FATCA Envy Spreads Across Hemisphere
The South American nation of Colombia does not have its own version of FATCA, but its government wishes it did. That’s evident from its current tussle with neighbor Panama. The root of the problem between the two nations is FATCA-style reporting of bank data, or the lack thereof. Colombia wants it badly; Panama wants nothing to do with it.
Panama City boasts a thriving financial center, one of the largest in Latin America. Together with the Canal Zone it accounts for most of the country’s GDP. One reason for the Panamanian banking sector’s success is ring-fencing. This policy attracts capital flow from wealthy foreign investors all over the world. Banks in Panama don’t collect information on accounts held by nonresident depositors, so there is no information to share with tax collectors in other countries.[FATCA alters that policy, but only for U.S. accountholders.]
Colombian law requires taxpayers to fully disclose bank deposit income regardless of where it was earned. But If a Colombian taxpayer failed to report his or her income from a Panamanian bank, the tax authorities would be very unlikely to detect the omission because of Panama’s lack of reporting. For practical purposes, the offshore account would remain a secret known only to the bank and the accountholder. Taxable income is thus concealed from Colombia’s revenue body with minimal risk.
Recently, Colombian officials asked their Panamanian counterparts to sign a bilateral tax information exchange agreement, known as a TIEA. The TIEA would have been reciprocal in nature, meaning it would oblige each signatory nation to collect and share bank information about the other nation’s residents. Panama said “no, thanks.” It has little to gain from a TIEA with Colombia.
Colombia retaliated by threatening to tag its northern neighbor with a “tax haven” designation. That legal status would trigger punitive taxes on all money transfers into Panama. It would also inflict reputational damage on Panama’s entire financial system, which could have a chilling effect on foreign investment.
It’s well known that tax laws have unintended consequences. Could one of FATCA’s ripple effects be the inclination of other countries to mimic its outcome? What cash-strapped government wouldn’t seek parallel treatment when its citizens put money offshore, particularly if banks have already implemented mechanisms to gather the relevant data? This may prove to be FATCA’s true legacy. For better or worse, FATCA envy could be here to stay.
Panama responded by threatening to deport Colombian workers, repatriate Colombian criminals from Panamanian jails, and impose travel restrictions on Colombians attempting to enter the country. It’s also considering a 300 percent increase in tariffs on goods imported from Colombia. Panama might also cancel a cross-border electricity sharing agreement.
This is precisely what FATCA was for, to pave the way for a global version (otherwise known as GATCA, more on that here).