The Ambassador in Panama (Dawson) to the Secretary of State

No. 799

Sir: I have the honor to report that the Star & Herald of November 19 carried a news item referring to an order from the Chief of Internal Revenue of Panamá to collect national taxes from employees of private enterprises established in the Canal Zone and commenting that the decision to collect such taxes is based on the administration’s thesis that the Republic maintains fiscal sovereignty over the entire territory of the Canal Zone.

Upon investigating the origin of this news item, the Embassy ascertained that the Panamanian General Administration of Internal Revenue has for some time been trying to have the West India Oil Company, S. A., pay the “Fondo Obrero” tax (See Despatch No. 708 dated April 10, 193945) for the employees of their branch operating in the Canal Zone, as well as that being paid for all their other [Page 469] employees in Panamá. On November 13 President Arnulfo Arias upheld in its entirety the decision of the Secretary of the Treasury, Resolution No. 251, dated August 30, 1940, that the West India Oil Company, S. A., branch in the Zone is not an auxiliary work of The Panama Canal or of the Panama Railroad, and that the employees thereof, even when they reside in the Zone, are therefore not exempted from taxation by Article III of the treaty of 1936;46 that since the Republic maintains fiscal jurisdiction in all the territory of the Canal Zone the employees of that company are subject to the “Fondo Obrero” tax; and that the company is therefore under the obligation of discounting and sending to the collecting office the monthly percentage deductible from the salaries of those employees. (Resolution No. 251 of August 30, 1940, was published in the Gaceta Oficial, No. 8368, dated October 8, 1940. Since the Spanish text of this resolution is available to the Department in the Gaceta Oficial, there is enclosed only an informal English translation thereof.47 So that the Department may have a complete record of the contentions set forth by the Government of Panama in arriving at this decision, there is also enclosed the Spanish text of the Executive Order, No. 580, dated November 13, 1940, which has not yet been published in the Gaceta Oficial,48 and an English translation thereof.)

I should like to call to the Department’s attention that the oil company’s appeal contended that having a direct relation to the functioning of the Canal, neither the branch nor its employees were subject to Panamanian taxation under Article III, Section 5, of the general treaty of March 2, 1936, and under Article X of the treaty of November 18, 1903.49

So soon as the decision of President Arias was announced, the Sub-secretary of Government and Justice wrote to the Administrator of Internal Revenue, instructing them to demand from all private enterprises established in the Zone “the payment of national taxes which may be applicable in each particular case, in accordance with the thesis sustained by the Government that the Republic retains its fiscal sovereignty in all the territory of the Canal Zone.” To complete the Department’s file, a copy of the Spanish text, obtained informally by the Embassy, and a translation of this letter, No. 691, dated November 13, 1940, are enclosed.47 This letter indicates that it is the intention of Panamá to levy all taxes, not only the “Fondo Obrero”, on private firms established and operating in the Zone.

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In the past few days the Embassy, as well as the Executive Secretary of The Panama Canal, has received requests for advice from numerous firms established in the Canal Zone as to what stand they should take towards the letters they have received from the Panamanian Internal Revenue authorities requesting a complete list of all their employees and their salaries. In discussing this matter with officials of The Panama Canal, it has been felt that since it involves the question of treaty rights it would be better, before communicating in any way with the Panamanian authorities, to submit the matter to the Department for instructions. Thus far the Embassy and the Executive Secretary have limited themselves to suggesting to inquirers that the replies to the letters from the Internal Revenue officials of the Government of Panama be confined to a simple acknowledgment with a statement that the matter is being brought to the attention of The Panama Canal under whose regulations the particular concern is established and operates within the Canal Zone.

In submitting this matter to the Department, I should like to call attention to the complications arising out of the varied set-ups of the different firms operating in the Zone. The West India Oil Company, S. A., for instance, is organized under the laws of Panamá, with head office in Panama City, maintaining in the Zone only branches directly subordinate to this Panamá corporation. The branches of the National City and Chase National Banks operating in the Zone are technically separate from those in Panamá and are directed from the head offices in New York, although in most instances the managers of the branches established in Panamá City and in Colón are also managers of the branches established in the Zone. Most of the shipping companies have branches both in the Zone and in Panamá, with interchangeable personnel, although a few have offices in the Zone only. Both the Standard Fruit and United Fruit enterprises have their offices in the Zone, and, in the case of the Standard Fruit Company, the manager thereof has informed the Embassy that they carry on no operations, either directly or indirectly in Panamanian territory, limiting their activities on the Isthmus to shipping and to purchasing bananas delivered to them in Cristóbal, upon which the Panamanian export tax has been paid. The Ford Company in Cristóbal conducts a great deal of business in Panamá and most of its employees are Panamanians living in Panamá. Consideration of this tax question is further complicated as it involves Panamanians and non-Panamanians, some of whom reside in the Zone, and many, nationals and otherwise, living in Panamá.

I should like to mention further in this connection that these firms operating within the Zone are not subject to taxation by the United [Page 471] States, except the nominal license fee exacted by The Panama Canal; that some of their employees reside within the Zone, but that the majority, although no exact data are available thereon, probably live in Panamá; that the employees of these private enterprises, as distinct from the gold employees of The Panama Canal and workers within Panamanian territory, are not covered by any retirement or benefit fund. Since a good proportion of them are Panamanian citizens and living within Panamanian territory, it probably would be advantageous to the workers themselves to make them eligible to the benefits of the “Fondo Obrero”.

It is feared, however, that the Panamanian authorities have picked out the “Fondo Obrero” as the most plausible wedge for eventually establishing its contention of having fiscal sovereignty in the Zone, and that, if it is able to maintain the position in regard to the “Fondo Obrero”, it might lead to attempts to make private firms in the Zone subject to all Panamanian taxes.

Respectfully yours,

William Dawson
  1. Not printed.
  2. General treaty of friendship and cooperation between the United States and Panama, signed at Washington, March 2, 1936; for text, see Department of State Treaty Series No. 945, or 53 Stat. (pt. 3) 1807.
  3. Not printed.
  4. For text, see Panama, Gaceta Oficial, No. 8406, December 4, 1940, p. 3.
  5. Foreign Relations, 1904, p. 543.
  6. Not printed.