Panama Renounces Financial Privacy

Below I report that Treasury Secretary Geithner will today sign a tax information agreement with Panama. How serious a problem is this for those who use Panama for financial privacy? Simon Black takes a look at the situation:

Panama's foreign minister is set to sign a treaty with Tim Geithner known as a tax information exchange agreement. I should pause for a moment to explain what this is, and what this isn't.

Countries frequently engage into tax accords to ensure that an individual, corporation, trust, or other legal entity from one country that does business in the other doesn't get taxed twice.

To give you an example, Australia has one such treaty with Malaysia; according to the treaty, an Australian corporation that does business in Malaysia would be subject only to Malaysian taxes, not Australian taxes. Similarly, a Malaysian individual working in Australia would be subject to Australian taxes, not Malaysian.

These are known as double tax treaties or comprehensive tax treaties. Full of rules and loopholes, these treaties can be astutely applied to legitimately save individuals and entrepreneurs a boatload on their tax liabilities.

(my lawyer could dazzle you, for example, with obscure passages that legitimately reduce certain capital gains taxes using Australian companies, or cut down on individual taxes in Palau, etc.)

What Panama and the US are signing, however, is not a double tax treaty, it's a tax information exchange agreement (TIEA). This is an administrative protocol in which the two signatories agree to share data relating to bank accounts, ownership of corporations, and trust beneficiary information.

Because TIEAs are technically international treaties, they become law in both countries, often superseding the countries' existing laws on financial privacy. By signing this agreement, Panama has effectively renounced the financial privacy that has long been a hallmark of its banking system.

Once the agreement is ratified, the US government will effectively have unlimited authority to request financial details of US taxpayers it suspects of having accounts in Panama. I've read the treaty, and there are a few points that I'd like to underscore:

1) The treaty is clearly one-sided, designed for the US government to obtain information from the Panamanian financial system about US taxpayers, not the other way around;

2) the requesting party (i.e. US government) does not need to provide detail on the targets of its requests;

3) the requesting party does not even need to have an immediate use for the information being requested, such as an imminent lawsuit or criminal tax investigation;

4) information about beneficial ownership of corporations and foundations is also fair game;

5) the sharing of information is retroactive-- they can request information from years ago as long as the records exist.

To be fair, the information that's being exchanged is, in principle, what taxpayers should have already been reporting. For example, I've written frequently that the US government requires its taxpayers to report information with respect to certain foreign companies on form 5471, or foreign bank account information on form TDF 90-22.1.

It's this same information that the government is after, and for anyone who has been making the appropriate disclosures, this TIEA is of little consequence.

For those who may not have been filing the forms, however, there's no need to panic: complying late is much better than not complying at all, and it's definitely better to step forward voluntarily than to wait for them to find you through the TIEA.

My suggestion is to engage a tax legal professional who can help you get compliant-- there are a number of advisors who can help, and I have already provided premium members with the contact information to one of my own tax professionals who was on yesterday's teleconference.

Going forward, , I recommend a steady, measured approach to crafting your own offshore tax strategy-- there's a right way and a wrong way to use these options. Frankly, the right way is easy when you have the right advice, and you sleep much better at night knowing you're both prepared and compliant.

There's more from Simon Black, here.