Tax man: New authority eyes improved transparency and a more efficient tax code

Heavy government spending on new social programmes and overhauling the infrastructure network has amplified the importance of increasing public sector revenue, income and in particular tax collections. However, administrative strategy has focused on maintaining or even lowering tax rates across the board while simultaneously closing loopholes and preventing tax evasion. The government’s tax administration underwent fundamental reform when Law 24 was passed in April 2013 creating a new autonomous tax administration, the National Revenue Authority (Autoridad Nacional de Ingresos Pú blicos, ANIP) to replace the Directorate General of Revenues (DGI). Even with significant nominal increases in tax revenue, the country faces an uphill battle in the long-term, thanks to a large informal economy, to sustain the current level of public sector spending.

Oversight

Since its creation in 1998 the Ministry of Economy and Finance (Ministerio de Economía y Finanzas, MEF) has been broadly responsible for managing national tax, royalty and general revenue collections. Under the purview of the MEF the General Directorate of Customs, the General Directorate of the Cadastre and the DGI formed the MEF’s revenue-generating team. However, in 2008 the Customs authority became the independent, autonomous entity now known as the National Customs Authority, while the same happened with the creation of the National Authority of Land Administration. The recent transformation of the DGI to the ANIP has been part of an overarching policy to inject autonomy and eradicate political influence in the primary revenue generators.

Revenues

Despite sizeable increases in recent years, total tax revenues in Panama remain fairly low compared with regional neighbours. Each of the past four years has seen a double-digit percentage rise in tax revenues as collections increased from $2.9bn in 2009 to $4.7bn in 2012, according to data from ANIP. As of the January-November 2013 period, tax revenues rose by 5.9%, or $244m, year-on-year (y-o-y) to $4.38bn.

Yet tax revenues amounted to just 12.96% of GDP, or $36.25bn, the World Bank estimated in 2012. In these terms, this places the 2012 tax revenue below the World Bank’s 2011 levels for Costa Rica (13.8%), Brazil (15.7%), Peru (15.9%), Chile (18.9%) and Uruguay (19.7%). A statement from the IMF recognised the government’s situation, acknowledging the necessity of increasing tax revenues to prolong “appropriate levels of social and capital spending”.

Tax Policy

Corporate tax rates were cut from 30% to 25% in 2011, while personal income tax brackets were simplified from five to two and the sales tax was raised from 5% to 7%. Reform of the tax regime continued under Law 24 which essentially transfers tax collecting authority from the DGI to the ANIP, which will maintain the same responsibilities, structure and directive with the primary alteration coming in the authority’s newfound autonomy.

National manager of public revenues and head of ANIP Luis Cucalon said, “The most important change that has come with the creation of ANIP is that its autonomy will allow it to function as a private entity without being mired in the encumbrances of political influence.” Cucalon said the move was also a way to improve transparency and professionalism.

ANIP

Funded by a budget equal to 1% of tax collections, which provides ANIP with more than three times its former $15m budget, or $47m based on 2012 collections, it will first need to consider how to utilise its increased budget. Whatever funds it is not able to utilise will be returned to the state for inclusion in the following year’s national budget. The new agency’s primary goals consist of modernising the administration and technology of the agency, professionalising ANIP personnel, increasing service and attention to taxpayers and combating corruption and fraud.

In a country that ranked 88th in the World Economic Forum’s “Global Competitiveness Report 2013-14” in the category of favouritism in decision-making of public officials, increasing both the autonomy and transparency of the national tax agency is a significant step forward. However, ANIP will not be entirely independent as decisions regarding tax settlements, fines and penalties will still be overseen by the Administrative Court of Taxes, which will have the authority to rule on cases pertaining to appeals and incidents regarding ANIP collection procedures.

International Realm

ANIP also inherits the responsibility of interpreting and enforcing double taxation treaties signed with other nations as Panama works to continue challenging its international reputation as a destination for tax evaders. Though strong bank secrecy laws exist – it is illegal for bank personnel to divulge personal financial information without a court order, for example – Panama has become increasingly flexible with international requests for individual financial information.

This is done primarily through tax information exchange agreements (TIEAs), which enable tax authorities in both countries to exchange information pertinent to administrative enforcement of domestic tax laws. This was made possible by amending Law 33 in 2010, permitting the national government to obtain and exchange financial information to comply with international conventions, even if they are at odds with domestic tax law. The country has TIEAs with the US, France, Canada, Czech Republic, Denmark, the UAE and Israel, among others.

Informal Economy

Arguably the largest obstacle to increasing tax revenues is raising the tax base. As in many parts of Latin America, a large informal economy exists. Though by its very nature near impossible to accurately measure, most estimates of Panama’s informal economy make it roughly equal to at least 40% of national economic production. Indeed, in 2011 a survey carried out by the Carana Corporation, an international consultant, the National Competitiveness Council and the Inter-American Development Bank, found that 5.7% of 1000 small and medium-sized enterprises (SMEs) surveyed were completely formalised, while 60.6% were considered partially formalised, with the remaining 33.7% considered completely informal. Of the informal businesses, just 40% claimed to understand how to formalise.

With 200,000 SMEs employing 430,000 workers, roughly 28% of the economically active population, the formalisation of the economy will in large part come from the country’s micro-businesses and SMEs.

With an estimated 60-79% of SMEs not complying with the basic requirements to be considered a formal enterprise and 46-63% of SMEs’ employees doing the same, it is a long road ahead for the ANIP.

The Programme for the Economic Inclusion of the Informal Sector (PASI) was created by the government to work towards reducing the barriers and prohibitive costs of formalisation from 2009 to 2012.

Some of the barriers identified that prevent SMEs from formalising include the lack of a stratified labour regime taking into consideration the size and revenue of a company, the fact that sole proprietorship is not a legal enterprise, inability to access financing and complex compliance requirements with varying agencies.

Much of the PASI’s strategy revolves around breaking down these barriers through streamlined bureaucratic procedures, a simplified tax regime for SMEs, reduced labour registration costs, and a clearer and immediate procedure for dispute settlement. However, formalising SMEs is indeed part of a wider government scheme to improve economic competitiveness and provide avenues for SMEs to grow and expand via financial and technical assistance.

Through the first 11 months of 2013, total tax revenues increased to $4.38bn, or 5.9% y-o-y with $4.14bn collected in the same period in 2012. Though a small y-o-y increase, this figure represents a 56% increase on the amount collected during the same period of 2010. Cucalon commented that elevated government spending on both social programmes and infrastructure would not have been possible in recent years without such increases in tax collections. With a new, autonomous entity in charge tax collection that trend is indeed expected to continue, albeit gradually.