Panama's Banking Sector Fights Latin American Withholding Taxes

by Mike Godfrey, Tax-News.com, New York

21 August 2001

Panama's banking sector is up in arms about withholding taxes imposed on interest payments it receives from many Latin American countries including Brazil, Argentina and Mexico - these countries have adopted a rule that penalises residents of countries which don't comply with the so-called Basle principles.

In the case of Argentina, for instance, that means a withholding tax of 35% on interest payments by Argentine borrowers to Panamian lenders. Lenders in countries which are Basle-compliant are subject to a withholding tax rate of only 15%. The figures are similar for other Latin American countries.

Since a large part of Panama's traditional market for banking services was in Latin America, these taxes are highly damaging. Celestin Cuq, general manager of Société Générale in Panama and secretary of Panama's banking association says that the taxes have effectively closed off the largest part of Latin America to Panamanian banks. "It is now more efficient to lend the money from France," he said.

"We believe this is unjust discrimination," said Melitón Arrocha, vice-minister for trade, quoted in the Financial Times. "We do not discount any action, including a complaint to the World Trade Organisation," he said.

The action by Brazil, Argentina and other countries against Panama was in part inspired by the country's appearance on the three blacklists of 2000. But Panama was removed from the FATF list this June after installing improved legislation, and has just submitted to an IMF assessment that found it "largely complied" with 23 of the 25 Basle principles that set international standards (effectively clearing it of allegations made by the G8's Financial Stability Forum.

The government has set up a high-level commission to discuss the problem with the countries imposing punitive withholding taxes but does not expect any immediate breakthrough.

Meanwhile banks are in danger of deserting. Three of the biggest of Panama's more than 50 international banks - Chase Manhattan of the US, UBS of Switzerland and ABN-Amro of the Netherlands - have quit in the last year. "The model created in 1971 has been left obsolete, and needs a change," says Mr Cuq, "If there is no change I don't think any European banks will be here in five years' time."

The Government says the picture is not as black as that: since Panama was de-listed by the FATF six foreign banks had applied for licences and six more had inquired, said a spokesperson, claiming that the withholding tax issue was just a temporary issue. The Government hopes to lift the number of banks from the current 83 to 100. At its peak in 1982 the sector had 120 banks with $49bn in assets; now assets total $37.6bn - but it's much cleaner money!

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