Inequity in the tax system distorts the economy

Panama has a tax system that represents a challenge for the economic policy, since there is inequity in the collection of taxes, because there are companies that have tax breaks or incentives, while others pay more taxes, as some specialists consider.

They indicate that the amount of tax that a company pays in Panama is high, however, after making an analysis, there are differences between what should pay and what they actually pay.

There are companies that pay high taxes while others are non-paying ones or pay almost nothing, mainly multinationals.

Economists agree that there must be a review of the Panamanian tax system, since Panama is characterized for being a country that punishes the less-income working persons, not those that generate more revenue.

"Panama for many years has had a culture that encourages the issue of exemptions to companies under certain arguments, such that for example, this generates employment,  makes contributions to the gross domestic product (GDP), among others," said economist of the Ministry of Economy and Finance, Horacio Estribí.

He said that excessive exemptions creates distortion in the economy.

In the country there are, according to the MEF, 110 provisions of exemptions from social, industrial, groups among others, making that at any given time, the State treasure suffers.

However, until March some 1,325 million 203 thousand dollars in tax revenue were collected, i.e. 4.8 percent more than the budget, according to figures from the Directorate General of Revenue.

Estribí noted that there are multinational companies that do not pay taxes for exemptions and take advantage of the benefits of the Panamanian tax system, but he clarified that this is a legal action.

For the President of the National Council of Private Enterprise (Conep), Julio De La Lastra, it would not be prudent to attack tax incentives and conditions of work that have been given to multinationals, because other countries would easily offer these to the companies thus making us stop receiving the investment and reinvestment.

Economist Olmedo Estrada notes that the Panamanian tax system is not the only attraction that interest companies to come to Panama, but also they are attracted by the financial center and the use of the dollar, enabling them to have dynamic operations and improve their incomes.

However, experts say that changing the rules of the game to foreign companies in Panama could infringe legal certainty making them decide to choose to settle in another country.

Recently, authorities approved to make some adjustments in tax matters to the Colon Free Zone and it is equated with free zones, prompting discontent entrepreneurs in these special areas, since they affirm that this situation is endangering the legal certainty.

The modification to the Free Zone Law establishes a tax cut of capital from 1% to 0.5%, which also will be paid by the free zones, in addition to the dividend tax.

As to the 7% ITBMS which is paid on all merchandises in the Colon Free Zone, export processing zones and special areas would have to pay on the services received, but not on goods.

"When we talk about foreign companies that want to set up their operations in Panama, they would not do it if they did not have an incentive", said De La Lastra.

He said that besides the inequity in the tax issue we should also revise the fact that more than 40% of the population pays no tax, since they are engaged in informal activities.

He stressed that the economic model works and this is the reason why foreign direct investment has been achieved and has allowed the economy to be as it is; companies are attracted by the reliable legal framework and tax issue.

"This would be acting against ourselves if we say that there will be incentive for companies", he said.

Foreign investment in Panama last year closed in 5 thousand 38 million dollars, representing an increase of 17% compared to 2014.

The taxes that are paid in the country include social insurance, education insurance, dividends, tax patent, municipality tax, tax on income, among others.

Estrada stressed that a revision of the tax system with that of other countries that are more equitable is necessary.