Ecuador and Panama Reset Relations After Diplomatic Rift

In a significant move to boost regional trade and transparency, Ecuador has officially removed Panama from its list of tax havens following the signing of a new bilateral Tax Information Exchange Agreement (TIEA). This decisive action, confirmed by both governments in mid-August 2025, immediately reduces the tax burden on cross-border transactions, cutting costs for businesses and paving the way for deeper economic integration between the two nations. The agreement marks a pivotal shift in fiscal policy that rewards transparency with tangible financial benefits.

Understanding the New Tax Treaty and Its Immediate Impact

The most direct consequence of Panama’s delisting is a substantial reduction in the withholding tax rate applied to payments for services from Ecuador to Panama. Prior to this agreement, Panama’s designation as a tax haven meant that Ecuadorian companies faced a steep 37 percent withholding tax on such transactions. This high rate was a significant barrier, increasing the cost of utilizing Panama’s robust service sectors, which include logistics, banking, and consulting.

With the new classification, these payments now incur the standard non-resident income tax rate of 25 percent. This 12-point reduction, confirmed by Ecuador’s Internal Revenue Service, provides immediate relief and lowers the operational expenses for firms engaged in cross-border trade. For Ecuador, which exported goods worth approximately $5.8 billion to Panama in 2024, this change makes it significantly cheaper to access the professional and logistical services that are vital for international commerce.

Strategic Benefits for Panama and Future Trade Relations

For Panama, the removal from Ecuador’s tax haven list is a major victory for its international credibility. The administration of President José Raúl Mulino has actively pursued the objective of clearing the country’s name from all discriminatory lists as part of a broader strategy to improve its global standing. This effort is closely tied to Panama’s ambition to join the Organisation for Economic Co-operation and Development (OECD), a process that requires demonstrating high standards of tax transparency and cooperation.

The agreement is seen as more than just a fiscal formality; it is a foundational step toward stronger bilateral ties. Government officials from both nations have indicated that the TIEA could serve as a precursor to negotiations for a comprehensive free trade agreement. This potential expansion of economic cooperation would build on existing strengths: Ecuador’s exports of hydrocarbons and other goods and Panama’s role as a global logistics hub through assets like the Colón Free Zone, which re-exported goods worth over $12 billion in 2024.

The agreement between Ecuador and Panama demonstrates how strategic diplomatic efforts can yield concrete economic gains, reducing business costs and fostering an environment ripe for increased investment and expanded trade across the region.

Must Know

What is a Tax Information Exchange Agreement (TIEA)?
A TIEA is a bilateral pact between countries to exchange information relevant to administering and enforcing their domestic tax laws. It is designed to combat tax evasion and improve financial transparency by ensuring both jurisdictions have access to necessary data.

Why was Panama on Ecuador’s tax haven list?
Panama was historically listed due to its strict corporate secrecy laws and a financial services regime that was perceived as lacking sufficient transparency, which could potentially facilitate tax avoidance for non-residents.

How does the delisting affect an Ecuadorian company importing services?
An Ecuadorian company paying a Panamanian entity for services like legal advice, consulting, or logistics will now have a 25% withholding tax applied to that payment, instead of the previous 37% rate, resulting in significant cost savings.

Could this agreement lead to a free trade deal between Ecuador and Panama?
Yes, officials from both countries have publicly stated that the successful implementation of this tax agreement creates a positive foundation and could be a stepping stone toward formal discussions for a broader free trade agreement in the future.

What are the benefits for Panama in being removed from the list?
Beyond the immediate benefit for its service providers, removal enhances Panama’s international reputation, supports its campaign to join the OECD, and helps achieve its goal of being excluded from all global tax haven lists, which facilitates better access to international markets and financing.