1 ‐ Free Zones (also known as Special Economic Zones/Areas) are typically areas in which has been reduced or eliminated for .

‐ Countries throughout Europe, Asia, and Latin America (including China and India) use SEA’s as the cornerstone of their promotion agendas. SEA’s boost local economies, increase export volume, and attract international business.

‐ Entities that operate in Free Zones serve two purposes: ‐ 1. They export goods from domestic producers to the international market. ‐ 2. They and redistribute goods from international, large‐market producer‐ exporters. ‐ An entity offering redistribution services should be “established” in a Free Zone, typically having subscribing to a contract with the Free Zone government (e.g., Lot Rental Contract or Operations Permit Contract), and should be able to furnish an Operations Permit showing its authorized level of activity in the Free Zone.

‐ Example of Free Zone success: Manaus [maˈnaws], Brazil ‐ Located where the Rio Negro and the Rio Solimões [sü‐lē‐mȯish] form the Amazon river. ‐ Once the center of Brazil’s relatively isolated economy, Brazil made Manaus a Free Economic Zone in 1960 and given an autonomous government agency with legal personality and its own administrative and financial autonomy a short time later. ‐ The Free Zone led to a boom in prosperity. Today Manaus is a finance center with global relationships.

2 is one of the largest economies in Latin America.

• $15.25 billion infrastructure projects • $280 million in U.S. exports in 2010 • 6.2% annual expansion through 2015

California’s Panama business connection is growing – quickly.

• This $450 million figure is up from an average of $276 million in 2008-2010. • The “Computer & Electronic Products” category is NAICS 334’s definition: “Industries . . . that manufacture computers, computer peripherals, communications equipment, and similar electronic products, and establishments that manufacture components for such products.”

3 (Note. Panama Pacifico is sponsoring this panel.)

• Panama has several Free Zones similar to Manaus. Free Zones attract activity by giving exporters and redistributors preferential tax treatment. The better tax treatment an exporter or redistributor gets, the cheaper a producer or producer‐exporter can deliver its goods to global markets. • This table shows the tax benefits of operating in either of the two largest areas.

In case the moderator didn’t give specific numbers: Colón Free Zone: • Purpose: Considered the "Trading Showcase" of Central and South America, and allows of easy regional distribution of wholesale goods. • Over 1,700 companies established and help producers, producers‐exporters (or themselves!) reach a market of 525 million consumers. • $6.5 billion exports and re‐exports passes through the zone. • Products include electric appliances to pharmaceutical products, liquor, cigarettes, office and home furniture, clothing, shoes, jewelry, toys, etc. • Requirements for a company to start a business in the CFZ (as opposed to exporting to a CFZ importer): • Any nationality allowed. • Must become incorporated in Panama and able to provide bank references and pay operating costs. • Commercial license / minimum investment amount not required. • If owned by a foreign person, must employ 5 or more Panamanians. 4 • This chart pertains to the Colon Free Zone.

• Using the Colón Free Zone as an example, we see that activity in the zones is increasing –even in the “global meltdown” years, and that its increase substantially accelerated in 2011.

5 The Trade Promotion Agreement (TPA) eliminates tariffs on U.S. exports into Panama, further reducing cost for U.S. exporters to engage with entities in Free Zones to deliver products to global markets.

% = The percent of products in each category have an immediate cessation of tariffs; remaining tariffs will be phased out within 10-15 years.

A U.S.-Panama TPA offers U.S. companies a tax-friendly entry into Panama’s Free Trade Zones, and thus into many Latin American markets. • Consumer / Industrial Exports: • Immediate cessation of tariffs on (not displayed): Agricultural and construction equipment, machinery, aircraft and parts, environmental products, fertilizers, and agro‐chemicals. • “Electronics / Technology Equipment” includes: • 91% of electrical equipment • 98% Information & Communication Technology equipment • Agricultural Exports: • Immediate cession of tariffs on: high‐quality beef, frozen turkeys, sorghum, soybeans, soybean meal, crude soybean and corn oil, almost all fruit and fruit products, wheat, peanuts, whey, cotton, and many processed products. • ‐free access for specified volumes of standard grade beef cuts, chicken leg quarters, pork, corn, rice, and dairy products through rate quotas.

• Because California is such a large exporter of technology products and other goods, the TPA 6 further advances Californian interests in Panama • In 2008, the U.S. Gov’t Accountability Office listed Panama as a “.” The EU’s Office of Economic Cooperation and Development listed Panama on its “Gray List,” which includes countries that have agreed to (but not yet implemented) a policy reflecting international tax standards.

• To address its tax status, Panama entered into 14 tax agreements with various countries, including the U.S.‐Panama Tax Information and Exchange Agreement (TIEA).

• TIEA: • Formal name: Agreement between the Government of the of America and the Government of the Republic of Panama for Tax Cooperation and the Exchange of Information Relating to . • Signing date: Dec. 1, 2010, effective date: April 18, 2011. Panama was formally removed from the “Gray List” on July 6, 2011. • Purpose: To curb illicit financial transactions associated with money laundering activities. • Scope: • U.S.: Federal income taxes, federal taxes related to employment, federal estate and gift taxes, and federal taxes. • Panama: , real estate tax, vessels tax, tax on financial institutions, insurance tax, consumption and transfer taxes.

• Substance: • Art. 5: • (a): will require resident agents acting for Panamanian entities to obtain and maintain in their records information sufficient to identify the owners of [bearer shares, except] where the resident agent acts for a professional 7 Summary

• Panama’s Free Trade Zones allow California businesses to reach many Latin American markets in just one location. The zones constitute a tax-friendly, strategic gateways into Latin America. Panama is home to the largest free trade port in the Americas and second largest in the world (the Colón Free Zone), and thus represents a strategic jump‐off point for goods to spread into neighboring countries with little tax and transactional cost.

• Panama has enacted several laws and international agreements to bolster legitimate business activities in Free Trade Zones.

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