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U.S. Department of State

Diplomacy in Action

2011 Investment Climate Statement - Panama


2011 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
May 2011
Report
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Openness to Foreign Investment

The Government of Panama (GOP) has promoted economic growth over the last decade through open market policies and by encouraging trade. The GOP maintains a liberal regime for foreign investment and investment in financial instruments while, with cooperation from the Panamanian business community, actively encouraging foreign direct investment (FDI ). The new President and coalition in control of the National Assembly, elected in 2009, have maintained this liberal regime. Panama became the fifth country in Latin America to obtain investment grade rating for its sovereign debt in spring 2010, indicating that the three major credit rating agencies have confidence that the Government of Panama has the willingness and ability to manage its debt obligations.

With few exceptions, Panamanian law makes 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 given to their domestic competition. While Panamanian courts generally uphold the sanctity of contracts, there are frequent allegations of corruption within the judicial system and within the executive branch. In addition, new policies or legislation are sometimes implemented without full consultation with the affected parties.

Under Law 41 (2007), Panama encourages multinational companies to open regional headquarters in Panama by offering various tax incentives; as of January 1, 2011, 44 companies have been established under this law. The Ministry of Commerce established in 2010 a specific office to attract investment: www.proinvex.gob.pa. Established by Law 6 (1999), the City of Knowledge offers a variety of incentives to academic, research, and international organizations and private firms located there.

On June 28, 2007, the United States and Panama signed the United States – Panama Trade Promotion Agreement (TPA). Panama approved the TPA on July 11, 2007. The United States has not yet approved the TPA. The TPAwith Panama is a natural extension of an already largely open trade and investment relationship. The TPA is a comprehensive free trade agreement. When the TPA enters into force, it will result in significant liberalization of trade in goods and services, including financial services. The TPA also includes important disciplines relating to customs administration and trade facilitation, sanitary and phytosanitary measures, technical barriers to trade, government procurement, investment, telecommunications, electronic commerce, intellectual property rights, and labor and environmental protection. Under the TPA, U.S. firms will have better access to Panama’s services sector than it provides to other WTO Members under the General Agreement on Trade in Services. All services sectors are covered under the TPA, except where Panama has made specific exceptions. Moreover, Panama agreed to become a full participant in the WTO Information Technology Agreement. Panama is unique in Latin America in that it is predominantly a services-based economy. Services represent about 75 percent of Panama’s gross domestic product.

The Panamanian Vice Minister of International Commerce within the Ministry of Commerce and Industry is the principal entity responsible for promoting foreign investment. Through Proinvex (http://proinvex.mici.gob.pa), 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, multiple governmental entities may have a passive or active interest in the investment in terms of ensuring that its parameters of operation are consistent with with relevant regulations and requirements for land use, employment, special investment incentives, and business licensing. There is no formal investment screening by the GOP, although the government does monitor large foreign investments.

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. Currently, the exercise of approximately 55 professions is reserved for Panamanian nationals only. In particular, medical practitioners, lawyers, accountants, and custom brokers, are currently reserved for Panamanian citizens. The GOP also requires foreigners in various sectors to obtain explicit permission to work. However, the Embassy has not received reports of such restrictions hindering U.S. firms operating in Panama.

Under the TPA, Panama will accord U.S. services suppliers substantial access to its services market, including financial services. Panama agreed to provide improved access in sectors like express delivery, and to grant new access in certain professional services that previously had been reserved exclusively to Panamanian nationals. Panama also agreed that portfolio managers in the United States would be able to provide portfolio management services to both mutual funds and pension funds in Panama. Under the TPA, U.S. insurance suppliers will be permitted to operate as a branch or a subsidiary.

Citizens of the United States may purchase a visa for $30 dollars at a relevant port of entry.

The United States – Panama Bilateral Investment Treaty (BIT) entered into force in 1991 (with additional amendments in 2001). The BIT ensures that, with some exceptions, U.S. investors receive fair, equitable, and nondiscriminatory treatment, and that both Parties abide by international law standards, such as for expropriation and compensation and free transfers.

The U.S. Government has received numerous property dispute complaints from U.S. investors and individual property holders. The complaints include lost property, broken contracts, demands for extra payments, accusations of fraud and corruption, and occasionally threats of violence. Many of these complaints appear to stem from the general lack of titled land in Panama, along with inadequate government administration of the property system and a weak judiciary. The majority of land in Panama and almost all land outside of Panama City are not titled.

The judicial system’s capacity to resolve contractual and property disputes is weak and open to corruption, as illustrated by the World Economic Forum’s rating of Panama’s judicial independence as ranking 103rd in the world, out of 133 countries ranked. Americans should exercise greater due diligence in purchasing Panamanian real estate than they would in purchasing United States real estate. Engaging a reputable attorney and licensed real estate broker is strongly recommended.

Panama enacted Law 80 (2009) which attempts to address the lack of titled land in certain parts of the country; however, it does not cure deficiencies in government administration or the judicial system. In 2010, the National Assembly approved the creation of the National Authority of Land Management (ANATI) to administer land titling.

Panama's privatization framework law does not distinguish between foreign and domestic investor participation in prospective privatizations. The law calls for prescreening of potential investors or bidders in certain cases to establish technical viability, but nationality and Panamanian participation are not criteria. The Government of Panama privatized many entities starting in the mid-1990s, but there has not been a privatization in several years. There were press reports of the water authority, convention center, and some functions of the public health system being privatized, but the current government has not indicated a desire to proceed with these or any other privatizations.

Panama has attracted more than one billion dollars per year in FDI flow since 2006, and for the third time in the past five years appears poised to break two billion dollars in FDI flows, having received $1,657 million in the first nine months of 2010, 13% higher than the same period in 2009. Levels of Foreign Direct Investment (FDI) were over 10% of GDP in years 2006-2008. The estimated data for 2010 show a slight decrease to 9% of GDP, anecdotally related to the world economic downturn. FDI levels have been driven by investments in the Colon Free Zone, logistics, energy, financial, maritime, construction and transportation sectors.

The Panama Canal Authority started a seven year, $5.25 billion expansion project of the Panama Canal in September 2007. The project contains a third set of locks, a deepening of Lake Gatun, and newly dredged channels. All major contracts have been awarded however, opportunities to supply goods and services to the contract winners. The Panama Canal Authority also annually procures approximately $250 million in goods and services in the course of daily operations and maintenance. Foreign companies can bid on such contracts on the same terms and conditions as Panamanian companies.

The Government of Panama has ambitious infrastructure investment plans that could run up to $10 billion in the next five years. As part of this effort, the Government of Panama started the process to construct a $1.5 billion metro line. The requirements for the project were publicized in early 2010 and line is planned to be completed before the May 2014 elections.

Panama’s Law 22 of 2006 regulates government procurement and other related issues. Law 22 was intended to streamline and modernize Panama’s contracting system by increasing transparency and reducing the opportunity for corruption. It establishes, among other things, an Internet-based procurement system (www.panamacompra.gob.pa) through which the government of Panama evaluates proposals and monitors the procurement process and holds consultations for public bids, including technical specifications and tender documents. The PanamaCompra program requires publication of all government purchases on the Internet; evaluation of proposals and monitoring of the procurement process; consultation of public bids, including technical specifications and tender documents; classification of purchases by different government institutions and gathering and analysis of data. The law also created an administrative court to handle all public contracting disputes. The rulings of this administrative court are subject to review by the Panamanian Supreme Court.

PanamaCompra has been the forum for over 330,000 contracts valued at over $3.8 billion since it opened in December 2006. The Panamanian government has generally handled procurement in a transparent manner, although occasionally U.S. companies have complained that certain required procedures have not been followed. Between January 1 and July 15, 2010, the government of Panama procured approximately $91 million through 1,300 sole-source contracts, which the government justified on grounds of “urgency.” Some of the procurements include expanding the airport ($26 million) and channeling the Caldera River ($11 million). Panamanian business leaders have requested that direct contracts be the exception, and US firms have expressed concern about how the GOP establishes and evaluates the criteria used to select a procurement winner. While Panama committed to become a party to the WTO Government Procurement Agreement at the time it joined the WTO, it remains an observer and, to date, it has not followed through on this commitment.

When it enters into force, the TPA will require Panama’s procuring entities to use fair and transparent procurement procedures, including advance notice of purchases and timely and effective bid review procedures, for procurement covered by the TPA. U.S. suppliers will be permitted to bid on procurement above certain thresholds of most Panamanian government entities, including key ministries and state-owned enterprises, on the same basis as Panamanian suppliers. In particular, U.S. suppliers will be permitted to bid on procurement by the Panama Canal Authority. Disputes relating to Panama Canal Authority procurement will continue to be addressed through the authority’s existing procedures. The TPA would strengthen rule of law and fight corruption by requiring Panama to ensure under its domestic law that bribery in matters affecting trade and investment, including in government procurement, is treated as a criminal offense or is subject to comparable penalties. Currently, importing entities are required to hold a commercial or industrial license to operate in Panama, which can be obtained through Panama’s online business registration service (http://www.panamaemprende.gob.pa). Importing entities are not required to have a separate import license, with the exception of certain controlled products such as weapons, medicine, pharmaceutical products and certain chemicals.

Additionally, commercial or industrial licenses may be obtained through Panama’s online business registration service, PanamaEmprende (https://www.panamaemprende.gob.pa/). This website, in which a prospective business owner may register his or her business in 15 minutes, has reduced dramatically the number of opportunities for corruption from the former process which took 60 days and involved numerous interactions with local officials.

Conversion and Transfer Policies

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 no independent monetary policy in Panama, as Panama uses the U.S. dollar for its currency and does not have a Central Bank. Inflation has historically been relatively low and predictable, except during the global rise in inflation during 2008.

Expropriation and Compensation

The Embassy is unaware of any current case of direct expropriation of property by the Panamanian government. Panamanian law recognizes the concept of eminent domain.

Dispute Settlement

Panama has a court and judicial system built around a civil code, as opposed to the Anglo-American system of 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 are the processes always transparent.

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. Over the last few years, the majority of investment disputes involving U.S. investors has been related to landpurchasing and/or titling issues. Such disputes have been difficult to resolve due to the lack of adequate titling, inconsistent regulations, lack of trained officials outside of Panama City, and a slow and cumbersome judiciary. Some of these disputes have resulted from U.S. investors being unfamiliar with the Panamanian titling system. The court system is slow and prone to massive case backlogs and corruption.

Panama’s commercial law is comprehensive and well-established. Its bankruptcy law is antiquated and remains under review to be adapted to modern business practices.

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.

Once ratified and implemented, the TPA will solidify the legal framework for U.S. investors operating in Panama. All forms of investment will be protected under the agreement, including enterprises, debt, concessions and similar contracts, and intellectual property. With very few exceptions, U.S. investors will be treated as well as Panamanian investors (or investors of any other country) in the establishment, acquisition, and operation of investments in Panama. The TPA draws from U.S. legal principles and practices to provide U.S. investors in Panama substantive and procedural protections that foreign investors currently enjoy under the U.S. legal system. The TPA’s investor protections are backed by a transparent, binding international arbitration mechanism, under which investors may, at their own initiative, bring claims against a government for an alleged breach of the TPA’s investment chapter. Submissions to investor-state arbitral tribunals would be made public, and hearings would generally be open to the public. Tribunals would also be authorized to accept amicus submissions from non-disputing parties.

Performance Requirements and Incentives

There are no legal performance requirements such as minimum export percentages, significant local requirements of local equity interest, or mandatory technology transfer. There are no established general requirements that foreign investors invest in local companies, purchase goods or services from local vendors or invest in R&D or other facilities. There are special tax and other incentives for manufacturers to locate in an export-processing zone (EPZ), which include call centers. 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 basic user fees and a 5% dividend tax (or 2% of net profits if there are no dividends. Banks and individuals in Panama pay no tax on interest or other income earned outside Panama. No taxes are withheld 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. Investment incentives offered by the GOP are available equally to Panamanian and foreign investors. The incentives do not discriminate or distinguish between Panamanians and foreign investors.

Right to Private Ownership and Establishment

With the current exception of retail trade, the media, and several 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 profession are receptive toward attracting foreign business.

Once ratified and implemented, the TPA, Panama would accord substantial market access across its entire services regimes, subject to very few exceptions, using a "negative list" approach. Under the TPA, Panama agreed to provide improved access in sectors like express delivery, and to grant new access in certain professional services that previously had been reserved exclusively to Panamanian nationals. U.S. financial service suppliers will have full rights to establish subsidiaries or branches for banks and insurance companies. Portfolio managers in the U.S. would be able to provide portfolio management services to both mutual funds and pension funds in Panama. Even under the TPA, investment by financial services firms would still be restricted.

Protection of Property Rights

Panama has an adequate and effective domestic legal framework to protect and enforce intellectual property. Since June 1997, two district courts and one superior tribunal have been exclusively adjudicating anti-trust, patent, trademark, and copyright cases. Beginning in January 2003, there has been a IPR-specific prosecutor with national authority, which has consolidated and simplified prosecution of those cases. Law No. 1 of 2004 added crimes against intellectual property as a predicate offense for money laundering; Law 14 establishes a five to 12 year prison sentence, plus possible fines. Given Panama’s role as a transshipment point and limited resources dedicated to addressing IPR (and other) issue, U.S. industry remains concerned that the Colon Free Zone is a conduit for trading in pirated and counterfeit goods.

Intellectual property policy and practice in Panama is the responsibility of an Inter-institutional Committee for Intellectual Property (CIPI), which includes representatives from five government agencies - Colon Free Zone, Intellectual Property Registry, Ministry of Education, Customs, and the attorney general - under the leadership of the Ministry of Commerce and Industry. CIPI coordinates enforcement actions and develops strategies to improve compliance with the law.

Mortgages, liens, and other security interests are recognized and registered in the public registry. Much of the information contained in the public registry is available on-line. The public property registry has been expanded and modernized. 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.

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 GOP has yet to introduce implementing legislation to put these treaties fully into force in Panama and to establish new offenses, such as those needed for internet-based copyright violations and to enhance border measures.

The TPA provides for improved standards for the protection and enforcement of a broad range of intellectual property rights, which are consistent with U.S. standards of protection and enforcement and with emerging international standards. Such improvements including state-of-the-art protections for digital products such as U.S. software, music, text and videos; stronger protection for U.S. patents, trademarks and test data, including an electronic system for the registration and maintenance of trademarks; and further deterrence of piracy and counterfeiting.

Under the TPA, Panama would be obligated to ratify or accede to the Patent Cooperation Treaty, the Convention Relating to the Distribution of Programme-Carrying Signals Transmitted by Satellite, and the Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure by the date the TPA enters into force. Panama would also be obligated to ratify or accede to the International Convention for the Protection of New Varieties of Plants by 2010 and the Trademark Law Treaty by 2011.

Copyrights

The National Assembly in 1994 passed a comprehensive copyright bill (Law 15), based on a World Intellectual Property Organization model. Law 15 provides copyright protection based on the life of the author plus 50 years. If there are co-authors, the protection is until the death of the last author plus 50 years. Collective works, software and audiovisual works are also covered for 50 years since the date of publication or after the work is finished (with no publication). 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. Though Panama’s 1994 copyright law modernized copyright protection and amendments to the law in 2004 provided for a special Copyright Office with anti-piracy enforcement powers, piracy remains a problem. Films in theatrical release are often downloaded to DVDs and videos, reproduced on optical discs, and then distributed by street vendors.

The TPA would require implementation of the WIPO Treaties in a manner consistent with the U.S. digital Millennium Copyright Act. The TPA would also extend copyright protection to life of the author plus 70 years; would require both governments to mandate the use of legal software in government agencies; and would include provisions to protect against the theft of encrypted satellite signals and the manufacturing or sale of tools to steal such signals.

Patents

Panama is a member of the Paris Convention for the Protection of Industrial Property. Panama’s Industrial Property Law (Law 35 of 1996) provides a term of 20 years of patent protection from the date of filing. Law 35 provides specific protection for tradesecrets.

Under the TPA, Panama must adjust the patent term for products (other than pharmaceutical products) to compensate for unreasonable delays that occur while granting a patent. For pharmaceutical products, Panama may, but is not required to, adjust the patent term if there is an unreasonable delay in granting a patent or providing marketing approval for a product.

Trademarks

Panama’s legal system provides for a trademark protection regime, which includes a simplified process of trademark registration, and the ability to renew a trademark for 10-year periods. However, U.S. companies report judicial irregularities and corruption once the cases reach the courts. Panama ranked 103rd out of 133 in judicial independence in the September 2010 World Economic Forum report. Law 35 provides trademark protection, simplifies the process of registering trademarks and allows for renewal of a trademark for ten-year periods. An important feature of the law 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 has undertaken significant modernization with a searchable computerized database of registered trademarks that is open to the public as well as online registration.

The Trademark Registration Office’s website allows applicants to track the status of their Trademark and Patent applications and the creation of a Customer Service Center. The Trademark Registration Office claims to be the most advanced in the region, with 90% automation. This office reports that it has reduced trademark registration processing time in half, 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.

Under the TPA, Panama must protect trademarks and geographical indications, including by refusing protection or recognition of a geographical indication that is likely to be confusingly similar to a preexisting trademark. Panama must also have a system of registration that provides efficient and transparent procedures governing applications to protect trademarks and geographical indications.

Transparency of Regulatory System

U.S. businesses are concerned about the responsiveness and transparency of most regulating agencies. Authorities often fail to consult with affected parties before enacting new policies or implementing new legislation. In late 2008 and early 2009 the GOP started to change the rules governing the import and sale of refined petroleum products. Fuel importers frequently did not consider the process to be fair and transparent.

In the last half of 2009, several U.S. companies believed regulatory agencies were seeking additional fees/taxes that were not contained in original contracts/concessions or were seeking to impose new taxes retroactively. For one American company, Standard and Poor’s lowered the corporate credit and senior unsecured debt ratings, and also lowered the rating on $300 million senior notes to 'BB+' from 'BBB-'. S&P stated the downgrade was due to Panamanian government changes in the regulatory framework. 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.

On July 12, 2006, Panama enacted Law 27 which allows the GOP to create enterprises to conduct oil and gas exploration, distribution, production, storing, industrialization, commercialization, importation, exportation and refining activities. Many observers have expressed concerns that Law 27 is ambiguous and may result in greater government intervention and restrictions on the energy sector.

Efficient Capital Markets and Portfolio Investment

Panama's 1998 Banking Law with amendments from the 2008 Banking Law regulates the country's financial sector. The law, which concentrates regulatory authority in the hands of a powerful and well-financed Superintendent (http://www.superbancos.gob.pa ), transformed the previously inadequate regime into one that approaches international standards.

Traditional bank lending from the well-developed banking sector is relatively efficient andis the most common source of financing for both domestic and foreign investors, offering the private sector a variety of credit instruments. The free flow of capital is actively supported by the GOP and is viewed as essential to Panama’s large banking sector.

Panamanian and foreign investors are treated equally vis-à-vis government policy and law with respect to access to credit. Panamanian interest rates closely follow international rates (i.e., the London Interbank Offered Rate - LIBOR), plus a country-risk premium.

Panama passed a securities law that established a National Securities Commission to regulate brokers, fund managers, and all matters related to the securities Industry in 1999. 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. Moreover, investor demand is generally limited because of the small pool of persons, companies, and investors with the resources to invest. Interest from time 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 is tax exempt. While wealthy Panamanians may hold overlapping interests in various businesses, Post is unaware of any established practice of having cross-shareholding or stable shareholder arrangements, designed to restrict foreign investment through mergers and acquisitions.

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.

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.

Political Violence

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. Unions, student groups, employee associations and unaffiliated groups frequently attempt to impede traffic and commerce in order to force the government or business to agree to demands.

In June, the President signed a new law, Law 30, which the National Assembly had approved rapidly behind closed doors. The controversial law revised several aspects of the Labor Code and eight other laws. Labor leaders, environmentalists, the media, and business groups opposed the law. In early July, the Sitrabana union in the province of Bocas del Toro began a strike against Law 30. The strike and related protests turned violent as police intervened. Authorities acknowledged that at least two deaths were the result of police action in response to the strike/protest, and authorities initiated investigations into five other deaths. In the wake of the violence, the government agreed to pursue a formal process of dialogue with labor, businesses and civil society groups. The dialogue led to a series of revisions to Law 30 in October 2010, under which the law was divided into six individual bills with amended provisions acceptable to all the participants.

Corruption

The Transparency International Corruption Index ranks Panama 73 out of 178 countries world in 2010. There is evidence of corruption in all levels of the judicial system. Weak administration and accountability among the branches of government and in rural areas facilitated corruption. The general perception is that anti-corruption laws are not applied rigorously and that the government enforcement bodies and courts have lacked effectiveness in pursuing and prosecuting those accused of corruption, particularly in high-profile cases. Panamanian law provides that only the National Assembly may initiate corruption investigations against Supreme Court judges and that only the Supreme Court could initiate investigations against members of the National Assembly, thereby encouraging, in effect, a “non-aggression pact” between these two branches of government. Supreme Court judges are typically nominated to their 10-year terms on the basis of political and personal considerations.

The GOP 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 civil service work force in Panama's public sector also hinders systemic change.

Complaints by American investors about allegedly corrupt judicial and governmental decisions prejudicial to their interests remain common and problematic. Nevertheless, other than cases involving drug trafficking, GOP officials, judges, and legislators are seldom investigated, much less convicted on corruption charges.

While corruption is present in many areas, Panama's Supreme Court has been a particular concern. In March 2005, four Court magistrates hurled accusations of corruption against each other, provoking wide-spread public demands for the dismissal of all nine justices. In response, President Torrijos created a State Justice Commission to recommend improvements to the administration of justice, mainly in the areas of transparency, efficiency, and public accessibility. The Commission released its report in October 2005, but thus far no long term substantial changes have been made. In November 2005, the National Assembly's Judicial Affairs Committee dismissed a complaint filed by NGO Citizens’ Alliance for Justice against eight of the nine magistrates for questionable rulings. Coincidentally, a day later the U.S. government revoked the visa of Supreme Court magistrate Winston Spadafora under section 212(f) of the Immigration and Nationality Act (regarding public corruption).

Bilateral Investment Agreements

Panama has bilateral investment agreements with the United States, the United Kingdom, France, Switzerland, Germany, Taiwan, Canada, Argentina, Spain, Chile, Uruguay, the Czech Republic, Netherlands, Cuba, Mexico, Dominican Republic, Korea and Ukraine. Commerce Ministry officials have said that there have been some exploratory talks toward investment agreements with other countries, but they acknowledge that these discussions have a lower priority than ongoing free trade negotiations. The U.S.-Panama Bilateral Investment Treaty (BIT) entered into force in 1991 (with additional amendments in 2001 to reflect Panama's joining the International Center for the Settlement of Investment Disputes (ICSID)).

If the TPA is implemented, it would supersede the BIT. With some exceptions, the BIT ensures that U.S. investors receive fair, equitable and non-discriminatory treatment and that both parties abide by international law standards such as for expropriation and compensation and free transfers. Under the TPA, the BIT would be suspended after a period of 10 years. Investors will continue to have important investment rights and protections under the investment provisions of the TPA. The TPA would establish a more secure and predictable legal framework for U.S. investors operating in Panama. Under the bilateral TPA, all forms of investment would be protected, including enterprises, debt, concessions, contract and intellectual property. U.S. investors would enjoy, in almost all circumstances, the right to establish, acquire and operate investments in Panama on an equal footing with local investors. Among the rights afforded to U.S. investors are due process protections and the right to receive a fair market value for property in the event of an expropriation. Investor rights would be protected under the bilateral TPA by an effective, impartial procedure for dispute settlement that is fully transparent and open to the public. Submissions to dispute panels and dispute panel hearings would be open to the public, and interested parties would have the opportunity to submit their views.

OPIC and Other Investment Insurance Programs

The United States and Panama signed a comprehensive Overseas Private Investment Corporation (OPIC) agreement in April 2000. OPIC offers both financing and insurance coverage against expropriation, war, revolution, insurrection, and inconvertibility for eligible U.S. investors in Panama. OPIC can insure up to US $200 million per project for U.S. investors, contractors, exporters, and financial institutions. Financing is available for overseas investments that are wholly owned by U.S. companies or that are joint ventures in which the U.S. firm is a participant. Panama is a member of the Multilateral Investment Guarantee Agency (MIGA).

Labor

The most common concern among American businesses in Panama is the labor code, specifically the cost and time of laying off or firing an employee. According the World Bank’s Doing Business 2010 Report, Panama’s “Employing Workers” rank was 177 out of 183 based on difficulties in hiring and firing workers.

Panama's non-agriculture labor force is approximately 1.2 million with 6.8% unemployment as of August 2010. Approximately 43% are employed in the informal sector, with a lower rate of informal employment in Panama capital area (37%) compared to indigenous areas (80%). Panamanian labor law, in requiring the Labor Ministry's permission to dismiss employees for "economic reasons," may act as a legal barrier to a firm wishing to reduce its workforce or repatriate its capital. If a firm is insolvent, the law also gives workers priority over all other non-secured creditors.

The monthly minimum wage varies between the region of Panama and the industry; the range is between $220.48 and $416.00.

Despite spending approximately 16% of the central government budget and 5% of GDP on education, approximately half of the students fail their university entrance exam. The lack of skilled labor is of serious concern to both Panamanian and foreign investors. The problem with the lack of skilled Panamanian labor is compounded by the Panamanian law that mandates 90% of an employer’s staff must be Panamanian.

While the GOP has periodically revised its labor code, including a modest revision in 1995, it remains highly restrictive. Several sectors, including the Panama Canal Authority, the Colon Free Zone, and export processing zones/call centers are covered by their own labor regimes. Employers outside of these areas such as tourism have called for greater flexibility, easier termination of workers, and the elimination of many constraints on productivity-based pay. Employers frequently cite the lack of skilled labor as a constraint to growth.

Foreign-Trade Zones/Free Ports

Law 25 of 1996 provides for the development of "export processing zones" (EPZ's) as part of an effort to broaden the Panamanian manufacturing sector while promoting investment in former U.S. military bases transferred to Panama. The law also includes specific labor and immigration provisions that are more favorable than the current Panamanian labor code. The government also provides numerous tax incentives to companies that operate in EPZs. Companies, whether Panamanian or foreign, operating in these zones may import inputs duty- free if products assembled in the zones are to be exported. Of the fourteen registered EPZs, 91 companies have established in recent years. . They face difficulties combating Panama's high relative wages, low industrial base, and weak infrastructure, particularly outside the Panama-Colon Corridor Law 25 of 2006 also provides for the development of call centers. Sixty two companies are licensed to operate call centers.

Law 41 of 2004 provides for the development of "Panama Pacific Special Economic Area" in the former Howard Air Base to encourage investment, specifically regarding logistics, in the area. Dell, HP, Proctor & Gamble, Singapore Technologies Aerospace, Caterpillar, and others are located there. London & Regional, the overall developer, will invest a minimum of $705 million for the development.

Index/Rankings

Transparency International Corruption Index (2009) 3.4, ranked 73 in the world

Heritage Economic Freedom (2011) 64.9, ranked 59 in the world

World Bank Doing Business (2010) ranked 72 in the world

World Economic Forum’s Global Competitiveness (2010) ranked 53 in the world

Foreign Direct Investment Statistics

Foreign Direct Investment (FDI) in Panama

1998-2009

(In nominal US$ millions)

1998 1,219

1999 517

2000 624

2001 467

2002 98

2003 818

2004 1,019

2005 962

2006 2,498

2007 1,907

2008 2,402

2009 (1) (2) 387

2010 1,657 (1) (2)

Source: GOP Comptroller General’s Office

(1) Preliminary figures.

(2) January 1, 2010 through September 30, 2010.

Web Resources

Contraloria General de la Republica http://www.contraloria.gob.pa/



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