The Colombian government announced on Wednesday that Panama will again be removed from a list of tax havens after the neighbors reached agreement on Panamanian support to combat tax evasion in Colombia.
After several days of negotiations, Colombia and Panama agreed to sign an agreement for cooperation in the exchange of tax information. The countries signed a memorandum of understanding that lays the foundation for further negotiating a double taxation treaty.
“Achieving an agreement to exchange tax and financial information with Panama is an important step for international cooperation in the fight against money laundering and tax evasion,” said Finance Minister Mauricio Cardenas
Colombian President Juan Manuel Santos tweeted that the “agreement with Panama is good news for everyone,” announcing his administration will continue to hunt down tax evaders.
Tensions flared earlier this month when Colombia declared Panama a tax haven, over the Central American country’s failure to meet a deadline to sign a bilateral tax information exchange agreement.
As a consequence, money transfers to Colombia’s neighbor to the north would be taxed more than triple.
With the agreement Colombia is closer to obtain an estimated $2 to $7 billion, which are the heart of the conflict. The Colombian government is already experiencing a fiscal gap of $6.5 billion, as citizens continue to hide money in Panama and other countries as a means of avoiding taxation.
It was in an attempt to stop this activity, Colombia requested that Panama sign the bilateral tax information exchange agreement. When the Panamanian government first refused, Colombia declared Panama’s status as a tax shelter by means of retaliation, meaning that money transfers to that country will be taxed with 33% rather than the normal 10%.
The initial stamp as a tax shelter led Panamanian officials to sent an official letter to Santos last week. The letter stated that if Panama were not removed from a list of countries declared as tax haven, that sanctions would be placed on Colombia, including imposition of VISAs for travel, and tax changes.
Panama is the largest foreign investor in Colombia after the United States, and has been one of Latin America’s fastest growing economy since 2008, showing a 8.4% GDP growth last year.
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.