The signs of wealth are easy to see in Panama - but how did it get that way, and is there a New Zealand connection?
Having coincidentally spent a few days in Panama just before the Panama Papers were released, a few observations can be made on the effect of its tax haven status on the country. We also need to try to address the question of whether New Zealanders hold assets through the small Central American country or other tax havens.
Panama City - which is undergoing a massive property boom reminiscent of Auckland in the 1980s and Dublin in the 2000s - has the clear signs of a tax haven. It has a huge number of banks and high-rise office buildings and its roads are gridlocked with pricey European cars. Hotel lobbies and coffee shops are populated by middle-aged men - in expensive suits with large gold watches and cufflinks - huddled over documents and talking about "deals".
Many of the conversations are in English and the coffee is paid for in United States dollars, the country's currency.
Panama City also has a 70-floor Donald Trump-owned hotel, which every taxi driver proudly points to, but the Trump Ocean Club International Hotel barely stands out because the city has so many hotels and apartment buildings of 50 floors-plus.
Panama is an important tax haven because it only taxes income earned in Panama; it doesn't tax income derived in other countries. Offshore companies incorporated in Panama, and their owners, are exempt from any corporate taxes, withholding taxes, income tax, capital gains tax, local taxes and estate, inheritance or gift taxes.
Panama also has comprehensive laws to protect corporate and individual financial privacy and the country doesn't have tax treaties with other countries.
This adds further secrecy and protection to its overseas banking clients.
Tax havens are big business, with Gabriel Zucman, author of The Hidden Wealth of Nations, estimating that 8 per cent - US$7.6 trillion - of the world's total wealth is held in these jurisdictions. Zucman estimates that only 20 per cent of this is declared; the other 80 per cent is not taxed.
He estimates that the US has approximately 4 per cent of its financial wealth offshore, Europe 10 per cent, Latin America 20 per cent, Africa 30 per cent and Russia 50 per cent. Wealthy Chinese are increasingly using tax havens but Zucman doesn't appear to have calculated this figure.
Jason Zweig recently wrote in the Wall Street Journal: "By some estimates, at least US$20 trillion in financial assets - not counting art, real estate, precious metals and other physical wealth - is invested in the dozens of countries that offer secrecy and tax avoidance to anyone with a bank account."
James Henry, of the US-based Tax Justice Network, believes that at least US$21 trillion to $32 trillion "has been invested virtually tax-free through the world's expanding hole of more than 80 'offshore' secrecy jurisdictions".
How much New Zealand wealth is held through Panama and how did the small Central American republic become a major player in the global tax haven industry?
The country's tax haven history began in 1903, when the United States backed a move by Panama, which was a province of Colombia at the time, to become an independent state. The move was strongly supported by US President Theodore Roosevelt, and a number of US banks, to facilitate the completion of the Panama Canal.
The Canal, which began operating in 1914, gave a huge boost to US trade and the country's commercial interests.
Shortly afterwards, Panama began registering ships, particularly those carrying US-produced oil. This Panamanian ship registration facility allowed US oil companies to avoid some of their domestic tax obligations.
By some estimates, at least US$20 trillion in financial assets ... is invested in the dozens of countries that offer secrecy and tax avoidance to anyone with a bank account.
Panama's tax haven status got a big boost in the 1970s when the US government tightened its tax evasion loopholes.
The Central American country also benefited from moves to require the Swiss government - and the country's banks - to become more transparent.
Panama, which has a population of nearly 4 million, is booming. Its economy grew by 8.4 per cent in 2013, 6.2 per cent in 2014 and 6.0 per cent last year, with the services sector contributing over three-quarters of this growth.
It has GDP per capita of US$20,900, on a purchasing power parity basis, while its two neighbours, Colombia and Costa Rica, have GDP per capita of US$14,000 and US$15,500 respectively.
It obviously pays to be a tax haven, as Colombia and Costa Rica have both experienced much slower economic growth than Panama in recent years.
The release of the Panama Papers brought the usual outpourings from right and left oriented commentators. A columnist in Canada's Financial Post argued that "whatever estate-planning methods law-abiding people are taking advantage of are entirely none of our business". He argued that if Canada had lower taxes, it would save "everyone the cost and trouble of resorting to Panamanian lawyers and Caribbean accountants".
A Wall Street Journal columnist argued that the problem was not tax havens, but corrupt regimes in many developing countries. He wrote: "In much of the world the distinction between criminal and politician is non-existent, and there would be no economic activity at all if wealth holders couldn't make assets hard to trace." He added: "Walk down Panama City any night and notice all the apartments where lights never come on - vacant and held as offshore assets by Russian, Chinese, Ukrainian and other oligarchs. The crying need is for reform of the home countries, not the legal systems of their hidey-holes."
Commentators on the left, particularly on social media, took the opposite point of view. They believe that an individual's wealth should be subject to full public scrutiny and the rich have access to loopholes that enable them to avoid paying their fair share of tax.
Tax avoidance used to be an issue in New Zealand but this is no longer the situation. This column believes that very few New Zealand residents use Panama or other tax havens.
In May 2001, I wrote a Herald column under the heading "Tax exiles cost NZ more than lost cash", which was criticised by a number of tax lawyers and accountants. They didn't argue that the column was inaccurate; they just couldn't understand why anyone would be interested in the financial planning of wealthy individuals. This is a similar point of view to that expressed by the Canadian Financial Post columnist quoted above.
The 2001 column noted that any individual can avoid paying New Zealand tax by leaving the country for 325 days in any 365-day period and taking their family with them. They must also sell their primary residence and have no intention of returning, thereby severing their "enduring relationship" with the country.
In the 1990s and early 2000s a number of wealthy New Zealanders moved to Britain, where under certain circumstances they would not be liable for British tax on earnings derived outside Britain.
The exodus to Britain appears to have ended and this column believes that very, very few New Zealanders, who remain domiciled in New Zealand, have their money in offshore tax havens.
The reason for this is that we have relatively low income tax rates, low corporate tax rates and no capital gains tax, withholding taxes or estate, inheritance or gift taxes. The desire to avoid these taxes is one of the main reasons individuals invest through Panamanian trusts and other tax havens.
The use of family trusts in New Zealand is a much bigger issue than the use of offshore tax havens, as is the avoidance of tax by multinationals operating in this country.
In other words, large companies rather than individuals are the major tax issue these days.
In light of this, it is important to remember that two New Zealand companies, Brierley Investments and Richina Pacific, moved their registration to Bermuda, a tax haven country, and both of these had a number of knights, dames and former prominent politicians on their boards.
Disclosure of interests; Brian Gaynor is an executive director of Milford Asset Management.
