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Panama. As you will remember, the question of taxation of U.S. businesses was a matter of great concern to the Congress, and I wonder if you could bring us up to date on this issue.
Mr. BLUMENFELD. Certainly.
[The information follows:]
PROCEDURAL GUARANTEES
The Government of Panama has assured us that the annexes to the two implementing agreements to the Treaty which contain the procedural guarantees in question are self-executing under Panamanian law. Until a contrary statement or action is taken, we are prepared to accept these Panamanian assurances.
Our attitude in this regard parallels the view we have repeatedly expressed regarding the Panama Canal Act and our actions under it. We have asked Panama to judge us on our actions; in effect, we have said that how we fulfill our Treaty obligations through our internal law should not be of particular concern to Panama, as long as our actions comport with the requirements of the Treaty.
The same holds true of Panama--we are not inclined to question its internal legal procedures unless they would clearly result in actions inconsistent with the Treaty. To date we have been given no reason to believe that Panama will fail to provide the full range of guarantees required by provisions of the Treaty and related agreements.
Recognizing the importance of these procedural guarantees to the morale of our citizens, our Embassy has been instructed to monitor this situation closely. A full and detailed comment on this section of the GAO repoi t is under preparation.
TAXATION OF CONTRACTORS
Before addressing the contractor taxation issue raised in the GAO report, it is important to make clear that this problem is completely separate from the issue of retroactive taxation by Panama of enterprises in the former Canal Zone which came up several times during the Congressional consideration of the Treaty implementing legislation. This issue was fully resolved at that time and remains so.
The GAO report's discussion of contractor taxation concerns the provisions of the two major Treaty implementing agreements which provide for post-Treaty exemption of designated contractors from Panamanian tax under certain circumstances. Both governments clearly agree that this exemption is valid and effective, but dicussions are proceeding to better define the circumstances in which it applies.
Designated contractors are exempt from Panamanian tax under the implementing agreements providing they are subject to "substantially equivalent" United States tax. This language reflects an effort by the negotiators: (a) to avoid subjecting the U.S. Government to an indirect tax which might result from the imposition ot a Panamanian tax on such contractors, and (b) to avoid giving U.S. contractors a "tax free" competitive advantage over their Panamanian competitors in bidding on contracts.
What has developed in the implementation of this provision can be described fundamentally as a definitional problem involving the term "substantially equivalent." This Treaty language was based on certain technical assumptions on how the tax laws of the two countries would be applied; in practice, the situation has proven to be more complicated than these assumptions.
A U.S. team composed of representatives of the Departments of Defense, Treasury and State, and including international tax law specialists, has been meeting with their Panamanian counterparts in an effort to work out a mutually satisfactory procedure to put this Treaty provision into practice. As a result, substantial progress has been made, to the point where only a handful of areas remain unresolved.
Another series of meetings has been scheduled for the week of June 23 here in Washington. As the GAO report states, a mutually satisfactory solution to this complex, technical issue has required time, dedicated and expert effort, and cooperation. We think we are close to a resolution of this matter which meets the requirements of the Treaty and its agreements, as well as the tax laws of the two countries.