VI. TRADE REGULATIONS AND STANDARDS TARIFFS AND IMPORT TAXES Traditional policies on trade and economic incentives directed agricultural and manufacturing production toward import- substitution until the end of the 1980's. Today, Panama's nominal tariff duties remain the highest in the region. Panama averages 40% in tariff rates, whereas, its Central American neighbors average 20%. The country has made significant strides to lower its duties and restrictions. From 1991 to 1993 the Government of Panama enacted a trade liberalization program, with the following objectives: - To reduce the ceiling on import tariffs to 40 percent for industrial products and to 50 percent for agro-industrial products. - To eliminate all specific import tariff rates. - To eliminate quantitative import restrictions for agricultural products and replace them with tariff protection. The Government met the majority of these objectives. However, there are still some products subject to tariffs outside these limits such as processed tomato products, beer and cigarettes. Other products, such as textiles and shoes, continue to have specific import duties. Various other agricultural products remain subject to quantitative restrictions e.g., dairy products and certain grains. The long term view is that, as Panama accedes to the GATT, tariff duties will continue to decline and non-tariff barriers will be eliminated. CUSTOMS VALUATION As mentioned before, Panama is assessing the majority of its import duties on an ad valorem basis, except for a number of products that are still using a dual ad valorem and specific system. However, the Government is in the process of eliminating this dual system. The ad valorem system uses the declared C.I.F. value as the basis for import duty calculations and utilizes historical information obtained from past liquidations as a reference. This historical method is criticized by the major private organizations in the country. In addition to the import duty, all imports into Panama are subject to a 5 percent transfer or value added tax (ITBM) levied on the C.I.F. value, with the exception of pharmaceutical and food products. Panama has recently changed its international trade classification system from the Customs Cooperation Council Nomenclature (CCCN) and Brussels Tariff Nomenclature (BTN) to the Harmonized System (HS). Also, entry into GATT will improve the present situation to provide a customs valuation system that conforms to international standards. IMPORT LICENSES No import licenses are required in Panama to engage in import activities. Any company holding a commercial license can freely import goods into Panama. A commercial or industrial license is issued to individuals or companies engaged in commercial or industrial activities. EXPORT CONTROLS The Fiscal Code regulates all matters concerning the country's exports. The Code establishes that all national products may be exported, except: - Drugs, with the exception of those having pharmaceutical or scientific purposes. - Staple products determined by the Government on a temporary basis due to scarcity in the country. - Those products the GOP determines not for export for reasons of convenience or in the economic interest of the country. Exports subject to the payment of export taxes require an Export Authorization, which is issued by the Ministry of the Treasury (Hacienda y Tesoro) through the Direccion Nacional de Aduanas. (See Appendix C for contact information). Exports subject to taxes are: bananas, metals, raw sugar, natural resources and foreign currencies. Exports of textiles are also subject to an export authorization. IMPORT DOCUMENTATION The processing of customs documents in Panama for the purpose of importing raw materials or finished goods is fast, efficient and reliable. Merchandise imported into Panama must be cleared through customs by a customs broker licensed by the Government of Panama. Exceptions are made for goods which are imported duty free, consigned to national and municipal governments, imported by foreign diplomats, for sales to the authorities of the Canal Area, sold to vessels transiting the Canal, or intended for reexportation. Basic import documentation required by the Panamanian Customs office is the following: - Import Declaration (Prepared and signed by a Customs Broker). - Commercial Invoice (To be presented in English or Spanish in quadruplicate). - Airway Bill. - Bill of Lading (To be presented in triplicate). - Consular Invoice (In case of surface transportation only. It must be in Spanish and presented in triplicate). - Commercial License Number. - Tax Clearance Certificate (Stating that the importer does not owe any taxes to the Government). - Phytosanitary Certificate (In case of meat and meat products, to be obtained from the U.S. Department of Agriculture). - Certificate of Free Sale (if required) Any food product or other items used for human consumption (including for use on human skin or clothes) may be subject to the Certificate of Free Sale (CFS) documentation requirement. The main purpose of the CFS is to prevent the dumping of inferior goods, especially for human consumption, to the Panamanian market. The CFS must verify that a product is sold freely and widely in the U.S. Potential exporters of items subject to the CFS documentation requirement may wish to either contact (1) their trade association which may provide the service issuing the documentation or (2) the Food and Drug Administration, Division of Programs and Enforcement Policy, 200 C Street, SW, Washington, DC 20204. These documents must be legalized by a consulate of Panama for all products surface transported to Panama. The exporter must submit the original and three copies of the shipping documents to the consulate of Panama within a period of eight days from the day following the dya of shipment loading. Bills of lading or waybills must specify the date in which the goods will be loaded. In addition, the documented date must be verified by the operator or authorized employee of the carrier. Late penalties are one percent of the CIF value of the shipment or ten Balvoas, whichever is greater; absence of consular legalization penalties are five percent of the CIF value of the shipment or twenty Balboas, whichever is greater. Exports that arrive in Panama by air do not require consular legalization. In addition, travellers' personal effects, not intended for commercial use do not require consular legalization. For more information on the consular legalization process, contact your nearest consulate of Panama in the U.S. If for any reason the bill of lading or any other required document cannot be presented within 24 hours after the shipment has arrived, clearance of the goods will be permitted by posting a bond equal to the amount of import duties. The bond is cancelled if the prescribed documents are presented in due form within a period of 90 days. The bond may be extended, extendable in justified cases, an additional 90 days. EXPORT DOCUMENTATION A licensed customs broker is also required to handle the export paperwork related to merchandise exports. The Panama Trade Development Institute (IPCE), a government organization, was created in 1984 to promote exports and investment. IPCE facilitates the processing of export documentation through a "One Stop" (ventanilla unica) office which can reduce the export process to a few hours from a process that can take days or weeks. (Refer to Appendix C for contact information). Export documentation required by Panamanian Customs authorities is the following: - Commercial Invoice. - Export Declaration (Prepared and signed by a Customs Broker). - Certificate of Origin (Issued by the Chamber of Commerce, Industry and Agriculture of Panama or the Panama Trade Development Institute). - Bill of Lading. - Airway Bill. - Consular Invoice. - Veterinary, Sanitary or Phytosanitary Certificate (when applicable). TEMPORARY ENTRY The Panamanian Fiscal Code establishes a temporary entry regime, up to one year, for all types of merchandise. There are two options. First, the goods can enter the country under a guarantee payment equivalent to the total value of the import duty. This payment will be reimbursed at the time the goods leave the country. Second, an insurance company issues a bond guarantee covering the import duty value if the goods fail to exit the country in a pre-determined period of time. Special temporary provisions apply in the case of trade shows and exhibitions taking place at the Atlapa Convention Center, Panama's largest exhibition and convention center. Goods can enter the Atlapa Convention Center with no warranty payment or bond required. Samples with commercial value are subject to temporary entry requirements. Samples with no commercial value are admitted duty free. If samples arrive in large containers, they will be dutiable even though they are marked as free samples. Any boxes or large packages, even though they may be marked as free samples, will be stopped and duties placed on those samples by Panamanian Customs. LABELING, MARKING REQUIREMENTS Panama has no special regulations for labeling and marking. Labels are required to have basic information regarding the name and address of the manufacturer, expiration date, list of ingredients, lot number, and the product form, e.g. powder, liquid, etc. Labels in English are accepted, except medicines, household products and special foods which require special instructions. In these cases instructions regarding dosage, usage, warnings, etc., must be in Spanish. All goods arriving in Panama intended to be reexported immediately must be marked "PANAMA IN TRANSIT" on each box or outside container. In general, products which comply with U.S. labeling and marking requirements, will also meet local requirements and are suitable for sale in Panama. PROHIBITED IMPORTS The following products cannot be imported into Panama: - Counterfeit coins or printed material that imitates monetary currencies. - Equipment or instruments for manufacturing coins. - Liquors, wines, beers or medicines with labels that describe false or deceiving contents, or of any kind of harmful preparation. - Certain firearms or war materials. - Foreign lotteries or raffle tickets. - Opium in the form of gum or for smoking. - Obscene brochures, books, newspapers, magazines, or postcards containing negative portrayals of the country's culture, civilization or dignity. - Plants, seeds, or animals when determined by the Ministry of Agriculture. STANDARDS (ISO 9000) While the Government of Panama has not designated a domestic registering authority for participation in the International Standards Organization ISO-9000 program, there is no legal limitation in Panama on participation in ISO-9000 by firms doing business here. Panama is a member of the Pan American Standards Commission (COPAN), headquartered in Venezuela. FREE TRADE ZONES/WAREHOUSES The Colon Free Zone The Colon Free Zone (CFZ), the largest in the Western Hemisphere and second to Hong Kong's, is located in the City of Colon, five kilometers from the Port of Cristobal on the Atlantic side of Panama and 90 kilometers from Panama City. Goods (except firearms or petrolum products) may be imported, stored, modified, repacked and re-exported without being subject to any customs regulations. Overall free zone activity, described as total imports plus re-exports from the free zone, reached US$ 9.5 billion in 1993; net benefit of this activity captured by Panamanian economy was US$ 611.2 million, the value of 1993 net re- exports (re-exports minus imports). Some 1,500 firms are established in the Free Zone, of which 980 have physical premises and 520 are represented by agents. Just over 12,000 employees work in the free zone; the monthly payroll is roughly US$ 6.1 million. Overall CFZ commerce grew at a slower rate in 1993 than in 1992; CFZ imports grew by 3.6 percent to US$ 4.52 billion as merchants drew down accumulated inventory, down from 1992 import growth of 18.5 percent. In 1993 CFZ re- exports climbed to US$ 5.13 billion, an increase of 5.1 percent from 1992 re-exports worth US$ 4.83 billion. This growth rate is down from 1992 annual growth of 22 percent. Generally, most merchandise is transshipped from Panama to other parts of the Western Hemisphere and Europe. Imports into the CFZ come mainly from the Far East. The largest individual supplier of the CFZ was Hong Kong, followed by Japan, the United States, Taiwan and South Korea. These five countries supply 67.5 percent of all imports through the CFZ. In descending order of exports from the CFZ, Colombia is the largest purchaser of merchandise, comprising nearly one quarter of all CFZ exports. Other principal buyers are Ecuador, Panama (domestic market), Venezuela, Aruba, the United States, Costa Rica and Chile. These countries buy 60% of all exports from the CFZ. The CFZ is administered by an autonomous institution of the Panamanian Government in operation since 1953. Today it is completely developed, and covers 300 hectares, including 45 hectares designated as an industrial zone. The CFZ offers the legal free movement of goods and complete exemption from taxation on imports and re-exports. There are no taxes on the export of capital or the payment of dividends. In addition there are reduced income tax rates on earnings from re-export sales. Furthermore, firms located in the CFZ are exempt from import duties as well as from guarantees, licensing, and other requirements and limitations on imports. Due to its geographic location, the CFZ is a major factor in facilitating the supply of goods from large industrialized countries to the consumer markets in Latin America. The CFZ is operated and managed by its Board of Directors, an Executive Committee and the General Manager of the institution. Corporations or individuals of any nationality may establish operations in the CFZ without requirements of a commercial license or a minimum investment of capital. Firms interested in operating in the CFZ must file an application, a copy of its articles of incorporation and bank references. There are four basic ways of doing business in the CFZ: 1. Leasing lots on which the firm builds a warehouse or other facilities as designed by the firm. The land lease arrangements are granted for a 20-year period; 2. Purchasing an existing facility from the Zone Administration; 3. Reaching an agreement with a company already established in the CFZ as the operator's representative. The cost of this service is set by mutual agreement between the parties concerned. Representation agreements shall be subject to the approval of the Zone Administration; or, 4. Leasing a public warehouse operated by the Zone Administration. The firm receives its goods and stores them like any other company there. There are no fixed costs and the payment of services is based according to the weight or volume of the goods stored. Companies operating in the CFZ are engaged in four types of sales operations: 1. Foreign Trade Operation, involving the re-exportation of goods from CFZ warehouses; 2. Internal Trade Operation, consisting of sales to clients located within Panama's customs territory; 3. Direct Sales, those made to foreign clients in which goods are shipped from the manufacturing sources without physically arriving in the CFZ territory; or, 4. Transfer Operation, in which sales are made to other CFZ firms. Companies operating from the CFZ enjoy numerous trade advantages along with special tax incentives such as tax credits, depending on the number of Panamanian employees, and special income tax rates on foreign trade operations. Companies in the free zone pay a maximum corporate income tax rate of 8.5 percent on income derived from export sales. Additionally, dividends paid on profits from foreign trade operations and from direct sales are not subject to the dividend tax. Merchandise arriving at, stored in, or leaving the CFZ destined for a foreign country is exempt from taxes, charges or any type of fee. Also CFZ companies are not subject to any type of federal or municipal tax. Contact the CFZ Administration and the Users Association for more information. (Refer to Appendix C for contact information). Export Processing Zones On November 30, 1992, Panama passed a Law No. 25 allowing for the establishment and development of Export Processing Zones (EPZ) within the country. EPZs are well-defined areas for the establishment of industrial, commercial and service facilities which operate in a free trade system. All its production is export-oriented and a range of incentives has been created to attract companies into the EPZ. Companies allowed to establish operations in EPZ are those engaged in: manufacturing, assembly (maquila), high technology, and specialized and general services, e.g. computer data entry, reinsurance. The EPZ law defines two different parties associated with the zone. The first is as Developer of the EPZ. The second is as the Tenant company located in the EPZ. The GOP offers the developer the following tax incentives: Tax exemption during the life of the contract (the maximum is 20 years), from taxes, duties and other charges related to the importation of machinery, equipment, accessories and material used in the construction of the facilities. Exempt from property and income taxes, and taxes on capital or assets for the first ten years of operation. From the 11th year until the end of the contract, the developer is exempt from income tax on net earnings reinvested in the development and expansion of the EPZ, provided that the amount reinvested exceeds 20 percent of the net taxable income for the fiscal year the reinvestment is made. Lastly, the developer may carry over losses from the year the loss takes place. The Tenant companies exporting from an EPZ are offered the following benefits: Exempt from taxes, duties and other charges related to the importation of machinery, equipment, raw materials, semi-processed goods and other materials such as packaging, fuel and lubricants used in the manufacturing process. Exemption from income tax on profits arising from exports, and exemption from export sales taxes, as well as from taxes on capital and assets of the export industry. The EPZ law also includes specific labor and migratory provisions for employees of EPZ firms which are more favorable than the Panamanian Labor Code. Presently, there are four EPZs approved by the GOP. Each is in various stages of development. Contact the Panama Trade Development Institute for information on EPZs. (Refer to Appendix C for contact information). Petroleum Export Zones The Government of Panama enacted Decree No. 29 (Executive Decree) dated July 14, 1992, allowing the creation of Petroleum Export Zones (PEZ) in specially-designated areas in Panama. Decree No. 29, allows any foreign or national company to establish operations in a PEZ to produce, refine and export petroleum products. It also permits direct sales to foreign vessels transiting the Panama Canal, and to foreign airlines. Companies operating out of these PEZs are exempt of any municipal or federal taxes and are not subject to government regulations affecting the local market. The Government of Panama has authorized the following for PEZ: Petroterminal de Panama, Refineria Panama, Autoridad Portuaria Nacional, and Aeropuerto Internacional de Tocumen. Contact the Ministry of Commerce and Industry, Direccion Nacional de Hidrocarburos for more information. (Refer to Appendix C for contact information). SPECIAL IMPORT PROVISIONS Special import permits are required for all types of firearms and ammunitions. Import permits can be obtained by the Ministry of Government and Justice. Also, certain agricultural and agroindustrial products are subject to import authorization by the Ministry of Agricultural Development (MIDA). Examples are: wheat, flour, animal fats, vegetable and animal oils, soybean protein, and frozen corn. (Refer to Appendix C for contact information). MEMBERSHIP IN FREE TRADE ARRANGEMENTS Panama is not a party to any agreements providing completely free trade, but does have bilateral preferential trade agreements with Costa Rica, El Salvador, Honduras, Guatemala, and Nicaragua; these accords are quota-based and deal with a limited number of specific products. A more inclusive preferential agreement has recently been signed with Colombia, and is now waiting ratification by the National Assembly. Panama is a beneficiary of the Caribbean Basin Economic Recovery Act, better known as the Caribbean Basin Initiative (CBI), which provides for one-way free trade access for specific Panamanian exports to the U.S. Recently the U.S. government proposed new legislation to the U.S. Congress that would enhance the CBI program. The Interim Trade Program (ITP) would grant further trade concessions, primarily in the textiles area. In return for NAFTA-like treatment for textiles and other miscellaneous items to the Caribbean Basin nations, the ITP would require the commitment of the Caribbean Basin countries on a bilateral basis to make commitments mainly in the following areas: bilateral investment treaties, intellectual property rights, workers rights, and the environment. In August 1994 the Interim Trade Program bill was still in committee in the House of Representatives and Senate.