Carlos Jasso / Reuters The Panama flag waves in the banking area of Panama City, April 4, 2016.

How Panama Became a Tax Haven

The Laws Behind the Pana-monium

The Panama Papers—the 11.5 million leaked documents that detail more than 214,000 offshore companies listed by the Panamanian corporate service provider Mossack Fonseca—have shed new light on how wealthy individuals, including public officials, hide their money from public scrutiny.

But Panama’s history as a tax haven is quite old. It goes all the way back to 1919 when, as a young nation, it was looking for economic opportunities and began allowing foreign ships to register in its country and sail under the Panamanian flag. This helped companies such as Standard Oil dodge U.S. taxes and regulations, such as the Seaman’s Act, which provided certain rights for sailors and safety standards for the boats. Offshore financing followed in 1927, when Wall Street, searching for ways to avoid taxes, helped Panama craft lax company incorporation laws that enabled foreign investors to set up anonymous tax exempt corporations.

Still, it wasn’t until the 1970s that offshoring really took off in a big way. As the OPEC oil embargo caused oil prices to skyrocket, the shipping industry was hit hard. A slump in shipping meant that Panama needed to broaden its scope and attractiveness to foreign investors beyond hiring out “flags of convenience” for foreign ships. During the 70s, Panama officially adopted what has now become the standard tax haven model based on a process known as “ring-fencing,” which involves exempting foreign investors and their international business companies from taxes, enforcing strict banking secrecy laws, and offering competitive incorporation laws. The revised legislation led foreign investors to flock to Panama and there, the financial services sector boomed. 

As a sign of how successful Panama has been as an offshore jurisdiction, it now has 370,000 international business companies, the third largest number in the world after the British Virgin Islands and Hong Kong. The Panamanian banking system is also the largest in Central America with consolidated assets of more than three times Panama’s GDP and a financial sector that makes up about eight percent

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