GOVERNMENT

A Spanish colony until 1821, when it broke away from Spain and forged a political alliance with neighboring Colombia, in 1903 Panama ended its ties with Colombia and emerged as an independent republic.

Public authority is vested in the legislative, executive and judicial bodies. The legislature is a unicameral National Assembly consisting of 67 Assemblymen elected by direct popular vote for a period of four years. The executive branch is headed by the President of the Republic, elected by direct popular vote for a period of five years, together with two Vice-Presidents. The Cabinet is appointed by the President. The 1983 amendment to the 1972 Constitution prohibits the President from succeeding himself but he may be reelected after his successor has left office. Legislative power is in the hands of the legislative assembly. The Supreme Court, the court of last appeal, is composed of Justices who are appointed by the Executive branch and must be approved by the Legislative Assembly. Cases are also tried in Superior District Courts and lower courts. For political purposes, Panama is broken down into nine provinces and the territory of San Blas. Each province is led by a governor and is divided into municipalities, each with a mayor as its chief executive.

LABOR REQUIREMENTS

At least 90% of the workers in every commercial or industrial enterprise must be Panamanians (or certain specified foreigners such as those married to Panamanians or residents of Panama for 20 years or more), and these persons must receive 90% of the wages and salaries. However, there are a number of exemptions and the laws are not rigid with regard to bringing in administrators, experts and technicians as required. The principal labor legislation is the Labor Code, which establishes a maximum of eight hours a day and a 48-hour work week for day work.

Collective bargaining is not mandatory and is not widely practiced. Organized labor represents considerably less than 10% of the labor force. There are no strong national union movements. Unemployment has dropped to 14%. The minimum wage in Panama City and Colon is less than $1.00 an hour, with a lower rate in other areas.

Employers are required to withhold from employees the social security quota of 7.5% on salaries, wages and other compensation plus 1.25% education tax, with no limit on the taxable amount, and to contribute an additional 10.75% plus a 1.25% education tax. Employers also may be charged from 0.56% to 5.6% of their total wages and salaries for cost of compensation to cover occupational accidents. Dismissed pay ranges from one week's salary to three weeks' salary when length of the employees' service is from one to two years. Severance payments graduate from one week's to seven months' salary when the employee's length of service exceeds 20 years. The Social Security Law sets forth the areas and categories of employment for which social security coverage is mandatory. Foreigners may engage in a business with the exception of the retail trade and certain professions and trades. Under the 1975 Tax Credit Certificate legislation to encourage nontraditional exports, 20% of the amount of local value added to exports may be used to offset all direct or indirect taxes. Companies in urban areas must add a minimum local content of 20% and a minimum local value of 20%. For rural areas, the limit is reduced to 10%.

FREE TRADE ZONE

One of the most efficient and sophisticated trade zones in the world, the Colon Free Zone is located on the Caribbean side of the isthmus adjacent to the Panama Canal. The Colon Free Zone has operated under special legislation as an autonomous institution since 1948. It provides facilities in the heart of Latin America where firms can warehouse, process, manufacture, repackage, display and ship their merchandise or products. They pay duty on imports only when items are shipped into the customs territory of the Republic. There are no taxes on production machinery or materials, no sales tax or tax on investments or on dividends, and there is no capital gains tax if the company keeps the asset for at least two years. Income that arises from sales to other countries gets the benefit of a reduced tax: on profits up to $15,000 the tax is 2.5%; $15,000 to $30,000 profit pays a tax of $375 and 4% on the amount above $15,000; $30,000 to $100,000 profit pay $975 and 6% on the amount above $30,000; over $100,000 profit pays a tax of $5,175 and 8.5% on the amounts above $100,000 only when items are shipped into the customs territory of the Republic. This enables them to serve the market of Panama, the Panama Canal Zone and the entire Latin American market effectively from one location.

Under Law 28 of October 22, 1995, tax credits available to exporters in the Colon Free Zone are progressively reduced until they are completely abolished by December 31, 2002. Benefits to taxpayers subject to the Industrial Promotion Law and operating under the Law may operate under the Tax Incentives Act but are subject to general income tax rules.

Imports arrive chiefly from the United States, Japan and Taiwan, while two-thirds of re-exports go to the Caribbean and Latin America, especially the Netherlands Antilles, Colombia, Ecuador and Venezuela. Relatively few of the more than 1,800 firms doing business in the free zone build their own facilities. They find it more practical to lease a building or space, or even to operate through independent public warehouses, management service firms, and other specialized organizations within the zone. Annual turnover in the free zone is currently at the rate of $17 billion and employment exceeds 8,000 workers.

As a result of the Colon Free Zone's continually expanding warehouse facilities for its tenants, foreign companies are able to reduce excessive inventory building for foreign markets, a costly burden in their overall profitability. For instance, by maintaining flexibility of stocks, goods may be avoided while, simultaneously, shortage of the same stock may be created due to unexpected demand by other markets. For companies, which are not in a position to build their own warehouses, the Colon Free Zone will arrange contracts of reasonable duration and at low rentals to construct these facilities to specifications of the lessee at reasonable fees. The present 178 acres of the zone, including 94 acres in Colon City and 84 acres on France Field, contain some public warehousing space but are occupied principally by buildings leased to companies or land on which firms have constructed their own buildings. Building plans must be approved by the free zone technical department. In view of the rapid expansion in turnover in the zone in recent years, the total area has been extended to 268 acres.

Development of France Airfield

With passage of the Canal Treaty and the return to Panama of the France Air Field, the Government acquired 148 additional acres. It has constructed a bridge that eases truck access into France Field. Leases usually are for 20 years with option for renewal. Free zone warehousing includes such services as receiving and checking merchandise, repacking, reshipping, documentation, freight forwarding and the maintenance of inventory and accounting records. A number of reputable management servicing companies, such as the Panama International Trust Corporation (PANTRUSCO), provide these facilities for foreigners who cannot or prefer not to provide their own staffs. Several banks now operate in the France Field as well as the original area. Captive finance companies may be used for short-term financing of distributor and agent sales as well as storage of goods in the zone.

Export Processing Zones

The success of the Colon Free Zone during the past four decades inspired Panama to pass a law authorizing the establishment of multi-sector export processing zones (EPZ's). Under Law No. 16, passed in November 1990, these zones are restricted to production or assembly of goods and services for export along with necessary support activities. The National Assembly has created a supervisory body, the National Commission of Export Processing Zones, under the Commerce Ministry, to handle the establishment of the zones and to regulate their activity. Under Law No. 25 of November 30, 1992 companies and individuals investing or operating in an EPZ are entitled to an exemption from income tax and import duties and sales taxes on imported machinery. Developers and promoters also are exempt from real estate taxes on the sale of land in an EPZ. In addition, interest and dividends from securities issued by promoters in local or international capital markets are exempt from tax in Panama. Investors may be foreign or Panamanian companies and must obtain a license from the National Commission of Export Processing Zones for the development of a specific zone. Companies established in an EPZ are expected to export 100% of their production. Special immigration and labor permits are available for investors and employees in approved EPZs. Companies that become zone tenants are exempt from some of the burdensome clauses of the Labor Code and from import taxes on equipment, building ownership taxes, and income tax for up to a 20-year period. Another benefit is loss carry forward provisions for up to three years. Profits exceeding 20% of the taxable income reinvested in the expansion and development of the export processing zones may continue to be exempt from income tax after termination of the original ten-year tax holiday. Private enterprises establishing industries in designated zone areas are also granted exemption from real estate taxes on transfer of land and sales taxes. When all production is re-exported, there is a 100% indefinite exemption and a 20-year holiday from real estate taxes if the zones are located outside the Provinces of Panama and Colon.

Petroleum Free Zones

Under Decree No. 29 of July 14, 1992 Petroleum Free Zones were created for foreign or domestic companies and individuals involved in importing, refining, marketing or distributing petroleum or derivative products. Investors are required to contract with the Ministry of Commerce and deposit an amount equal to 1% of their investment up to a maximum of $250,000. Investors also are expected to employ Panamanians except for skilled technicians and managers and maintain a minimum environmental liability insurance policy for $1,000,000. Local products must be used if available at competitive prices.

Qualified investors can engage in the following activities:

Lease or acquire property and construct port facilities, including docks for loading and unloading petroleum shipments;
Build, install and operate refineries and pumping facilities, construct storage tanks, pipe lines and other equipment for processing petroleum or preventing fire or spillage; and
Import, store or handle petroleum for export or marketing and distribution within Panama.
Petroleum imported into the Zone is exempt from import duty or taxes and is exempt from sales tax if sold within the Zone: Enterprises operating in a Zone are eligible for the incentives under Investment Promotion Law 3 of 1986.

DOCUMENTATION FOR TRADING

Panama permits the invoicing of foreign trade documents in any currency, including that of the importing and exporting country. Importers are not required to make prior deposits in local banks whose export proceeds do not have to be surrendered to authorized banks or to the Central Bank. An importer must provide a commercial invoice and a consular invoice issued in the country of origin indicating the unit price, total FOB value and any freight and insurance charges. An entrance form signed by the Commercial Movement Department of the Free Zone must accompany the invoice and bill of lading. In addition, an internal movement form is needed when goods are transferred to another firm in the Zone and there is an outgoing form for exports. Imports generally are not subject to quota restrictions. A 7% surtax and a 5% VAT may be imposed.

TAX TREATY

Panama has a tax treaty with the United States avoiding double taxation only on shipping income. And in April, 1991, Panama signed an agreement for a "Treaty for the Mutual Assistance on Criminal Matters" with the United States in order to provide for more effective coordination between the two countries in dealing with investigating, prosecuting, and suppressing serious crimes, and with continuing effort to increase this effectiveness. Despite powerful opposition from Panamanian bankers, who were concerned the treaty would violate their secrecy status code, the National Legislative Assembly of the Republic of Panama approved the execution of the treaty in July 1991. This Mutual Assistance Treaty, similar to those approved with other Caribbean Basin Initiative countries, including Bahamas, British Virgin Islands and Cayman Islands, relates to drug abuse, crime and fraud, or specifically such criminal activities as illegal narcotics, theft, crime of violence, fraud, or use of fraud, or violation of a law of one of the Contracting States relating to currency or other financial transactions contributing to the crime. The provisions in the treaty do not allow for any exchange of information in matters relating to taxation.

In an effort to cooperate in the arrest of money launderers, the Government also signed a Mutual Legal Assistance Agreement with the United Kingdom and adopted a law tightening requirements for companies' registered agents concerning gathering information and their client references.

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