As this issue of The Panama News was uploaded the National Assembly’s Finance Committee was holding hearings on the Torrijos administration’s revised tax package, various business organizations were either protesting the proposal before the committee or else skipping their planned presentations, and the government seemed intent on a hefty overall tax increase.
The government’s problem is a foreign debt that’s running at more than $9 billion, chronic problems meeting ordinary expenses like paying teachers’ salaries and maintaining crumbling infrastructures, and a tax system that 20 years ago used to skim off 0.14% of the national economic gross and now captures just 0.08%. After a generation of acceding to the demands of the most powerful and wealthy special interests and listening to the advice of neo-liberal economists who said that lower taxes would stimulate the economy and thus bring more revenue into government coffers, Panama finds itself disappointed. More to the point, Martín Torrijos has some ambitious plans, the most costly of which would be a modernization of the Panama Canal, and without putting the budget in order he would find the interest rates on financing these programs prohibitive.
Thus the need to raise taxes, with the obvious payers those who can afford to pay but have until now been largely exempt. Exempt as in tax-free “gastos de representación” or unitemized payments for sometimes real but mainly theoretical expenses. Exempt as in many years’ worth of accreted tax breaks to encourage this or that business. Exempt as in business profits that would show up if International Accounting Standards were used, but in a country where the Supreme Court has banned that system of keeping the books and people who drive BMWs “prove” to the government’s satisfaction that they’re in the poorhouse.
So after a great deal of secrecy, Torrijos announced a tax package encompassing 76 articles and 27 tabloid pages that boiled down to its essentials meant higher taxes for corporations and for individuals at the upper end of the income scale. Most controversial of all was IRMA, the Minimum Alternative Income Tax, whereby companies must pay a percentage of their gross receipts if that percentage turns out to be more than they would otherwise pay in corporate income tax. In the original proposal IRMA was set at 2%, but after protests the Torrijos administration backed it down to 1.4%. Part of the objection to IRMA is that it would apply the same to businesses with high profit margins, which would not be much affected, as those with low per-item profit margins.
In the first draft of the proposed law the Colon Free Zone would have been taxed, which elicited a united protest from Colon province’s business, labor and civic leaders, including the local Catholic bishop. The provision was stricken, but Free Zone merchants and some other observers expect that some sort of fee increase will effectively raise the duty-free import-export zone's contribution toward government operations. Meanwhile, a Dichter & Neira poll commissioned by La Prensa found that 86.7% of their polling sample believe that the Free Zone ought to be taxed.
The original proposal would also have capped corporate tax deductions for charitable contributions at $50,000, but after many non-profit organizations protested the plan was revised to give a $50,000 deduction and after that limited to a deduction for such contributions only up to 1% of the donor company's gross revenues for the year.
Corporations would have to pay a $350 annual fee to renew their licenses instead of the previous $250, and the fee to reactivate a dormant company after two or more years of not paying would be raised from to $500, in addition to the $50 per year late fee.
In the field of individual income taxes, those who make more than $60,000 per year would have to pay 10 percent of their gross income if that amount would be more than what they would pay using the old methods of tax figuring. The exemption of gastos de representación from payroll taxes would be abolished, although there would remain a limited tax break for that sort of compensation.
Section 13 of the plan departs in several important ways from the country’s traditional strict “territoriality” concept in taxation. Panamanian consuls abroad would have to pay tax on the incomes they make overseas, and people living here who derive income from abroad would for the first time be taxed on it.
One “gray area” is pension payments from abroad: the law doesn’t mention the concept of pensions, but it would appear that they would be covered under “remuneration” received from abroad, and those who live here more than 70 percent of the time could be taxed on it. But there remains an exemption for income from transactions that take place entirely abroad, and arguably a pension that one receives from a lifetime of work in the USA would qualify for that exclusion. People who get stock dividends from playing foreign markets would also get that income excluded from their Panamanian tax calculations.
The proposal also would also impose a 5% tax on slot machine winnings over $250 (collectible by the casinos).
Penalties for tax evasion or nonpayment of taxes would also be increased.
From the national business sector there have been howls of protest, which on January 21 went so far as a small group of professionals who had been told that they’d lose their jobs if the tax reform goes through blocking traffic on Calle 50 in the banking district.
But analysts for Credit Suisse First Boston spoke for a general consensus of international financial institutions by applauding the tax package and predicting that if passed it “would significantly improve the long-term fundamentals” of the Panamanian economy.
The Panama Chamber of Commerce, Industry and Agriculture issued its alternative plan, the centerpiece of which was to impose the individual income tax on people who earn less than $800 per month. That idea, however, was politically stillborn. Also rejected by Minister of Economy and Finance Ricaurte Vásquez were suggestions that the government’s revenue problem be solved by another increase in the sales tax, which was raised during the Moscoso administration.
By and large, and with the noteworthy exception of Colon, few working class Panamanians are supporting the anti-tax protests. That’s not because they don’t believe that higher taxes on companies and the rich won’t filter back to them in the form of higher prices, but mainly because the public services that they use are clearly impaired by the government’s financial problems and because they are not disposed to follow leaders from the privileged classes when the main point is the defense of tax privileges that they don’t personally enjoy.
Genaro López, secretary general of the nation’s most militant and successful private sector union, the construction workers’ SUNTRACS, criticized the tax package in La Prensa for not being as thorough a reform as he’d like. Other labor leaders noted that the government’s fiscal reforms imply layoffs of public employees and higher prices for working people. However, no union is calling its members onto the streets to oppose the tax package.
It appears that despite all objections, President Torrijos will get his tax package through the legislature and that starting next year the nation’s overall tax bill will go up substantially. It will no doubt cost the president approval rating points in the public opinion polls.
Editor's note: In an earlier version of this article there were several errors, related to the application of IRMA to the Colon Free Zone (it won't be), the revised formula for limiting corporate deductions for charitable contributions, the present charges for keeping a corporation registered and proposed penalties for late payments and the accounting system that the Supreme Court banned (it was the International Accounting Stanndards, not the Generally Accepted Accounting Principles used in the USA). That is, sad to say, a lot of mistakes for one article. Thanks to Juan Ramón Vallarino J., a corporate lawyer with Vallarino, Vallarino & García-Maritano who works with these matters for his living, for pointing out the errors and providing some very useful insights. Vallarino, as readers probably don't know, is the most persistent corrector of errors in The Panama News, and any annoyance at having been shown in error is far more than compensated for by appreciation for his help in getting things right. If you catch a mistake in The Panama News, your help in pointing it out goes a long way toward making up for this publication's lack people to "filter," check and perfect stories in the way that bigger news organizations can afford to do.
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