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The United States Congress is currently at odds with itself over the signed-but-not-yet-ratified US-Panama Free Trade Agreement (FTA), with anti-offshore hawk Senator Carl Levin insisting that the deal should not be ratified until issues surrounding the Latin American’s nation’s ‘tax haven’ status are resolved. However, the leading figures on the Senate Finance panel argue that the importance of the deal to the US economy overrides concerns about tax transparency, at least in the short-term.

In a letter dated May 20, Michigan Democrat Levin, along with Congressman Lloyd Doggett, a Texas Democrat, urged the President to make approval of the Panama FTA “contingent on Panama’s cooperation with efforts to combat international tax evasion.”

“In this time of economic distress, we can no longer afford to ignore the billions of dollars of tax revenue lost to the US Treasury due to the bank secrecy practices of Panama and other tax havens,” they wrote. “Implementing an agreement on trade while ignoring Panama’s status as one of the world’s recognized tax havens would not only undermine your efforts to address offshore tax evasion, but would also thwart the best opportunity our nation will have to obtain cooperation from a country that has resisted for years American efforts to encourage changes to its secretive banking and regulatory practices.”

Dogget and Levin claim that the US Treasury loses USD100bn a year in tax revenues to offshore jurisdictions. However, this figure is much disputed and even Internal Revenue Service Commissioner Doug Shulman admitted in recent testimony to the House of Representatives Appropriations subcommittee that such ‘tax gap’ calculations are nothing more that “wild estimates” using “pretty broad numbers.”

Panama is currently named on the Organization of Economic Cooperation and Development’s (OECD) ‘grey list’ of jurisdictions that have committed to the “internationally agreed tax standard” but not yet “substantially implemented” it. To achieve elevation to the OECD’s ‘white list’ a country must sign Tax and Information Exchange Agreements with a minimum of 12 other countries. Unsurprisingly, the United States appears on the OECD ‘white list’ despite concerns from ‘grey-listed’ such as Luxembourg and Switzerland that company laws in some states, including Delaware and Nevada, appear to directly contradict the transparency standards that the federal government claims to uphold.

Panama has yet to enter into any bilateral or multilateral tax data sharing agreements, but according Senator Max Baucus, the Montana Democrat who chairs the Senate Finance Committee, which has jurisdiction over federal tax and trade laws, Panama has “made clear” that it intends to address this situation and he called on administration to send the agreement to Congress as soon as possible.

“American workers and ranchers in my home state of Montana and across the country have much to gain from the US-Panama Trade Agreement,” he said following a Finance Committee hearing on the matter. “Well over 90% of Panama’s products currently enter the United States duty-free under our trade preference programs. It is high time that US products get similar treatment in Panama. The time to move the FTA is now.”

“Both the current and incoming administrations in Panama have made clear that they are willing to take the necessary steps to change their tax laws and share tax information with the United States,” Baucus continued. “We should move forward on both fronts—expanding our trade ties and addressing our tax issues—before the opportunity to secure the best possible trade deal is lost.”

Senator Chuck Grassley, the ranking Republican on the Finance Committee, said during the hearing that he welcomed a report claiming Panama’s Vice President has committed Panama to negotiating a legally binding instrument this year to facilitate the exchange of tax information with the US. However, he argued that such an undertaking should not be a pre-condition of the trade agreement being sealed.

“I fully support concluding a Tax Information Exchange Agreement with Panama as soon as possible,” he said. “But I don’t see why our exporters should have to pay for that agreement with lost export opportunities, which is exactly what’s happening.”

“I urge the Administration to submit the US-Panama Trade Promotion Agreement to Congress for approval next month,” Grassley went on to add. “We can, and should, pursue both priorities simultaneously.”

Dogget and Levin are the authors of a hard-line anti-offshore bill known as the Stop Tax Haven Abuse Act which would, among its many provisions, treat foreign corporations managed and controlled in the United States as domestic corporations for income tax purposes, create a ‘blacklist’ containing 34 jurisdictions, and dramatically strengthen penalties against tax shelter promoters.

While the Dogget/Levin bill faces competition from less stringent proposals due to be introduced by Baucus, Obama was a co-sponsor of an earlier version of the Stop Tax Haven Abuse Act while sitting in the Senate in 2007, and has placed elements of these legislative proposals in his 2010 budget. These include elimination of ‘check the box’ rules for US companies with offshore subsidiaries and more onerous reporting requirements for businesses and individuals with offshore financial arrangements.

Although non-binding, the budget serves as a blueprint for future tax and spending legislation and the proposals therein will be debated by Congress in the coming months.

The Congressmens’ letter was sent just two days after US Trade Representative Ron Kirk signaled in a speech to business leaders that the administration is working with the Panamanian government to iron out tax and labor rights issues with a view to sending the agreement to Congress in the near future.

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