BOGOTA Colombia on Wednesday declared Panama a tax haven for individuals and businesses as the government looks to curb tax evasion and seeks to pressure the Central American country to sign a financial information-sharing agreement.
The move could push Colombian investors and businesses to pull out of Panama, since assets stored in declared havens are taxed at three times the rate of foreign assets in countries that share data with Colombia.
The decision may motivate Panama to sign an accord rather than risk losing investments.
Under the declaration, Colombian assets in Panama will be taxed at a rate of 33 percent, instead of the previous 10 percent rate, the country's tax authority said. If Panama signs the accord, Colombians will go back to paying the 10 percent.
Colombia's Congress, dominated by a coalition that backs President Juan Manuel Santos, is likely to approve a package of tax reforms aimed at raising an additional $26 billion in revenue and recovering $10 billion lost to tax evasion during the next four years.
The reform would introduce prison sentences for tax evaders for the first time. Any citizen who fails to declare foreign assets worth more than 8 billion pesos ($3.9 million) could face four years in jail.
Colombian investments in Panama more than quadrupled last year to $3.2 billion, and represented 41.8 percent of total foreign investments by Colombians in 2013, according to central bank figures.
The Colombian government stands ready to negotiate an agreement, Finance Minister Mauricio Cardenas said in a statement.
"We will continue to make necessary efforts to find a solution that is satisfactory for both countries," he added.
Panamanian officials quoted by local media said the decision was unfortunate and denied the country was a tax haven.
Business leaders said the decision could put a dent in investments and hurt connections with Panama.
"This will damage economic and political relations with Panama. It's not how you treat a friend," Carlos Raul Yepes, president of Bancolombia BIC.CN told reporters. Bancolombia is Colombia's largest banking group and has interests in Panama.
The decision to add the country to the list will be reversed if a financial information-sharing deal is signed, a finance ministry official said.
"Once Panama decides to sign a tax information agreement it will be excluded," Andres Escobar, the deputy Finance Minister, said on the sidelines of a conference. "As an example, Barbados is on the list but we are very close to signing a deal and they will be taken off."
Along with Barbados, the United Arab Emirates, Kuwait and Qatar were also included on the 41-country list, though they were not on it last year, as the Colombian government sought their signatures on information-sharing accords before the Oct. 7 deadline.
(Reporting by Nelson Bocanegra and Carlos Vargas; Writing by Julia Symmes Cobb; Editing by Jeffrey Benkoe)