New double taxation agreements with former tax havens: Distrust persists, with Panama as an example

11.2015

Building on a previous article where we discussed recent changes in international tax information exchange, it is important to emphasize that this is still a very recent process, one that requires significant adjustments within national administrations. It will take several more years before these new methods of information exchange become fully operational. Correcting the historical inertia, which, on the one hand, involves the lack of information exchange between national tax administrations, and, on the other hand, the distrust between these very same administrations—along with the political and legal challenges this brings, even within the EU—remains a highly complex task.

When it comes to countries that were, until recently, considered tax havens, distrust still lingers. For this reason, national administrations, including Spain’s, are very reluctant to remove a country from their list of tax havens (in Spain’s case, Royal Decree 1080/1991). Evidence of this can be seen in the recent double taxation agreements signed with some of these countries, which include anti-abuse provisions and even specify the non-application of the agreement’s rules in certain cases.

A notable example is the recent changes between Spain and Panama. This double taxation agreement, effective since late 2011, includes a number of anti-abuse clauses. Thus, it can be observed that, while the agreement exists, it provides for its non-application with regard to certain clauses (such as those concerning specific types of income) unless certain requirements are met. It should be noted that the wording of these provisions is somewhat ambiguous.

In Protocol No. 7 of the agreement with Panama, it is stated that "Articles 6 to 22 of the Agreement shall not apply (...) 1) to entities resident in a contracting state when the income earned is exempt in that state due to the fact that the services provided have effects outside that state, unless they are related to storage or manufacturing activities carried out in that contracting state." If any of these anti-abuse measures are applied, it is concluded that some parts of the agreement will be applicable, while others will not.

This phenomenon is new and places the Spanish taxpayer in a position of uncertainty. A double taxation agreement always offers more security for investments by limiting the discretion of the administration. If part or all of an agreement is not applied, the situation reverts to the status quo prior to the existence of the agreement, where only national law was applicable. This national law is, by definition, unilateral and more protective of the interests of the Spanish administration.

Regardless of the non-application of certain aspects of the double taxation agreement between Spain and Panama mentioned above, it should be emphasized that Law 36/2006, which introduced "measures to prevent tax fraud," defined "low-tax jurisdictions" (a classification that currently applies to Panama, as the new agreement has removed it from the OECD blacklist and Spain’s list of tax havens).

Moreover, if the information exchange clause is not effectively applied, the Spanish administration may declare that the country is once again on the list of tax havens. In this context, the relevant issue is not so much the substantive rule (which may exist on paper), but whether it is actually implemented in a manner that benefits the Spanish administration. If not, that country—even if it has a valid double taxation agreement—will return to the blacklist.

Therefore, it must be concluded that the existence of an agreement between Panama and Spain does not guarantee that, in a couple of years, Panama will not be added back to the blacklist of tax havens. However, given that this agreement was signed very recently, it is unlikely that this penalty (re-entering the blacklist soon after having been removed) will be formally enacted in the coming years. Only in the event of repeated and serious non-compliance with Panama’s obligations would Spain be forced to take this exceptional measure.