PANAMA

New Panamanian tax code

PANAMA - New Panamanian tax code

May 2019

Law 76 of 2019, published in the Official Gazette No. 28714-B on 14 February 2019, enacts the new Code of Tax Procedures for the Republic of Panama (TPC). Most of its content will enter into force from 1 January 2020.

We summarise below some of the new procedural developments to be included to our tax regime that promise to strengthen the rights and guarantees of taxpayers, but also introduce new rules that in our opinion will increase the complexity of the relationship between the tax authorities and taxpayers.

1. General tax principles

Article 7 of the TPC legally codifies a series of principles that are constitutional by nature, related to the establishment of the tax (material aspects) and to its collection (formal aspects).

  • Taxpayers must be taxed in direct proportion to their economic capacity
  • Taxes should not be confiscatory
  • Taxes must:
    • Comply with the principles of legality, non-discrimination and equality before the law and its due process
    • Respect the principle of substitute income and budgeted income.
    • Respect the principle of periodicity of the taxes. The changes will take effect in the following fiscal period.

Although the intention is to reinforce taxpayers' guarantees, these principles (for example, the periodicity of the taxes) should be expressly embodied in the National Constitution and not simply in a rule of legal hierarchy, which can be amended by the legislator at any time.

2. Retroactivity principle

Article 13 of the TPC establishes that the non-retroactivity must be understood in a double sense:

  • General: tax regulations should not have a retroactive effect.
  • Special: in penalty matters the most favourable law will be applied to the liable person or taxpayer.  

This is another guarantee-type rule that aims to correct the Supreme Court of Justice’s position of being excessively tolerant when evaluating whether or not a fiscal reform has a retroactive nature.

3. General Anti-Avoidance Rule (GAAR)

Article 20 of the TPC introduces the ability of the tax authorities (DGI) to disregard or ignore the adoption of legal forms (i.e. contracts agreed by the taxpayer) when their sole purpose is to avoid the payment of taxes or to obtain some type of tax advantage.

The tax consequences of the acts that "were really executed" will be attributed to ‘simulated’ acts.  In these cases, it is noted that the DGI has the burden of proving:

  • The existence of fraud under the tax law.
  • The lack of a purpose of pure and simple fiscal saving through the adoption of improper forms.

This has been highly controversial in other countries, precisely because of the subjective burden of pinpointing the initial or actual motives for adopting a contractual or other legal form (e.g. the creation of a consortium rather than a legal person).

4. Payment methods

Under article 68 of the TPC, the following means of payment of tax obligations are accepted, being considered as accurate and fitted to our times:

  • Cash
  • Cheque
  • Debit to current or savings account
  • Debit or credit cards
  • Any other legally qualified instrument
  • Payment in kind, as an exceptional form of payment, duly endorsed by the General Comptroller of the Republic.

5. Prescriptive terms

Article 88 of the TPC adopts a new statute of limitations for taxes, namely:

  • Ex officio and automatic statute of limitations: (a) indirect taxes (12 years) and (b) direct taxes (5 years):
    • Tax obligations self-assessed by Taxpayers through tax returns and tax forms, administrative tax assessments issued by the Tax Administration and related penalties sanctions imposed.
    • Taxpayers’ omitted obligations and payments.
    • The power to impose tax penalties, including administrative tax evasion.
      The report that serves as the foundation for the DGI to file a complaint with the Public Prosecutor's Office for criminal fraud.
  • Five years statute of limitations:
    • The right to request the refund of undue payment, overpayments or balances in favour of taxpayers.
  • Three years statute of limitations:
    • The power to establish additional payments of taxes calculated inaccurately by taxpayers.
    • The power to impose tax penalties, including administrative tax evasion, of additional sums.
  • 18 months statute of limitations:
    • The right to request and file amendments of tax returns.

6. Tax consultations

Articles 145, 146 and 147 of the TPC establish the new rules to be taken into consideration with regard to the consultations that taxpayers may submit to the DGI, which in general indicate the following:

  • Taxpayers may submit their queries to the DGI regarding the application of the tax law to particular cases.
  • It is compulsory to mention the specific circumstances, background information and other facts about the particular situation.  
  • The response of the tax consultation will have binding effects on the DGI, to the extent that it favours the interests of the consultant.
  • The binding nature of the query will be lost if it is discharged on the basis of inaccurate circumstances, background and facts.

In our opinion, this regulation will provide more legal certainty to the operations of taxpayers.

7. Administrative tax jurisdiction

A new tax administrative jurisdiction is created, according to the wording of articles 316 to 356 of the TPC, and will be composed by:

  1. Unipersonal tax administrative courts, which will be responsible for resolving reconsideration petitions. It will comprise:
    1. Five courts for the provinces of Panama, Panama Oeste, Colon, Darien and the Kuna Yala Comarca, headquartered in Panama City;  
    2. One court for the provinces of Cocle, Herrera and Los Santos, with headquarters in the city of Aguadulce; and  
    3. One court for the provinces of Veraguas, Chiriqui and Bocas del Toro and the Ngabe-Buglé Comarca, with headquarters in the city of David.
  2. The Administrative Tax Court, which is a second-instance collegial body, with jurisdiction all over the Republic.

8. Alternative conflict resolution methods (Articles 357 to 375)

By means of articles 357 to 375 of the TPC new rules regarding alternative resolution methods for conflicts between the taxpayers and the DGI are adopted. A wide range of tax conflicts may be resolved with these new alternative methods.

The figure of the tax transaction is adopted, which is nothing more than an agreement between the DGI and the taxpayer, prior negotiation of an offer and counter-offer, to resolve a dispute as a result of non-payment of taxes.

Also, the process of tax arbitration is created, where controversies may be resolved for amounts greater than USD 100,000, provided the governmental procedures have been exhausted before the administrative tax courts, in the first instance; and before the Tax Administrative Court, in the second instance. Tax arbitration may be used for the following topics:

  1. Additional payments on taxes of an administrative nature,
  2. International tax matters; and
  3. Transfer Pricing.

Taxpayers have the option of submitting their disputes with the DGI under tax arbitration before one or more arbitrators (who will be lawyers).

In cases where the amount ranges between USD 100,000 and USD 250,000, there may only be one arbitrator and in cases of amounts over USD 250,000 three arbitrators (all attorneys) must be appointed.

Our observations on the process of tax arbitration are that the TPC (instead of establishing an arbitration requested on the unilateral wishes of the taxpayer, which in our opinion violates the pact or arbitration agreement figure) should also have respected article 200 of the National Constitution that requires the Cabinet Council, in agreement with the President of the Republic, to settle or submit under arbitration those litigious matters in which the State is a party.

From a practical point of view, we consider that arbitration awards issued based on the TPC could well be challenged by the Executive Branch when making them effective, alleging a violation of the constitutional mandate contained in article 200 of the National Constitution.

BDO comment

From a positive perspective, the TPC modernises the old and anachronic system of administrative justice of the current Tax Code, seeks to provide more guarantees to the taxpayer and also adopts new international trends promoted by international organisations such as the Inter-American Center of Tax Administrations and the Inter-American Development Bank.

Nevertheless, this initiative to provide modern rules, including the creation of a jurisdiction of tax judges without knowledge of the budgetary effort that its effective and efficient implementation requires, as well as the adoption of private arbitration that takes away responsibilities from the Supreme Court of Justice, but maintains the long process of government procedures with all its deficiencies and delays, not to mention a set of rules of almost 400 articles regulating the relationship between the taxpayer and the tax authorities, ultimately far from simplifies the Panamanian tax system.

Rafael Rivera
rrivera@bdo.com.pa