After declaring Panama a “tax haven” for its failure to sign an agreement on the exchange of tax information, finance ministers from both countries met in Washington this week to try and settle the dispute.
Panama is the largest foreign investor in Colombia after the United States, and has been Latin America’s fastest growing economy since 2008, growing at an average of 8% per year.
Latin America Post 2008 Average GDP Growth by Country
Much of that growth has been driven by favorable tax structures attracting foreign investment and companies, where exemptions from income, property and import taxes are often granted. These kinds of favorable taxing laws made Panama by far the largest foreign investment market for Colombia, with over 40% of Colombia’s 2013 total going there.
2013 Colombian FDI Outflows by Country
With Colombian money pouring into its northern neighbor in an attempt to take advantage of a host of lower taxes and confidentiality agreements, the Colombian government’s attempts at reigning in more revenue by exchanging more financial information with Panama would give it better control of its national wealth there that does not pay taxes at home.
The immediate effects of being labeled a “tax haven” have significant impacts on Colombian businesses. Santiago Rojas, director of Colombia’s Directorate of National Taxes and Customs (DIAN) said that Colombian companies may continue doing business with Panama, but will have to abide by different tax rules, one of which is complying not to a 10 but 33 percent rate, which will not be deductible from income tax.
Panama’s finance minister decried the move, saying “Panama has consistently communicated to Colombia that an agreement of this nature would not be a benefit to Panama and would rather be a disadvantage to our international corporate and financial center.”
According to Carlos Raul Yepes, president of Bancolombia, Colombia’s second largest bank with significant assets in Panama, said “the measure is highly undesirable from an economic and political perspective.”
Already having put forward huge progressive tax overhauls in order to finance increased social spending over President Juan Manuel Santos’ second term, the Colombian government is trying to bring in more revenues from its massive financial network.