It is a common question among investors, businesses, importers, and tax advisors: Do Panama and the United States have a tax treaty?[cite: 1]
The answer is no.[cite: 1] Although both countries have several bilateral agreements in force, none of them qualifies as a Double Tax Treaty (DTT) in the traditional sense.[cite: 1]
Currently, three key instruments govern the relationship between Panama and the United States:[cite: 1]
- The Trade Promotion Agreement (TPA), focused on international trade and tariff reduction.[cite: 1]
- The Tax Information Exchange Agreement (TIEA), designed for tax cooperation between Panama’s Directorate General of Revenue (DGI) and the U.S. Internal Revenue Service (IRS).[cite: 1]
- FATCA, which establishes the automatic exchange of financial account information.[cite: 1]
Understanding the scope of each instrument is essential to avoid misunderstandings in international tax planning and to identify the benefits that are actually available for cross-border operations between the two countries.[cite: 1]
The Short Answer: Panama and the United States Do Not Have a Double Tax Treaty
Although the term “tax treaty” is often used to describe any agreement related to taxation between two countries, a Double Tax Treaty (DTT) has a very specific legal purpose and structure.[cite: 1]
Its primary objective is to prevent the same income from being taxed twice by different jurisdictions while also providing mechanisms to prevent tax evasion and resolve disputes between tax authorities.[cite: 1]
A typical Double Tax Treaty generally covers:[cite: 1]
- Tax residency.[cite: 1]
- Taxation of dividends.[cite: 1]
- Taxation of interest.[cite: 1]
- Taxation of royalties.[cite: 1]
- Foreign tax credit mechanisms.[cite: 1]
- Mutual agreement procedures.[cite: 1]
- Rules to eliminate double taxation.[cite: 1]
Although Panama and the United States have bilateral agreements in force, none of them contains this comprehensive framework, which is why they cannot be considered a Double Tax Treaty.[cite: 1]
What Agreements Exist Between Panama and the United States?
There are currently three different legal instruments, each serving a distinct purpose.[cite: 1]
| Instrument | Primary Purpose |
|---|---|
| Trade Promotion Agreement (TPA) | Facilitates trade through tariff reductions and rules of origin.[cite: 1] |
| Tax Information Exchange Agreement (TIEA) | Allows the exchange of tax information between the DGI and the IRS to combat tax evasion.[cite: 1] |
| FATCA | Establishes the automatic exchange of financial account information relating to U.S. taxpayers.[cite: 1] |
Although all three have tax implications, none reduces income tax, withholding taxes, or eliminates double taxation between Panama and the United States.[cite: 1]
What Is the Trade Promotion Agreement (TPA)?
The Trade Promotion Agreement (TPA) is an economic integration agreement whose primary purpose is to facilitate trade between Panama and the United States by eliminating or gradually reducing import tariffs.[cite: 1]
Its principal benefits include:[cite: 1]
- Elimination or reduction of import duties.[cite: 1]
- Rules of origin to qualify for tariff preferences.[cite: 1]
- Origin verification procedures.[cite: 1]
- Tariff-rate quotas for certain products.[cite: 1]
- Special agricultural safeguards.[cite: 1]
What the TPA Does NOT Do
Despite being an important trade agreement, the TPA does not modify income taxation or provide the benefits typically associated with a tax treaty.[cite: 1]
Specifically, the TPA:[cite: 1]
- Does not reduce income tax.[cite: 1]
- Does not reduce withholding taxes on international payments.[cite: 1]
- Does not grant foreign tax credits.[cite: 1]
- Does not eliminate double taxation.[cite: 1]
- Does not modify Panama’s VAT (ITBMS) or Selective Consumption Tax (ISC).[cite: 1]
What Is the Tax Information Exchange Agreement (TIEA)?
The Tax Information Exchange Agreement (TIEA) is a bilateral administrative cooperation agreement between Panama and the United States that facilitates the exchange of tax information between the Directorate General of Revenue (DGI) and the Internal Revenue Service (IRS).[cite: 1]
Its primary objective is to combat tax evasion and tax fraud by allowing both tax authorities to exchange information relevant to the administration and enforcement of their respective tax laws.[cite: 1]
The information that may be exchanged includes:[cite: 1]
- Banking and financial information.[cite: 1]
- Accounting records.[cite: 1]
- Financial statements.[cite: 1]
- Beneficial ownership information.[cite: 1]
- Information relating to companies, trusts, and private foundations.[cite: 1]
- Commercial documentation relevant to tax investigations.[cite: 1]
What the TIEA Does NOT Do
The TIEA is not a Double Tax Treaty.[cite: 1]
Accordingly, it does not:[cite: 1]
- Reduce withholding tax on dividends.[cite: 1]
- Reduce withholding tax on interest.[cite: 1]
- Reduce withholding tax on royalties.[cite: 1]
- Modify income tax rates.[cite: 1]
- Grant bilateral foreign tax credits.[cite: 1]
- Eliminate double taxation.[cite: 1]
In addition, information may only be exchanged through specific, properly substantiated requests.[cite: 1] General or speculative requests are not permitted.[cite: 1]
FATCA and Its Relationship with the TIEA
In addition to the TPA and the TIEA, Panama also implements the Foreign Account Tax Compliance Act (FATCA) through an Intergovernmental Agreement (IGA Model 1A) incorporated into Panamanian law by Law 47 of 2016.[cite: 1]
Unlike the TIEA, FATCA establishes an automatic exchange of financial information.[cite: 1]
In general:[cite: 1]
- Panamanian financial institutions report certain information to the DGI.[cite: 1]
- The DGI automatically transmits that information to the IRS.[cite: 1]
- The objective is to identify financial accounts held by U.S. taxpayers.[cite: 1]
While FATCA operates through automatic reporting, the TIEA allows the exchange of information through specific requests made during tax investigations.[cite: 1]
Comparison Between a Double Tax Treaty, the TPA, and the TIEA
| Feature | DTT | TPA | TIEA |
|---|---|---|---|
| Eliminates double taxation | ✔ | ✘ | ✘ |
| Reduces withholding taxes | ✔ | ✘ | ✘ |
| Grants foreign tax credits | ✔ | ✘ | ✘ |
| Regulates international trade | ✘ | ✔ | ✘ |
| Allows tax information exchange | Partial | ✘ | ✔ |
| Facilitates tax investigations | ✘ | ✘ | ✔ |
What Does This Mean for Businesses and Investors?
The absence of a Double Tax Treaty between Panama and the United States has significant practical implications for cross-border transactions.[cite: 1]
In general:[cite: 1]
- Domestic withholding tax rules continue to apply.[cite: 1]
- There are no automatic reductions for dividends, interest, or royalties.[cite: 1]
- Foreign tax credits depend on each country’s domestic legislation.[cite: 1]
- Transactions may be subject to information exchange between the DGI and the IRS.[cite: 1]
- Proper international tax planning remains essential.[cite: 1]
Frequently Asked Questions
Does Panama have a tax treaty with the United States?
No. Panama and the United States do not currently have a Double Tax Treaty.[cite: 1]
Does the TPA eliminate double taxation?
No. The Trade Promotion Agreement regulates trade and customs matters only.[cite: 1]
Does the TIEA reduce withholding taxes on international payments?
No. The TIEA is limited to tax information exchange between the DGI and the IRS.[cite: 1]
What is the difference between the TIEA and FATCA?
The TIEA operates through specific information requests, while FATCA establishes an automatic exchange of financial account information.[cite: 1]
What should businesses operating between Panama and the United States consider?
Businesses should carefully analyze the applicable tax legislation in both countries, applicable withholding taxes, and their reporting obligations under the TIEA and FATCA, since no treaty currently eliminates double taxation between Panama and the United States.[cite: 1]
Conclusion
Although Panama and the United States maintain important commercial and tax cooperation agreements, none of them functions as a Double Tax Treaty.[cite: 1]
Understanding the differences between the TPA, the TIEA, and FATCA enables businesses and investors to properly structure international transactions, comply with their tax obligations, and avoid assuming tax benefits that do not currently exist between the two countries.[cite: 1]
International Tax Advisory for Panama–United States Transactions
At LAC Legal, we advise businesses, investors, and multinational groups on cross-border transactions, international tax planning, treaty interpretation, and compliance with tax obligations arising from operations between Panama and the United States.[cite: 1]
If your business operates between Panama and the United States or requires advice regarding the TPA, the TIEA, FATCA, or international tax matters, our team is ready to assist you.[cite: 1]