Flat Tax Proposed For Panama

by Mike Godfrey, Tax-News.com, Washington

30 April 2009

Ricardo Martinelli, the Panamanian businessman who is leading the race to become the next President of the Central American country is proposing to revamp the tax system with the introduction of a ‘flat tax.’

Frank De Lima, Martinelli’s senior economic advisor, told Dow Jones Newswires in a recent interview that the opposition Democratic Change candidate is still considering the rate at which the flat tax will be imposed, but it will likely be fixed somewhere between 18% and 22% for companies and between 12% and 17% for individuals.

In another pro-business tax proposal, Martinelli wants to abolish a 1.4% tax on gross revenues, approved by Panama’s legislature in February 2005 as part of a major fiscal reform package which sought to raise additional revenues to reduce the country’s level of debt. Martinelli also wants to increase the number of deductions available for business in the tax system, although it is intended that the proposed reforms would be revenue neutral.

Currently, taxation in Panama, which is governed by the Fiscal Code, is on a territorial basis; this is to say, that taxes apply only to income or gains derived through business carried on in Panama itself. An entity which has its activities or assets outside Panama will automatically escape taxation.

The rate of income tax in Panama is 30% on chargeable income up to PAB100,000 (USD100,000) rising to 42% on income over PAB500,000 for companies that are registered with the Official Registry of National Industry or that have government contracts. But the territorial nature of Panama’s tax system has succeeded in attracting 120,000 corporate entities, of which the majority can be considered to be 'offshore'.

Aspects of Panama’s tax system have been called into question by the Organisation of Economic Cooperation and Development, which recently placed the country on its ‘grey list’ of territories which have not yet achieved prescribed minimum standards in tax transparency (i.e. signing a minimum of 12 tax and information exchange agreements).

Tax is also one of the issues holding up a free trade agreement with the United States. Signed by President Bush in 2007, the US Congress is refusing to ratify the agreement until “specific actions to meet ILO labor standards and resolution of the tax haven issue” are resolved, as Rep. Charles Rangel, the New York Democrat who chairs the influential House Ways and Means Committee, said recently.

It is unclear, however, how Panama’s proposed flat tax would fit into this mix if Martinelli wins the popular vote on May 3. The supermarket tycoon is currently the favourite to replace President Martin Torrijos, whose term expires in September.

Flat taxes, which reduce the complexities involved in progressive tax systems, have become a popular means of attracting foreign investment in certain parts of Europe, and have been a key ingredient in the transformation of several economies, notably the former Eastern Bloc nations of Estonia, Slovakia and Russia. The flat tax revolution has yet to reach the shores of Latin America; but while Panama is one of the more successful economies in the region, Martinelli must be hoping his proposals will achieve similar results.

Recommended