A friendship ‘taxed’

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View of the Miraflores Locks of the Panama Canal.
View of the Miraflores Locks of the Panama Canal.

A centuries-old practice of murky financial transactions was up-ended last year when Switzerland reached a tax agreement with the United States that allowed its Internal Revenue Service to pinpoint wealthy Americans with offshore accounts. Throughout negotiations, about a dozen Alpine banks operating in the United States were already under criminal investigation by federal authorities.

When Colombia designated Panamá a tax haven on October 7, 2014, it did not have the same upper hand. Instead, the Andean nation’s private sector publicly rejected any initiative against its third largest commercial partner, following the United States and China. Only two weeks later, the Colombian government removed Panamá from its black list, but left tensions high between typically amicable neighbors.

President Santos explained that Colombia is required to maintain an official inventory of tax shelters in order to join the Organization for Economic Cooperation and Development. When Panamá refused to sign a tax information exchange agreement, it joined the ranks of the Cayman Islands and United Arab Emirates. Among other punitive measures, taxes on Colombian assets in the Central American country would have more than tripled.

Colombian companies with interests in Panamá were reluctant to support their own government. Over one hundred and fifty firms have expanded to the isthmus, including heavyweights like Juan Valdez, Arturo Calle, Nutresa, and EPM. Colombian investment in Panamá quadrupled last year to US$3.2 billion, and accounted for 41.8 percent of total Colombian foreign investment in 2013, according to its Central Bank.

“This will damage economic and political relations with Panamá. It’s not how you treat a friend,” said the CEO of Bancolombia, Colombia’s largest commercial bank, and which recently bought Banistmo, a leading Panamanian bank. The President of Grupo Argos, a Medellín-based investment holding company focused on cement and energy, told reporters that the policy would chiefly harm Colombian companies working legally in Panamá.

Meanwhile, leading Panamanian companies urged the Juan Carlos Valera administration to retaliate. Suggestions included higher taxes on remittances sent by Colombians from Panamá; a visa requirement for Colombians; the repatriation of all Colombian prisoners; the exclusion of Colombian companies from public tenders; and the suspension of the Treaty of Montería, which grants Colombian ships free passage to the Panamá Canal.

Nine former presidents of Panamá, including current opposition figure Ricardo Martinelli, signed a statement to support retribution. Indignation surged nationwide when two Colombians were implicated in an armed robbery attempt against former President Mireya Moscoso, a fellow signatory. The government set a one-week ultimatum for Colombia to absolve Panamá of its tax haven status, or face sanctions.

On October 21, President Santos announced that the respective Foreign Ministers had signed an agreement to remove Panamá from the list, and that Colombia and Panamá would nego- tiate a financial information-sharing deal. However, the memorandum of understanding modified the focus of the treaty to cooperation in the fight against money laundering and the financing of terrorist activities.

With the diplomatic standoff over, Colombians and Panamanians alike questioned why the Santos administration had decided to take action against a close ally. After all, Panamá has been a strong defender of its neighbor throughout a long-standing maritime border dispute between Nicaragua and Colombia. At least a half-million Colombians are legally living in the Central American country.

The answer stems from the Santos administration’s two year dialogues with the Revolutionary Armed Forces of Colombia, or FARC. The government is in serious need of extra revenue to fund a possible post-conflict development in the event a peace treaty is signed with the leftist guerrilla group. The National Congress is likely to approve a tax overhaul bill that aims to raise an additional US$26 billion over next four years.

Currently, the government is experiencing a US$6.5 billion fiscal gap. It is estimated that Colombians taxpayers are stashing between US$2 and 7 billion in unregistered accounts, and Panamá is believed to house the majority. Moreover, public and private sector analysts warn of a looming drop-off in profits for Ecopetrol, Colombia’s largest oil company, and of which the government is the primary shareholder.

The United States, the European Union, and the United Nations have all vowed to pitch in should the Colombian armed conflict come to a close. Nevertheless, it is becoming clear that the Andean country will have to cover the vast majority of post-war spending. Relations with Panamá will smooth over, but national debate about the next step of negotiations with the FARC may soon shift to the price of peace.

 

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