TWN Info Service on Finance and Development (May17/04)
23 May 2017
Third World Network
United Nations: Panama urged to deepen reforms on tax evasion
Published in SUNS #8466 dated 19 May 2017
Geneva, 18 May (Kanaga Raja) -- A United Nations human rights expert has called
on the government of Panama to deepen its reforms on tax evasion, focusing
amongst others on strengthening governance and incorporating the banking sector
in any national strategy towards curbing illicit funds.
This recommendation was made by Mr Juan Pablo Bohoslavsky, the UN Independent
Expert on the effects of foreign debt and other related international financial
obligations of States on the full enjoyment of all human rights, at the end of
an official nine-day visit to the country from 2-10 May.
In an end-of-mission statement, the rights expert noted that illicit financial
flows are a global challenge, affecting developed and developing countries.
They are not accidental or a by-product of the market, rather these flows often
appear to be the result of state- sanctioned practices.
"There is no doubt that these flows can only be effectively addressed and
curbed through mechanisms of international cooperation and shared
accountability," said the rights expert.
By the same token, responses by one country alone, isolated from structural
changes in other jurisdictions or from international efforts to fight opacity,
will seldom produce meaningful results.
"This is why I commend Member States of the United Nations for committing
themselves to reducing such flows substantially as part of target 16.4 of the
2030 Agenda for Sustainable Development."
Closely linked, the Addis Ababa Action Agenda states that the bulk of the funds
needed to reach the Sustainable Development Goal will come from the developing
countries themselves through significant gains in domestic resource
The reduction of illicit financial flows and other tax abuses and the
universally understood need to increase domestic resource mobilization are
inherently connected to each other and, of course, to human rights.
While there is a large number of phenomena classified as illicit financial
flows and other tax abuses, including illegal tax evasion, clandestine tax
avoidance by transnational corporations, bribery, corruption and other criminal
activities such as money laundering, trafficking of people, drugs, weapons or
child pornography, it has been estimated that the majority of all illicit
financial flows are related to cross-border tax-related transactions.
Indeed, said Mr Bohoslavsky, the rationale for international capital movements
transferring financial assets or accounting profits to jurisdictions with low
(or no) taxation and strong secrecy rules is essentially for reducing tax
Curbing tax-related illicit financial flows ought to include minimizing tax
evasion by high net-worth individuals, commercial tax evasion through trade
mis-invoicing and tax avoidance through abusive transfer-pricing by
Global estimates point to a significant amount of wealth held offshore,
benefiting from secrecy and the use of financial instruments that have been set
in a number of countries, not declared appropriately.
Using 2015 estimates available, there are between $24 trillion to $36 trillion
unrecorded private wealth invested offshore.
It has been estimated that the relative amount of wealth from developing
countries held abroad is much greater than for developed countries, ranging
from 20-30 per cent in many African and Latin American countries.
It has been estimated that 85 to 90 per cent of wealth belongs to fewer than 10
million people - just 0.014 per cent of the world's population.
The rights expert pointed out that there are three main measures that can
contribute to overcoming the shadow economy:
(a) abolition of shell companies and anonymous accounts, by imposing a legal
requirement for public disclosure of ultimate beneficial ownership information
of all business entities, including companies, trusts, charities and
(b) automatic exchange of tax-related information worldwide; and
(c) public country-by-country reporting, mandated by a legal obligation on
multinational corporations to submit thorough reports about their assets, profits,
revenue, taxes paid and number of employees, their profits and losses in every
jurisdiction where they operate rather than presenting a consolidated balance.
"Empty and easily manipulated corporate vehicles, hidden funds with
unknown owners, and impunity for designing global corporate strategies to pay
zero or near-zero taxes do not deliver inclusive growth."
Mr Bohoslavsky noted that the recent so-called "Panama Papers" (along
with information leaks about similar phenomena) drew international attention to
the scale and volume of tax abuse and money laundering by business
corporations, politically exposed persons and high-net worth individuals from
around the world.
"Whilst the international perception is that this scandal was a turning
point in the domestic sphere towards enhanced regulation and more transparency
in Panama, I have learned during this visit that there were already a number of
discussions and reforms set in place well before the "Papers", and
that the revelations accelerated their implementation, and gave them a more
Among these reforms are new obstacles on corporate shares issued to bearer,
establishment of an obligation to companies to keep accounting books of
offshore transactions, reinforcement of due-diligence requirements on resident
agents who are asked to identify the real owners of the corporate vehicles for
which they provide services, regulation and supervision of non-financial actors
(such as casinos, Free Trade Zone of Colon, accounting and legal firms, and
real estate, among others) who are now obliged to report suspicious
"Yet, I am convinced that Panama needs to broaden its understanding of the
challenges in terms of financial and fiscal opacity."
The rights expert said firstly, he has learned that tax evasion is not
considered a crime under Panama's criminal law. Those obliged to report
suspicious transactions do not have to pay close attention to whether taxes
involved have been paid or not.
The entire suspicious transaction reporting system does not seem to grasp the
fundamental fiscal dimension of the broader illicit financial flows problem.
In other words, "know your client" currently excludes assessing
compliance with tax obligations and status at home or abroad.
In the rights expert's view, this gap needs to be closed in the Panamanian
regulation without delay.
Second, he believes that the financial and banking sector still needs to be
integrated into the agenda of curbing illicit funds in Panama.
The banking sector in the country represents approximately 7 per cent of the
GDP, with 90 banks in operation, most of them licensed to carry out general
activities domestically and internationally. This begs the question: what role
have the banking and financial institutions played in the flows of funds that
the corporate vehicles facilitate?
"While it is true that many financial transactions performed by companies
formally created in Panama take place in foreign jurisdictions, given that more
than 40 percent of the financial assets in the Panamanian financial sector are
sent/lent abroad, I find it absolutely essential that any national strategy
towards curbing illicit funds incorporate the banking sector," he said.
The rights expert also noted that the overall involvement of financial institutions
in abusive tax planning strategies for transnational corporations worldwide is
confirmed by the number of cases in which individual financial institutions
received specific declared penalties and investigations for a host of
infractions, the most widespread of which was helping wealthy clients and
corporations engage in tax fraud.
Panama cannot consider itself an exception, particularly given its highly
connected financial platform.
"I therefore encourage the Panamanian banking regulator to broaden the
scope and nature of information that is publicly available to offer the
complete file: including any investigations of, and sanctions imposed upon, the
institutions it supervises as well as the reasons for such investigations and
Panama needs to strengthen the fiscal dimension of due diligence in the banking
sector: beyond the volume of the tax actually evaded from the Panamanian state
(given the territoriality principle upon which its tax system is based), there
is an extraterritorial obligation not to facilitate adverse fiscal impacts in
Third, said Mr Bohoslavsky, in order to effectively implement reforms towards
enhanced financial and fiscal transparency in the country, governance must be
strengthened. Clear and robust conflict-of-interest legislation must be put in
place so that the autonomy and independence of sectorial supervisors and
decision-makers are ensured.
It is also crucial to guarantee the independence of the judicial branch,
including a more participatory and transparent system of appointing judges on
the basis of merit and more stability in appointments and staffing to enhance
Beyond all the issues already outlined, this means that all States of origin
ought to apply clear regulations that make it illegal to intentionally,
incorrectly or inaccurately state the price, quantity, quality or other aspect
of trade in goods and services in order to move capital or profits to another
jurisdiction or to manipulate, evade or avoid any form of taxation.
THE "FOUR PANAMAS"
Mr Bohoslavsky also pointed out that economic growth in a country with a world
class financial sector should bring substantial reductions in economic, social
and political inequalities of its population and massive improvements in the
enjoyment of economic, social and cultural rights for the poor and
Panama takes pride in the strength of its economic model geared towards
services and in the impressive 7.2 percent average annual growth it has
achieved during the last decade - more than double the regional average and
among the world's highest. Around 5.5 percent growth per year is estimated for
the years to come.
In absolute terms, growth has led to a clear reduction of poverty, especially
since 2004. Between 2008 and 2014 figures indicate a reduction from 26.2 to
18.7 per cent of poverty, and from 14.5 to 10.2 per cent of extreme poverty.
"While this has meant that more people are now considered
"middle-income" in the country, I have repeatedly heard of the
"four Panamas": wealth and income continue to be sharply stratified
and indicate pervasive inequality and exclusion."
There is a small wealthy urban group, an urban-poor group, a poorer rural
Panama, and a worst-off indigenous peoples in the comarcas, indigenous
territories where the eight indigenous peoples live.
Urban extreme poverty represents about 4 per cent, while rural extreme poverty
represents 27 per cent, six times higher.
In the comarcas, poverty is above 70 percent and extreme poverty as high as 40
per cent, 4 times the national average.
The rights expert pointed out that Panama has one of the lowest tax/GDP ratio
in the Latin American region (16.2 percent vs regional average 22.5 percent in
2015). While all the countries in the region have increased this ratio from
1990 to 2015, in Panama it remains practically the same.
The Government's Strategic Plan 2015-2019 acknowledges that development in
recent years has been based on a social, economic and institutional structure
with multiple imbalances and gaps. It also explicitly aims at enhancing social
"I concur with this diagnosis and aim. In my view, lack of balances and
loopholes in taxation impede keeping wealth widely distributed and systemic
changes are needed to create a more inclusive, fair and productive
Tax policy is a powerful tool that Governments can use to address exclusion and
inequality, and to ensure that no group hoards the benefits of economic growth
More importantly, said the rights expert, taxation must also be understood as
an essential element in the implementation of international human rights
obligations, notably in balancing disparities.
To exemplify, in the flourishing area of high-end real estate and horizontal
properties in Panama, especially in Panama City, a current legislative debate
is related to lowering the tax on properties.
While some developers have argued that the current tax is too high and the
valuation too "subjective", the Government rightly considers that a
discontinuation of this tax would be detrimental to the overall tax base.
"In addition, I would highlight that property and land taxes in a rapidly
urbanizing country like Panama, with "financialization" of housing as
a phenomenon, could be an essential element in the fight against poverty and
inequality and would also address possible illicit flows via real estate
Mr Bohoslavsky called on the National Budget to be rationalized, with better
planned and regulated public investment in the social areas, which are sorely
needed especially in the poor and marginalized areas.
Another critical dimension of the disproportionate attention given to economic
growth in detriment of human development and inclusion can be perceived in the
implementation of vast investments in infrastructure, agro-industry and
hydroelectric power plants.
Panama's economic capacity, easy access to credit, and its priority geared
towards providing services to international markets have captured an uneven
emphasis in a series of projects, without a robust consideration for human
rights and environmental impact assessment prior to carrying them out, said the
rights expert. +