the treaty. The nation is one of 12 "tax havens" listed by the Paris-based Organisation for Economic Cooperation and Development.

"We understand that we have to move ahead on this, and we're gonna do it," Panama Vice President Juan Carlos Varela told USA TODAY in an interview. "We are committed to fight tax evasion and corruption everywhere."

A country of 3.3 million people with a dollar-based economy, Panama is emerging as a test of the Obama administration's stated goal of reorienting U.S. trade policy toward the needs of the middle class. The tiny Central American nation's location astride a key global trade route in the Panama Canal and its role in hosting thousands of foreign corporations has earned it an economic profile out of proportion to its tiny $24 billion annual output.

But whether the Panamanian government's planned actions, including likely negotiations with the U.S. and other countries on new tax treaties, will ameliorate congressional resistance is unclear.

The open pressure from Washington, however, already is sparking predictable resentment in a region that has long chafed at the dominance of its largest northern neighbor. "We really do not think it's fair Congress is using ratification of the free trade agreement as some kind of pressure to obtain other things that were not on the table the first time. ... The agreement should be ratified without any preconditions," says Adolfo Linares, president of Panama's Chamber of Commerce.

Panamanian officials say the U.S. has its own corporate secrecy issues — such as an opaque "limited liability corporation" that can be established under Delaware law — and insist that the trade and tax issues should be kept separate. But political reality in Washington already has fused them. President Obama discussed with Panama's newly elected president, Ricardo Martinelli, the tax and other remaining hurdles shortly after the former businessman was sworn in July 2, says chief U.S. trade negotiator Ron Kirk. Obama co-sponsored legislation to crack down on tax havens while still a U.S. senator.

A buzz saw

When the U.S. and Panama reached a trade agreement on June 28, 2007, it took the Panamanians all of 13 days to ratify the deal. In Washington, however, the process quickly ran aground over a controversy involving a top Panamanian politician. In September of that year, the then-ruling party selected Pedro Miguel Gonzalez to head the National Assembly. Gonzalez, the son of a prominent anti-American politician, had been indicted in the U.S. in the 1992 death of a U.S. soldier in Panama. He was acquitted of similar charges in a Panamanian court, though the trial was widely regarded as flawed.

By the time Gonzalez ultimately resigned from office in 2008, potentially clearing the way for U.S. consideration of the treaty, the U.S. was in the middle of a presidential election campaign. Once the Obama administration took office in January, the worst recession since World War II was destroying jobs at a rate that left few lawmakers eager for a bruising fight on a new trade deal.

Now, as the Panamanians grumble, the U.S. is preoccupied with health care reform; every day of delay pushes a potential congressional vote nearer the elections of 2010. In an interview earlier this month, Kirk played down the challenge of an election-year vote, saying of trade politics: "It's always difficult."

The proposed trade deal would eliminate tariffs on U.S. exports to Panama, spurring new sales for American pork producers and heavy equipment makers such as Caterpillar. But the volume of two-way trade between the U.S. and Panama is a minuscule $5.2 billion, about equal to what the U.S. produces in three hours. And the modest economic gains carry a steep political price.

Along with treaties with Colombia and South Korea, the Panama deal is opposed by those arguing that trade accords dating to the 1994 North American Free Trade Agreement have cost the U.S. jobs. Proposed legislation requiring the renegotiation of NAFTA and other deals has drawn 115 co-sponsors, including Rep. Louise Slaughter, D-N.Y., who blames heavy manufacturing job losses in the Buffalo area on trade.

"All of our jobs went south. It was absolutely awful," she says.

In response, the administration has promised a "trade policy that makes sense to the American people," enforcing existing deals and producing well-paying jobs. The makeover — set to include an as-yet-unscheduled presidential address — is aimed at lawmakers such as Slaughter and her blue-collar constituents. Kirk has said the administration must demonstrate that expanded trade will benefit those who most fear its effects, a task that eluded Obama's Republican predecessor.

So far, Slaughter, the powerful chairwoman of the House Rules Committee, sees little difference between the Bush and Obama approaches. "They really want to send the (treaties) up here," she says. "They're gonna run into a buzz saw if they do that."

An outlier moves

Foreigners have about $13.6 billion in deposits with Panama's 43 banks, plus an additional $11.7 billion in 30 so-called offshore banks, which are not allowed to accept deposits from Panamanians, according to the country's banking superintendent and the International Monetary Fund. A key attraction for depositors, especially wealthy individuals from politically volatile Latin American countries, is Panama's tradition of banking secrecy. The tax man back home, whether in Venezuela or the United States, never learns of interest earned here.

Investors also can establish corporations in Panama using a device called "bearer shares," which shield the owner from disclosure. "The secrecy laws there are very, very strict," says Shawn Carson, director of international tax at accounting firm CBIZ Mahoney Cohen.

Panama agreed in 2002 to implement international standards on transparency and exchange of tax information, but seven years later, it has not yet done so. Some smaller local banks and law firms, which profited from the lucrative work, resisted the shift. The issue flared into prominence in the past year, as world leaders sought to armor the global financial system against future crises. As governments in the U.S. and Europe risked taxpayer wrath to bail out leading financial institutions, official tolerance for shady tax practices plunged.

In April, the London summit of G-20 nations warned of the risks to the global financial system posed by "non-cooperative jurisdictions" and threatened "agreed action against those jurisdictions which do not meet international standards in relation to tax transparency."

This month, the OECD reaffirmed Panama's standing as a "tax haven" and listed it among just 12 jurisdictions that had failed both to implement the global standards and negotiate any bilateral tax accords.

Unwelcome attention amid the crisis atmosphere prompted several countries that had been identified as tax havens, such as the Cayman Islands, to sign information-sharing agreements with other countries. Panama thus far has done little in response to the growing international clamor. "I certainly wouldn't put them as one of the more forthcoming countries. ... Panama is beginning to look increasingly like an outlier," said Jeffrey Owens, director of the OECD's Centre for Tax Policy and Administration.

That may be about to change. Upon taking office earlier this month, Martinelli named Finance Minister Alberto Vallarino to head a new cabinet-level commission to craft a new tax policy. The panel already has reached a tentative consensus on the necessary changes, including opening negotiations with more than one foreign country, Vallarino said. The United States is almost certain to be among the initial negotiating partners. An announcement is tentatively expected on Tuesday.

"We will move to modernize our financial and international services center independently, without any consideration of what's happening in Washington," Vallarino said.

The government's objective is to win an investment-grade label from credit-rating agencies Moody's and Standard & Poor's. That would allow the Panamanian government and domestic companies to borrow at lower interest rates.

A recent study conducted for the government by the consulting firm KPMG identified several weaknesses in the country's position as a global finance hub, Vallarino said. Compared with larger centers such as New York, London, Singapore, Hong Kong and Dubai, Panama was the only nation that lacked tax agreements with other OECD countries.

To put the country's finances on sounder footing, Vallarino said, tax revenue must be increased by an amount equal to 4% to 5% of gross domestic product. That, too, argues for less secrecy in the country's tax regime.

Still, Panama appears intent on negotiating a specific type of agreement — a treaty on double taxation — that may not satisfy U.S. congressional critics who instead are demanding Tax Information Exchange Agreements, which provide for the sharing upon request of information needed to enforce U.S. tax law. The Office of the U.S. Trade Representative would be satisfied with either approach, according to an administration official, who requested anonymity to discuss sensitive talks.

In Panama, officials vow action before a Sept. 1 OECD meeting in Mexico. And they're looking for action in return. "We expect Congress to ratify the treaty in the next six to 12 months," says Varela, the vice president. "Our country deserves that."