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SUBJECT: PANAMA ‐ 2006 INVESTMENT CLIMATE STATEMENT
Ref: 05 State 202943
A.1. OPENNESS TO FOREIGN INVESTMENT
¶1. The resolution of a number of investment dispute cases
in recent years opened the way for the April 2004 start of
bilateral negotiations for a free trade agreement between
the United States and Panama.
¶2. Traditionally, Panama has maintained a rather liberal
regime for foreign investment and investment in financial
instruments. The government and the Panamanian business
community actively encourage foreign direct investment
(FDI). Laws in general make no distinction between domestic
and foreign companies. In 1998, the GOP enacted the
Investment Stability Law, which, among other things,
guarantees foreign investors, who invest at least two
million dollars in Panama, equal treatment under the law to
that of their domestic competition.
¶3. The Panamanian Vice Ministry of Foreign Trade (VICOMEX)
is the principal entity responsible for promoting foreign
investment. It provides investors with information,
expedites specific projects, leads investment‐seeking
missions abroad, and supports foreign investment missions to
Panama. However, depending on the character of the planned
investment, several different governmental entities may have
a passive or active interest in the investment in terms of
setting its parameters of operation, particularly within
relevant regulations, land use, employment, special
investment incentives, business licensing, etc. There is no
formal investment screening process by the GOP, although the
government does tend to monitor large foreign investments.
¶4. The GOP does impose some limitations on foreign
ownership, such as in the retail and media sectors where
ownership must be Panamanian. Foreign retailers, however,
have been able to work within the confines of Panamanian law
primarily through franchise arrangements. Some professions,
such as medical practitioners, lawyers, and custom brokers,
are reserved for Panamanian citizens. The GOP also requires
foreigners in various sectors to obtain from the government
explicit permission to work, but to Embassy's knowledge
these restrictions have not hindered U.S. firms operating in
Panama. The U.S. government is seeking to achieve
meaningful market openings for the provision of services
within the context of the ongoing free trade negotiations.
¶5. There is no de jure discrimination against U.S. or other
foreign investors in most sectors. A domestic investment
protection law was enacted in 1991 and remains in force;
however, it has not yet been invoked or used in
contravention of U.S. investment. There is a constitutional
prohibition against foreign land ownership within ten
kilometers of the national border or on an island. Neither
Panamanian citizens nor foreigners may own beaches or the
shores of rivers or lakes. Law 2 was enacted in 2006 to
foster tourism investment on islands, beachfront and
government properties through a concession, requiring
projects to have an environmental impact study, financial
support, bonds, etc. Builders and investors may rent such
lands for 40 years, via the Ministry of Economy and Finance,
extendable for an additional period of 30 years. When there
is a major investment with potential job creation, this
tourism incentive law expands this period for up to 90
years.
¶6. Panama experienced a boom in foreign investment between
1996 and 1998 as a result of former President Balladares'
privatization and modernization program. Foreigners,
including U.S. firms, participated actively and successfully
in the privatizations of ports, electrical generators, and
telecommunications firms. The conduct of major public bids
and tenders for some public sector projects raised concerns
about the openness and transparency of the process and the
responsiveness of authorities to participants. U.S.
companies complained that some bidding processes lacked
transparency.
¶7. The Panamanian government has "corporatized" Tocumen
International Airport as a private entity with all shares
owned by the GOP. The airport is undergoing a $70 million
expansion of the passenger and cargo terminals. The
government has pledged not to privatize its inefficient
water and sewage utility, its electric transmission company,
or the Caja de Seguro Social (Social Security System).
¶8. Panama's privatization framework law does not
distinguish between foreign and domestic investor
participation in prospective privatizations. The law calls
for pre‐screening of potential investors or bidders in
certain cases to establish technical viability, but
nationality and Panamanian participation are not criteria.
¶9. Following the privatizations of the late 1990s, Panama's
FDI dropped to only $98.6 million in 2002, primarily as a
result of losses by major banks and the drop‐off in
privatizations. However, FDI rebounded dramatically to
nearly $800 million in 2003 and over by $1 billion in 2004
as a result of major investments in port expansions, Colon
Free Zone profits, the sale of shares of a telecommunication
company, dividends from the electrical companies, as well as
a resurgence of the banking sector. There are announced
projects in the energy sector, golf courses, residential and
commercial construction (including the planned 102‐story
"Ice Tower," which would be the tallest building in Latin
America), and a new megaport near the Pacific entrance of
the Panama Canal. A major challenge for the Panamanians is
scheduling a referendum for the canal expansion and
achieving a positive outcome.
¶10. The Panamanian government developed some of the U.S.
government properties transferred to Panama by the United
States from 1979 through December 1999. The commuter
airport development at the former Albrook Airfield, now
known as Marcos A. Gelabert Airport, has been one of the
most successful ventures. Other projects now underway
include major tourist projects at the former Fort Amador and
at Farfan on the Pacific, as well as a museum of ecology
designed by world‐renowned architect Frank Ghery. On the
former Howard Air Base, Dell Corporation opened a customer
service call center in August 2003 that employs about 2000
people. Progress in the academic and research community
(City of Knowledge) has been slow but steady. Several U.S.
universities have located campuses in various former
military installations as well as international and regional
organizations.
¶11. Panamanian Law forbids monopolistic and anticompetitive
behavior. The Government of Panama passed in
February 1996 an Antimonopoly Law, designed to prevent
monopolistic practices and create a consumer protection
authority. Although Panama's Free Competition and Consumer
Affairs Commission (CLICAC) was set up to protect consumers
against practices such as the sale of expired products to
price gouging, it was widely viewed as ineffective and underfunded.
In February 2006 the Torrijos Administration
enacted by "decree law" the elimination of CLICAC and
creation of a new "Authority for Consumer Protection and
Defense of Competition." The GOP's aim is to create a more
agile entity with greater autonomy and stronger capabilities
to protect consumer rights by combatting false advertising,
monopolistic practices, and unfair competition. The
effectiveness of this new entity remains to be seen.
A.2. CONVERSION AND TRANSFER POLICIES
¶12. Panama has no legal restrictions on the transfer abroad
of funds associated with or capital employed in an
investment. There are no restrictions on capital outflows
or convertibility. Panama uses the U.S. dollar as legal
tender. Currency conversion therefore is not an issue.
There is, therefore, no independent monetary policy in
Panama. Inflation, bound by the U.S. dollar, is low and
predictable. According to the IMF, "dollarized Panama has
had significantly lower inflation (and inflation volatility)
at a cost of more volatile GDP growth." Although inflation
topped 3.5% during 2005, Panama's annual inflation averaged
less than 3.2% over the previous 30 years. This apparent
predictability enhances the attraction of foreign
investment.
A.3. EXPROPRIATION AND COMPENSATION
¶13. The Embassy is unaware of any outright expropriation of
property by the Panamanian government in recent years. Very
few U.S. investors have alleged that irregular or illegal
actions of some government entities, past and current, have
resulted in "de facto" expropriation of their property. In
October 2005, some 150 U.S. citizen residents of the Bocas
del Toro area feared that a proposed new land titling law
(Law 2) would strip them of the rights of possession they
had acquired for lands where they build homes, hotels, and
other improvements. Under previous law, rights of
possession were transferable in this and other regions where
formal land titles were either non‐existent or problematic.
Following concerns raised by various residents of the area
and by the U.S. Embassy, the GOP subsequently enacted a
revised Law 2 stipulating that none of the law's provisions
shall affect rights of possession granted under previous
law. It remains to be seen whether implementation of Law 2
ultimately avoids any "de facto" expropriation of lands held
by U.S. citizens with rights of possession.
A.4. DISPUTE SETTLEMENT
¶14. Panama has a court and judicial system built around a
civil code, rather than the Anglo‐American system of
reliance upon case law and judicial precedent. Fundamental
procedural rights in civil cases are broadly similar to
those available in U.S. civil courts, although some notice
and discovery rights, particularly in administrative
matters, may be less extensive than in the U.S. Judicial
pleadings are not always a matter of public record, nor is
the process always transparent.
¶15. The business community lacks confidence in the
Panamanian judicial system as an objective, independent
arbiter in legal or commercial disputes, especially when the
case involves powerful local figures with political
influence. When disputes with foreign investors arise, as
they do from time to time, the investors often choose not to
pursue remedies available to them via the court system. In
a few cases the appearance of corruption has been so widely
accepted as to constitute conventional wisdom. The decision
by investors to avoid the court system is understandable,
given massive case backlogs and the specter of corruption.
¶16. An increasingly popular and viable alternative for
settling disputes is the Center for Mediation and
Arbitration established by the Panamanian Chamber of
Commerce. Depending on the issues there are other dispute
resolution centers as the Pananamian Construction Chamber,
and the Supreme Court. Rulings by arbitrators are generally
fair and reasonable. In 1998, these rulings were given
status as judicial rulings.
¶17. The GOP accepts binding international arbitration of
disputes with foreign investors. Panama became a member of
the International Center for the Settlement of Investment
Disputes (ICSID) in 1996. The United States and Panama
signed an amendment to the Bilateral Investment Treaty to
incorporate Panama's membership into ICSID on June 1, 2000.
This amendment took effect in May 2001. Panama also became
a member of the World Bank's Multilateral Investment
Guarantee Agency (MIGA) in 1997.
¶18. Panama's bankruptcy law is antiquated and is under
review to be adapted to modern business practices.
A.5. PERFORMANCE REQUIREMENTS/INCENTIVES
¶19. There are no legal performance requirements such as
minimum export percentages or significant local procurement
rules. There are special tax and other incentives for
manufacturers to locate in an export‐processing zone (EPZ).
Official support for investment and business activity is
especially strong for the Colon Free Zone (CFZ), the banking
sector, the tourism sector, and EPZs. Companies in the CFZ
pay no income taxes. Banks in Panama pay no tax on interest
or other income earned outside Panama and withhold no tax on
savings or fixed time deposits in Panama. Individual
depositors do not pay taxes on time deposits. EPZs offer
tax‐free status, special immigration privileges, and license
and customs exemptions to manufacturers who locate there.
¶20. Law 8 of 1994 offers tax and other incentives to
investors in tourist industries. In 1997, the Panamanian
government enacted legislation to promote the restoration of
historical buildings and sites Panama City's old downtown
area known as "Casco Viejo." Tourism incentive laws
provide, among other measures, tax exemptions for vehicles
and other designated goods imported for use in, or to build
infrastructure for, the tourist sector. Similar incentives
exist for the mining sector. Legislation affecting the
mining sector is under review. Law 28 of 1995 extended
national industry and export incentives. However, contracts
that were created prior to Law 28 continue to receive the
benefits of the previous incentives. In 1997, the GOP
eliminated tariffs on fuel imported by electricity
generators to promote privatization of the former state
electric company. The government has gradually phased out
tariff incentives that favor the importation of raw
materials for further processing in Panama. The Torrijos
Administration is also reviewing fiscal incentive programs
as part of its overall fiscal reform.
A.6. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT
¶21. With the exception of retail trade, the media, and a
few professions, foreign and domestic entities have the
right to establish, own, and dispose of business interests
in virtually all forms of remunerative enterprise.
Foreigners need not be legally resident or physically
present in Panama to establish corporations or to obtain
local operating licenses for a foreign corporation.
Business visas (and even citizenship) are readily obtainable
for significant investors. Banking, financial services, and
the legal regime are receptive toward attracting foreign
business.
A.7. PROTECTION OF PROPERTY RIGHTS
¶22. Some of Panama's business, corporate, and banking codes
have been modernized and are, in general, enforced so as to
strengthen confidence in property rights. Mortgages, liens,
and other security interests are recognized. The public
property registry is undergoing expansion and modernization.
Unique features of Panamanian law and practice in specific
areas (including but not limited to banking, accounting
requirements, formation and functioning of corporations, and
taxation) make retention of local legal counsel highly
advisable.
Intellectual Property Rights
‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐‐
¶23. Panama is a member of the World Intellectual Property
Organization (WIPO), the Geneva Phonograms Convention, the
Brussels Satellite Convention, the Universal Copyright
Convention, the Bern Convention for the Protection of
Literary and Artistic Works, the Paris Convention for the
Protection of Industrial Property, and the International
Convention for the Protection of Plant Varieties. In
addition, Panama was one of the first countries to ratify
the WIPO Copyright Treaty and the WIPO Performances and
Phonograms Treaty, although the government has yet to
introduce implementing legislation to put these treaties
fully into force in Panama. Panama is not a signatory to
the Patent Cooperation Treaty, Trademark Rights Treaty and
the Madrid Protocol. Should Panama conclude a Free Trade
Agreement with the United States, Panama would become a
signatory to these agreements.
¶24. The legal framework for the protection of intellectual
property rights (IPR) in Panama has improved significantly
in recent years. The government passed an Anti‐Monopoly Law
in 1996 mandating the creation of commercial courts to hear
anti‐trust, patent, trademark, and copyright cases
exclusively. Two district courts and one superior tribunal
began to operate in June 1997 and have been adjudicating
intellectual property disputes. IPR policy and practice in
Panama is the responsibility of an Inter‐institutional
Committee for Intellectual Property (CIPI). This committee
consists of representatives of six government agencies and
operates under the leadership of the Vice‐Minister of
Commerce, who has delegated chairmanship to the head of the
industrial property office. CIPI coordinates enforcement
actions and develops strategies to improve compliance with
the law, including organizing training and public awareness
seminars, among other activities. In January 2003, the GOP
designated an IPR‐specific prosecutor with national
authority, which has consolidated and simplified prosecution
of those cases.
Copyrights
‐‐‐‐‐‐‐‐‐‐
¶25. The National Assembly in 1994 passed a comprehensive
copyright bill (Law 15), based on a World Intellectual
Property Organization model. The law modernizes copyright
protection in Panama, provides for payment of royalties,
facilitates the prosecution of copyright violators, protects
computer software, and makes copyright infringement a
felony.
¶26. The Copyright Office has yet to introduce long‐promised
improvements to the Copyright Law to implement the new WIPO
treaties (the WIPO Copyright Treaty and the WIPO
Performances and Phonographs Treaty) and to establish new
offenses, such as those needed for internet‐based copyright
violations and to enhance border measures.
Patents
‐‐‐‐‐‐‐
¶27. Panama's Industrial Property Law (Law 35) went into
force in 1996 and provides 20 years of patent protection
from the date of filing. The Industrial Property Law
provides specific protection for trade secrets. However, at
least one pharmaceutical company has raised the alarm that
these protections are not being respected by the office of
the Ministry of Health that registers generic medicines,
though the Ministry is attempting to address the concerns.
Trademarks
‐‐‐‐‐‐‐‐‐‐
¶28. Law 35 also provides trademark protection, simplifying
the process of registering trademarks and making them
renewable for ten‐year periods. The law's most important
feature is the granting of ex‐officio authority to
government agencies to conduct investigations and to seize
materials suspected of being counterfeited. Decrees 123 of
November 1996 and 79 of August 1997 specify the procedures
to be followed by Customs and Colon Free Zone (CFZ)
officials in conducting investigations and confiscating
merchandise. In 1997, the Customs Directorate created a
special office for IPR enforcement, followed by a similar
office created by the CFZ in 1998. The Trademark
Registration Office continued to undertake significant
modernization in 2005 with the introduction of imaging and
workflow automation of their processes and on‐line
application processing. This includes a website that allows
applicants to track the status of their Trademark and Patent
applications. A Customer Service Center is planned for
¶2006. The Trademark Registration Office claims to be the
most advanced in the region, with 90% automation. This
office reports that it cut trademark registration processing
time in half during 2005, down from one year to six months.
This office also reports that it has conducted classes on
the importance of IPR protection at the Technical University
of Panama and recently sponsored a National Inventor's
Competition that brought inventors together with prospective
investors and customers.
A.8. TRANSPARENCY OF THE REGULATORY SYSTEM
¶29. Panama's 1997 accession to the WTO, wholesale
privatization, and overhaul of various laws that regulate
economic activity created a fluid regulatory climate.
Panamanian regulators have been exposed only recently to
complex issues, many of them technical. Regulators'
responsiveness to the concerns of those they regulate has
been mixed, depending on the sector. U.S. businesses have
complained of arbitrariness or a lack of responsiveness by
officials responsible for issuing sanitary/phytosanitary
(SPS) permits for the importation of agricultural products.
They have also complained about unannounced and costly
sanitary controls imposed upon arrival of various shipments
of agricultural products that had previously been precleared
for importation. The application of new SPS
requirements, based on re‐interpretation of old regulations,
has led to unforeseen increased costs on the part of
importers and delays in bringing goods to market. Such SPS
issues are being addressed through current bilateral free
trade agreement negotiations between the U.S. and Panama.
In response to complaints from the U.S. and several other
agricultural exporters, the Torrijos Administration
initiated steps in early 2006 to create an independent,
entity to handle SPS and import permitting procedures in a
science‐based way consistent with Panama's WTO obligations.
¶30. Public Utilities and telecommunications industries long
complained of slowness of Panama's Regulatory Entity ("Ente
Regulador") in responding to competitive concerns or
requests for information. In February 2006, the Torrijos
administration enacted by "decree law" the elimination of
the Ente Regulador and creation of a new "National Public
Services Authority." The GOP's aim is to provide more
effective oversight by separating administrative and
regulatory functions related to water, electricity, and
telecommunications providers. It is too early to tell
whether this new Authority will, in fact, deliver improved
regulation of public utilities. In the banking and finance
sector, private entities generally give good marks to the
Panamanian entities that regulate them, such as the
Superintendent of Banks.
A.9. EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT
¶30. Panama's 1998 Banking Law regulates the country's
financial sector. The law, which concentrates regulatory
authority in the hands of a powerful and well‐financed
Superintendent, transforms the previously inadequate regime
into one that is by and large able to meet international
standards.
¶31. Traditional bank lending from the well‐developed
banking sector is relatively efficient and is the most
common source of financing for both domestic and foreign
investors, offering the private sector a variety of credit
instruments. Panamanian interest rates closely follow
international rates (i.e., the London Interbank Offered Rate
‐ LIBOR), plus a country‐risk premium. The rate on a
domestic commercial loan averaged 8.2% in 2004 and increased
slightly for 2005 (through September) to 8.5%. The sixmonth
domestic deposit rate was 2.2% in 2004 and 2.7% in
2005 (through September). Total assets in Panama's banking
system topped $29 billion in December 2004 and grew to $30.1
billion as of September 2005.
¶32. Early in 1999, Panama passed a securities law that
established a National Securities Commission to regulate
brokers, fund managers, and all matters related to the
securities industry. The Commission began to function in
early 2000. Some private companies, including multinational
corporations, have issued bonds in the local securities
market. Companies rarely issue stock on the local market
and, when they do, they often try to issue shares with no
voting rights. As a result, these stocks are less
attractive than those with voting rights. Moreover,
investor demand is generally limited because of the small
pool of persons, companies, and investors with the resources
to invest.
¶33. Interest from fixed bank deposits and certain bonds are
tax‐exempt. There is a 10% withholding tax on dividends,
although capital gains from the sale of equities listed on
the Panamanian exchange are tax exempt. Cross‐shareholding
or stable shareholder arrangements, designed to restrict
foreign investment through mergers and acquisitions, do not
exist. There are no restrictions on, nor practical measures
to prevent, hostile foreign investor takeovers, nor are
there regulatory provisions authorizing limitations on
foreign participation or control or other practices to
restrict foreign participation. There are no government or
private sector rules to prevent foreign participation in
industry standards‐setting consortia.
¶34. Financing for consumers is also relatively open, as
mortgages, credit cards and personal loans, even to those
earning modest incomes, are widely available on terms
similar to those in the U.S.
A.10. POLITICAL VIOLENCE
¶35. Panama's Constitution provides for the right of
peaceful assembly, and the Government generally respects
this right. No authorization is needed for outdoor assembly,
although prior notification for administrative purposes is
required. Throughout much of the year, police showed
restraint and professionalism while monitoring large
protests by students, political activists, and workers.
¶36. Political violence in Panama since the end of the
Noreiga era in 1989 is not common, but there are exceptions.
Between April and June 2005, Panamanian police forces
peacefully subdued large, potentially violent nation‐wide
protests against Social Security reforms with few complaints
of use of force. A local protest against utility rate hikes
in Bocas del Toro in October 2004 left 24 PNP officers
wounded and ended with charges of police brutality by the
protests. September 2003 protests spurred by the ouster of
Social Security Director Juan Jovan turned violent when
construction workers led by SUNTRACS labor union attacked
police. In 2002, there were several public demonstrations,
including a major public protest against corruption in
Panama City. Several times during the year, rural groups
protested against the presence of Panama Canal authorities
in the watershed and potential expansion of the Canal. In
August 2002, rioting broke out in Colon for two days,
ostensibly to protest persistently high unemployment,
halting commerce and causing minor property damage.
¶37. Two high‐profile incidents in 2001 were triggered by
the government's decision to allow bus owners to raise fares
and by the delay in raising the minimum wage (which was
raised in August 2003). The former led to weeklong riots
that caused over 20 injuries, hundreds of arrests, and
sporadic looting in the capital. Opposition to the proposed
privatization of the state water utility in 1998 also led to
vociferous, but generally nonviolent, protests. The lack of
economic opportunities, a high unemployment rate (officially
at 9.6% as of late 2005, but much higher in certain areas),
and a growing use of illicit drugs have been cited as the
chief causes of crime.
A.11. CORRUPTION
¶38. Panama is a member of the Organization of American
States (OAS) Inter‐American Convention Against Corruption
(IACC), but not a signatory to the OECD Convention on
Combating Bribery. Panama's submission to the IACC lacks
empirical examples of how its anti‐corruption laws have been
applied. The suspicion that anti‐corruption laws are not
applied rigorously feeds the concern that government
enforcement bodies, such as the Comptroller General's and
the Attorney General's offices, have historically been
ineffective in pursuing and prosecuting those accused of
corruption, particularly in high‐profile cases. However,
the Torrijos Administration has taken steps to permit
official investigation of corruption cases involving public
officials and the public release of information regarding
government activities and expenditures. Constitutional
reforms that permit the Supreme Court to decide whether to
investigate or indict legislators while in office were
implemented on November 15, 2004. The government has not
acted to dismantle Panama's dictatorship‐era libel and
contempt laws, which often are used to punish
whistleblowers, while those accused of acts of corruption
are seldom prosecuted and almost never jailed. Panama's
government lacks strong systemic checks and balances that
incentivize accountability. The lack of a strong
professionalized career work force in Panama's public
offices also hinders systemic change.
¶39. Allegations of corruption have been a habitual aspect
of the political give and take in Panama throughout its
history. However, complaints by American firms about
allegedly corrupt judicial and governmental decisions
prejudicial to their interests remain problematic. In 2005,
the Torrijos Administration successfully reversed a deal
struck between the Moscoso Administration to Panama Ports
Company (PPC) that would have enabled PPC to walk away from
$1.4 billion in payments to Panama as part of a 40‐year port
concession agreement. Amid allegations of corruption in the
Moscoso‐PPC deal, the Torrijos Administration successfully
renegotiated new terms for the agreement with PPC that
effectively erased the Moscoso‐PPC deal.
¶40. Since taking office in September 2004, the Torrijos
Administration has taken several steps toward following
through on its "zero tolerance" anti‐corruption campaign,
including the launch of investigations into the finances of
several prominent figures in the Moscoso Administration. The
GOP rescinded former President Moscoso's June 2002 decree
that impeded enforcement of the January 2002 Transparency
Law. Moscoso's