The Torrijos administration’s tax plan was approved on third and final reading by the National Assembly on January 31, and the president signed the measure a couple of days later. The measure, which amounts to a substantial tax increase, even garnered the support of three opposition deputies --- Rogelio Alba (Liberal Nacional), Aristides De Icaza (Solidaridad) and Sergio Gálvez (Arnulfista) --- with all the PRD legislators and the single Partido Popular deputy supporting it and three more oppositionists --- Arnulfista José Olmedo Carreño, MOLIRENA’s Héctor Aparicio and Solidaridad’s José Luis Fábrega --- not voting. Most of the changes will go into effect in 2006, but some of the procedural and record keeping provisions will have the force of law earlier than that.
The main and most controversial tax was the IRMA, or minimum tax on a company’s gross receipts. Originally proposed at two percent, the law as passed set it at 1.4 percent. Businesses that do a high volume with a low per-unit profit are the ones that stand to be most affected, the conventional wisdom goes, and those with high per-unit profits won’t feel the change very much.
The idea of a minimum tax on a business’s gross receipts is based on the idea that among legal tax breaks, cost structures that on paper eat up most or all of a company’s profits and outright tax fraud, a lot of businesses that ought to be contributing to defray the costs of government are not and have not been. But of course, IRMA’s effectiveness is predicated upon the notion that tax evasion and funny bookkeeping will be the rare exception rather than the rule, and in order to ensure that such is the case new record keeping rules are imposed on corporations and the accountants they hire.
A number of marginal businesses are likely to be forced to shut their doors or go into the underground economy not because of any new tax burden, but due to the added expenses of hiring CPAs to meet the paperwork requirements. However, companies with capital of less than $100,000 and receipts of less than $50,000 will generally not be required to hire CPAs to prepare and file their tax returns.
As before, individuals making less than $800 per month will not pay income taxes, and those who make more than that will pay on a sliding scale that runs from 7.3 to 27 percent.
Certain income from abroad that was formally exempt from Panamanian taxation will now be subject to taxes, and the law as written creates some ambiguities in this respect. Although it’s apparently not this government’s intention to tax pensions entirely derived from working abroad, the law’s definitions do include foreign pensions as taxable income but they do not repeal the existing exemptions. Basically, those who reside in Panama and work from here for pay that comes from abroad will be treated as if their income was made here, with large exceptions for international commerce and securities speculation. Those who work as consuls or in other Panamanian diplomatic posts abroad will also be taxed on the income from such jobs for the first time.
The annual fee to keep a corporation in good standing will be raised $100 to $350, and the penalties for late payments will also be increased.
In the end the Colon Free Zone is not subject to IRMA as such, but merchants there will be hit with higher fees that will have the same effect as taxation. The nation’s private ports will also pay more to the government.
A number of tax exemptions have been repealed or scaled back, most notably the one for reforestation projects. The National Environmental Authority (ANAM) is, however, proposing a new reforestation subsidy to make up the loss to investors. The tax exemption for reforestation was widely abused since its creation in the mid-90s, most egregiously by those who claimed and received exemptions for cutting down natural forests and replacing them with stands of teak. The main problem there, however, was not with the law but with its corrupt or inefficient application.
Politically, the tax debate showed an opposition in disarray, a labor movement whose most radical element called out its members to protest the government employment cap that’s part of the package (total public employment will be set somewhere near the level it was at the end of 1999) and got little response, and business organizations whose stands mixed reasoned criticism with petty whining and were mostly ignored in either case. The legions of people who did a little campaign work for the PRD and expected that this would entitle them to government jobs have by and large had the door slammed on them, so the hiring cap provisions of the reforms may also cause some dissension within the ruling coalition. On the international level lending institutions tended to like the changes, which would allow Panama to make larger payments on its foreign debt and substantially increase that debt in order to finance a canal expansion project.
So far it appears that most Panamanians have given Torrijos the benefit of the doubt. He said that the country needs to bring in more money, that the old system was grossly inequitable and that everyone must shoulder his or her fair share of the burden of financing schools, police, infrastructure maintenance and all the other costs of government and it seems that most people are taking him at his word on that. The reforms as first proposed bore hallmarks of improvisationm, but the silliest and most onerous sections were changed in the legislative process and that in turn prevented opponents from effectively mobilizing public opinion against the legislation.
The tax package’s principal architect, Economy and Finance Minister Ricaurte Vásquez, vows that the government will act against businesses that use the tax increase as a pretext to jack up prices. However, a number of companies have already put their customers on notice that prices will go up and others --- like The Panama News --- are waiting to see how the tax hike ripples through the economy in order to then make adjustments accordingly.
The complete Spanish-language text of the tax reform law is published in the Spanish news section of this edition of The Panama News. However, when reading that document understand that existing parts of the tax laws that were not changed are generally not mentioned, even in cases where the reforms seem to imply that changes have been made.
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Tax plan passes with some modifications
French company wins $32 million for Mireyista contract theft
The Panama News readership figures
Business & Economy Briefs
