VII. INVESTMENT CLIMATE OPENNESS TO FOREIGN INVESTMENT On the one hand, taking its cue from Panama's central geographic location and its limited manufacturing and agricultural sectors, the Government of Panama and the business community actively promote this country's long-standing reputation as an international trading, banking, and services center, and as a site for foreign direct investment (FDI). Panamanian businessmen and officials can point to Panama's dollar-based economy as offering low inflation and zero foreign exchange risk. The Panamanian Trade Development Institute (IPCE) provides investors with information, expedites specific projects, leads investment-seeking missions abroad, and supports foreign investment missions in Panama. On the other hand, as the new Minister for Planning and Economic Policy has noted, no major foreign investment has been made in Panama for at least 10 years. The new government which took office September 1, 1994, knows Panama must improve its international image (e.g., on money laundering) and its infrastructures if it is to attract FDI. A major test for the new government regarding its intention to improve Panama's attraction of FDI, will be how it addresses the former military areas being reverted under the Canal treaties. Government inattention to basic public infrastructure and public services, combined with slow progress on economic reforms that would establish clearer "rules of the game," undermine somewhat the generally welcoming stance toward foreign investment. Cumbersome legal procedures sometimes delay resolution of contract and other business disputes. Setting up shell corporations, however, is not cumbersome. Colon Free Zone: Official support for investment and business activity is especially strong in the Colon Free Zone (CFZ). There are special tax incentives to encourage investment in the CFZ and the international banking center. Companies in the free zone pay a maximum corporate income tax rate of 8.5 percent on income derived from export sales; income from purely offshore operations is not taxable; there are no taxes on the repatriation of profits or the payment of dividends. Banks in Panama pay no tax on interest or other income earned outside Panama and withhold no tax on savings or fixed time deposits in Panama. Several locations designated export processing zones (EPZ's) offer tax-free status and special immigration privileges, and license and customs exemptions to manufacturers who locate there. (Refer to Section VI for more detailed information on CFZ). Privatization: Panama has a program to privatize a number of state-owned enterprises, although to date only a few privatizations have been carried out. Treatment of potential foreign investors in this process has been non-discriminatory. Possible near and medium term privatizations may occur in cement manufacturing, refuse collection services, and some water utility operations. The government is also open to private investment in cellular telephone and other high-tech telecom services. Panama offers all investors (domestic and foreign) tax and other financial advantages if they invest in manufacturing ventures, export- oriented ventures, or tourism, or if they locate in certain regions of Panama. These advantages include tax-exemption of export income, exemption from import duties, accelerated depreciation, tariff protection, and tax allowance certificates (CATS). Investors require substantial legal and accounting advice to take advantage of these incentives. (Refer to Right to Private Ownership and Establishment in Section VII for more information). CONVERSION AND TRANSFER POLICIES Panama has no legal restrictions on transfer abroad of funds associated with, profits deriving from, or capital employed in an investment. Panama uses the U.S. dollar as legal tender. Currency conversion therefore is not an issue. The Government of Panama has repeatedly emphasized its intention to retain the U.S. dollar as the national currency (denominated as the balboa); the U.S. Government has consistently supported Panama's use of the dollar. There is, therefore, no independent monetary policy in Panama. Inflation, bound by the dollar, is relatively low and predictable, thus simplifying foreign investments. EXPROPRIATION AND COMPENSATION Panama has no current case of expropriation of property for public or any other use. There are no policy shifts or other indications suggesting that expropriation in the near future is likely. Although the Government of Panama did decide in 1993 not to sell publicly owned land (in Chiriqui Province) to U.S. investors, there are no large enterprises at special risk of expropriation. Beyond the OPIC insurance prohibition discussed below (Section on OPIC Investment Insurance), the Government of Panama does not in general discriminate against U.S. or other foreign investors. There is a constitutional prohibition against foreign land ownership within ten kilometers of a national border or on an island. Neither Panamamanian citizens nor foreigners may own beaches or the shores of rivers or lakes. Builders and investors generally rent the land for 20-30 years, via the Ministry of Finance. The new tourism incentives law expands this period for up to 40 years. DISPUTE SETTLEMENT Disputes with foreign investors are rare. Where they have occurred, they have involved special circumstances not likely to be repeated. Most notable business complaints have involved individuals who have not fully pursued remedies available to them via the court system. Panama has a court and judicial system, like many Latin American countries, built around a civil code, rather than the Anglo-American system of reliance upon 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. Business, corporate, and banking laws are relatively modern and sophisticated and in general are enforced so as to create a favorable business climate, although there is no modern bankruptcy law. Mortgages, liens, and other security interests are recognized. There is a public property registry, now undergoing expansion and modernization. The judiciary is independent, in law and practice, of the executive branch of government. 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 advisable in many cases. In its bilateral investment treaty with the United States, Panama recognizes the "additional facility" of the International Center for the Settlement of Investment Disputes (ICSID) as a potential means of resolving disputes with foreign investors outside of Panamanian courts. PERFORMANCE REQUIREMENTS/INCENTIVES There are no performance requirements such as minimum export percentages or significant local procurement rules. There are special tax and other incentives for manufacturers to locate in an Export Processing Zone (EPZ), the only active one of which currently is at Isla Margarita, outside Colon (notional but inactive EPZ's exist at Ojo de Agua and Telepuerto). (Refer to Section VI - Export Processing Zones for detailed information.) Tax incentives are available to manufacturers, wherever located in Panama, who produce wholly or partially for export, in proportion to the percentage of product exported. There may, as a matter of administrative practice, be an official preference for local procurement of certain types of business insurance. Several tourism incentives laws provide, among other measures, tax exemptions for vehicles and other designated goods imported for use in, or to construct infrastructure for, the tourist sector. Tax incentives are available to small businesses (less than 10 employees) and to certain types of agricultural production and investment, especially where production is for export. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT With the exception of retail trade and certain 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 Panamanian passports) are readily obtainable for significant investors. Banking, legal and financial services and the legal regime are strongly oriented toward attracting foreign business and banking activity. Panama's privatization framework law does not distinguish between foreign and domestic investor participation in prospective privatizations. The law calls for pre-screening of potential investors or bidders in certain cases to establish technical viability, but nationality and Panamanian participation are not a criteria. Foreigners have participated actively in all privatizations to date. Privatization (in whole or in part) of state- owned entities such as the national telephone company (INTEL), the National Power and Light Company (IRHE), and the National Water Company (IDAAN) will require separate laws. Privatization of these high-visibility, politically sensitive enterprises has been debated vigorously. There are likely to be limits on foreign investor participation if indeed the core utilities are ever privatized. There are no sectors in which private enterprises compete directly with public enterprises. (Refer to the Privatization portion in this Section for more information). PROTECTION OF PROPERTY RIGHTS Intellectual Property Rights Panama is a member of the World Intellectual Property Organization (WIPO), the Geneva Phonograms Convention, the Brussels Satellite Convention, and the Universal Copyright Convention. Although Panama is not a member of the Bern Convention for the protection of Literary and Artistic Works or the Paris Convention for the Protection of Industrial Property, the Government of Panama has submitted to its National Assembly legislation for Panama to accede to the Paris Convention. In general, protection for intellectual property rights in Panama is less than adequate in several areas and Panama is on the Special Mention List for Special 301. Panama's adherence to other major international conventions on intellectual property rights offers more protection to foreign rights-holders than is available under current Panamanian Law. The U.S.-Panama Bilateral Investment Treaty, negotiated in 1983 but not put into effect until 1992, does not contain an intellectual property annex. In 1994 representatives of some U.S. industrial sectors alleged Panama provides inadequate trademark and copyright protection and complained of excessive delay in the enactment of pending legislation to strengthen intellectual property protection. The National Assembly as of June 1994 had before it one draft bill which would modernize copyright protection and another which would strengthen industrial property protection (patents, trademarks, and trade secrets). U.S. industry representatives have strongly supported passage of both bills. The Government of Panama is working to improve customs controls and is taking other steps to improve enforcement of existing law in the Colon Free Zone, where copyright and trademark infringing activity has allegedly been heaviest. Patents The current Panamanian draft law on industrial property is modeled after Mexico's new, world- class industrial property law. The Panamanian draft law would provide 20 years of patent protection in place of the current period of 5 to 15 years for foreigners and 5 to 20 years for Panamanians. The bill would grant patent protection from the date of filing. Pharmaceutical patents would be granted for only 15 years, but could be renewed for an additional ten years, if the patent owner licensed a national company (minimum of 30 percent Panamanian ownership) to exploit the patent. There are however, several important weaknesses in the current draft law. Compulsory licensing provisions fall below GATT (chapter on Trade-Related Aspects of Intellectual Property, or TRIPS) standards. In addition, the bill excludes numerous subject matter areas and several specific items from infringement protection in a matter incompatible with the TRIPS agreement. The bill also provides for protection of trademarks, simplifying the process of registering trademarks and making them renewable for ten-year periods. Although complaints of inadequate intellectual property laws and enforcement have not focused on them, trade secrets currently have little formal protection. The draft industrial property law, however, would provide specific and adequate protection for trade secrets. Copyrights The National Assembly is also considering a comprehensive copyright bill, based on a World Intellectual Property Organization model. The bill modernizes existing law, provides for payment of royalties, facilitates the prosecution of copyright violators, protects computer software, and makes copyright infringement a felony. There is widespread support for the improvement of copyright protection in Panama, although some powerful domestic interests oppose the current bill. If passed in its present form, the copyright bill would give Panama a thoroughly modern law. It is possible significant modifications will be made to any law which is actually passed. Even if the bill as now written is passed, however, key issues would remain before copyright owners would be assured of a modern, completely investment-friendly copyright regime. Necessary elements of such a regime would include effective enforcement by government authorities of the new statute, as well as the ability of Panama's judicial system to provide speedy and effective remedies for private civil litigants under the law. Panama's current copyright registration and patent and trademark registration capabilities need to be upgraded in any case. REGULATORY SYSTEM Transparency Government regulation and occasional intervention in the Panamanian economy have tended to reduce transparency, hinder competition and the efficient allocation of investment. The government's economic liberalization program is designed to reduce these distortions and increase competition and competitiveness, but has fallen short in some areas. Government-administered price controls remain on a number of agricultural products, such as feed grains and poultry, and on a mix of designated food items and other staples (the basic shopping basket, or "canasta basica"). High nominal tariff protection, and high effective protection (non-tariff barriers) keep some product prices artificially high and discourage the development of efficient export- oriented firms. Incident to Panama's pending application to join GATT, Panama's tariff structure is being adjusted, and non-tariff barriers are to be tariffized. Factors Affecting Investment Overregulation of hiring and firing practices reduces labor mobility and flexibility. Public enterprises provide high-cost public services, with no more than partial privatization likely in the near future. The National Labor Code ranks with the most pro-labor in the world. The combination of relatively high costs for both utilities and labor makes unit costs higher than average for the region. Although the Panamanian constitution forbids certain kinds of monopolistic behavior, Panama has no modern competition or anti- trust laws, policy, or regulatory authority now in place. A low-level working group has been formed to examine the possibility of a competition regime for Panama, but no formal legislative proposals yet exist. Oligopolistic distortions in many domestic markets are unchecked, and contribute to continuing support for food price controls. Consumers have few rights, although the Ministry of Commerce and Industry has the authority to enforce the very limited consumer protection laws which do exist. An accommodating bankruptcy law to facilitate the restructuring of firms, such as Chapter 11 in the U.S. does not exist in Panama. Panama's banking sector is regulated by the National Banking Commission (CBN), which coordinates government policy with bank executives represented by the National Banking Association (ABP). The continued success and vigorous growth of the banking sector is directly attributable to the very business and depositor-oriented laws, passed in the 1970's, which govern this sector. In April 1993, a law was passed creating tax incentives for the creation of voluntary pension funds (IRA's) by individuals or corporations. The tax system promotes savings and investment by giving a wide variety of incentives and maintaining rates which are comparable to those in the U.S. The maximum personal income tax rate is 30 percent and the maximum corporate rate is 34 percent of domestically produced earnings. Other formal legal, regulatory, and accounting systems are relatively transparent, but their enforcement is diminished somewhat by certain non- transparent aspects of legal practice and the judicial process. The overall regulatory and supervisory framework is weak. CAPITAL MARKETS AND PORTFOLIO INVESTMENT Stock market financing is limited due to the small size of the national stock exchange, and the limited liquidity which is therefore available. Bank and non-bank financing is available on market terms to private domestic and foreign investors. Panamanian interest rates closely follow international rates (i.e., the London Interbank Offered Rate - LIBOR). Traditional bank lending from the well- developed banking sector is relatively efficient and is the most common source of financing. Some private companies -- including foreign multinational corporations -- have issued bonds on the fledgling local securities market. Companies rarely issue stock on the local market. When they do, investor demand is limited because there is a 10 percent withholding tax on dividends, although company earnings on the exchange are tax exempt (Fixed bank deposits and certain bonds are tax-exempt.). A bill currently pending before the National Assembly would allow the creation of and trading by mutual funds on the Panama Stock Exchange. The private sector does have access to a variety of credit instruments. International accounting norms apply. Cross-shareholding or stable shareholder arrangements, designed to restrict foreign investment through mergers and acquisitions, do not exist. There are no restrictions on or customary 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. The constitutional prohibition on foreign ownership of retail enterprises is discussed above. There are no government or private sector rules to prevent foreign participation in industry standards-setting consortia, such as ISO-9000. BILATERAL INVESTMENT AGREEMENTS Panama has bilateral investment agreements with the United States, the United Kingdom, France, Switzerland, Germany and Taiwan. Panama is not a party to any agreements providing for 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 awaiting ratification by the National Assembly. OPIC INVESTMENT INSURANCE PROGRAM OPIC is supporting several U.S. investments in Panama. In general, modest expansion of OPIC programs is likely. Panama appears ready to rescind its requirement that Panamanian Government approval be obtained for any OPIC-insured investment in Panama, thus removing a major bureaucratic burden on investment here, and upgrading an already favorable national investment climate. Panama has approached the World Bank to join its Multilateral Investment Guarantee Agency (MIGA), which provides investment guarantees similar to OPIC, but has been unable to join to date due to budgetary limitations; a government proposal to fund MIGA membership is pending. LABOR CODE Labor/management relations are governed by a labor code that defines conditions and terms of employment in great detail and establishes minimum terms of employment that rank with the most pro-labor in the world. The result has meant that employers tend to economize on the use of labor by adopting labor-saving processes and favoring capital-intensive vs. labor-intensive production. There is increasing pressure to modify the current labor code to make it less restrictive and encourage more investment in employment-creating jobs. The new government is expected to address Labor Code reform early on in its Administration. The present labor code is viewed by many investors as too favorable to labor. In particular, the difficulty in discharging workers, restrictions on labor flexibility and constraints against productivity-based pay (such as piece- work) are usually cited. (Refer to Section III for information on the Labor Force.) FOREIGN DIRECT INVESTMENT STATISTICS The following tables provide data on the value of foreign direct investment (FDI) in Panama for the years 1980 - 1992 (preliminary for 1992), FDI by country of origin for 1992, and FDI by industry sector destination for 1979 and 1992. The sources are the office of the Comptroller- General and the IMF. There are no comparable data on Panama's direct investment abroad. MAJOR U.S. INVESTORS * American Airlines * American Express Services * American Foreign Insurance Assoc. * American Hospital Supply Co. * American Life Insurance Co. * Amway International * Armour Company * Arthur Anderson & Co. * AT&T * Bank of America * Becton Dickinson & Co. * Black and Decker International Corp. * Booz-Allen & Hamilton, Inc. * Borden Co. * Braswell Service Group * Bridgestone/Firestone Int'l. * Bristol Laboratories International Corp. * Brown & Williamson * Budget Rent-A-Car Corp. * Burger King * Challenge Air Cargo * Chase Manhattan Bank, N.A. * Cheesebrough Pond's Int. Ltd. * Chiriqui Land Company (Chiquita) * Chevron Corp. * Citibank, N.A. * Coca-Cola Bottling Co. * Colgate Palmolive (Central America), Inc. * Continental Insurance Co. * Cyprus Minerals Co. * Del Monte Corporation * Deloitte Haskins and Sells * DHL * Digital Equipment Corp. * Diner's Club Int'l. * Dole Foods Co. * Eastman Kodak Company * Emery Worldwide * Empire Brushes Inc. * Environmental System Research Institute * Ernst & Young * Exxon Corp. * Esso Standard Oil, S.A. * Firestone Tire & Rubber Co. * First National Bank of Boston * Freeport Exploration Co. * General Mills Inc. * Georgia Pacific Corp. * Glidden - Durkee * Goodyear Tire and Rubber Co. * Griffith Laboratories, Inc. * GTE * H. B. Fuller Co. * Hertz Corporation * Hospital Corporation of America * IBM * International Dairy Queen * International Proteins Corp. * International B. F. Goodrich Co. * Jenny Manufacturing, Inc. * Johnson and Johnson * Kendall Company * Kentucky Fried Chicken Corp. * Ketchum Public Relations * Kimberly-Clark International, S.A. * KPMG Peat Marwick * Kraft Foods, Inc. * Lanier Worldwide, Inc. * Lykes Line * M & M Mars * Manpower Inc. * Marine Midland Bank * McDonald's Corporation * Merrill Lynch, Pierce, Fenner & Smith Int'l * Minnesota, Mining & Manufacturing * Nabisco Brands Inc. * National Car Rental * National Union Fire Ins. Co. * Northville Industries Corp. * Otis Elevator Company * Chas. Pfizer & Company, Inc. * Pan American Life Ins. Co. * Chas. Pfizer & Company Inc. * Perisco Int'l. * Pizza Hut * Phelps Dodge Corp. * Phillip Morris, Inc. * Price Waterhouse & Company * Republic National Bank * Revlon Inc. * Rubbermaid Inc. * Schering Corp. International * Seaboard Marine Ltd. * Sherwin Williams * The Gillette Co. * The Singer Company Inc. * Sterling Drugs International * Swift and Company * Syntex Corporation * Technoserve Inc. * Texaco Inc. * Touche Ross & Company Int. * TRT Telecommunications Corp. * Twentieth Century Fox * United Brands * United Parcel Service * UNYSIS USA * Wang Laboratories Inc. * Warner Lambert Co. * Xerox Corp.