(Tax-News.com)In its latest Article IV consultation with Panama, the International Monetary Fund (IMF) described recent tax reforms and added its support together with some advice about future medium term financial forecasting.
In his first year in office, President Martinelli had enacted two far-reaching tax reforms, said the IMF. With these reforms, Panama’s tax system had increased its reliance on indirect taxes, reduced income tax rates, improved dividend taxation, and was modernizing its tax administration. The IMF expected the reforms to increase government revenue by 2.25% of GDP on a permanent basis.
The IMF described the first tax reform, which was approved in September 2009. It broadened the tax base, changed tax rates on specific sectors, increased license fees and enhanced tax administration. The changes made the Colón Free Zone, casinos, maritime transportation, and oil trade subject to a more comprehensive corporate and dividend taxation treatment, while taxing profits from some foreign operations. In addition, the IMF said the reform levied taxes on real estate transactions, including capital gains on the sale of property, and brought bank commissions under VAT coverage.
The second tax reform was characterized by lower personal and corporate income tax rates, a higher VAT rate, and additional improvements to tax administration, according to the IMF. The rates of personal income tax (PIT) were lowered from 20–27% to 15–25% and the exempted income threshold level was raised from 1.1 to 1.4 times income per capita. The rate of the corporate income tax (CIT) was lowered from 30% to 25% over two years, and over 4 years for some sectors (telecommunications, banking, electricity, insurance and casinos), said the IMF.
The IMF said most personal expenditure deductions were eliminated and the corporate expenditure calculation method was modified, notably for the financial sector. The minimum alternative tax rate was also lowered while the standard rate of the VAT was increased from 5% to 7%, said the IMF.
The IMF added that operational and financial autonomy was granted to the tax administration unit, and a specialized tax court was created. Income tax rates in Panama were now below international levels, according to the IMF. The PIT rate was slightly below the regional average and substantially lower than the OECD average. The top CIT rate was also somewhat lower than the regional average and broadly similar to the OECD average, said the IMF.
The IMF supported the government’s recent tax reforms. The reforms bolstered the credibility of Panama’s fiscal framework, would allow higher levels of capital spending, and were economically sound, in the IMF view, especially as it shifted from income towards consumption taxation. The IMF commended ongoing efforts to strengthen tax administration, and would like to see similar steps in the area of customs. The IMF may provide technical assistance in both areas.
The IMF supported a modest withdrawal of fiscal stimulus in 2010 and projected a slight strengthening of the primary balance in cyclically-adjusted terms in 2010. Given the strength of the recovery, the IMF agreed that an additional impulse was not essential and the government’s projected fiscal stance was broadly appropriate. The IMF also agreed that maintaining a low overall deficit would help further strengthen fiscal credibility.
The IMF regarded the fiscal consolidation envisaged over the medium term as ambitious but feasible. The targeted decline in public debt would provide, in the IMF view, substantial additional scope for adopting a counter-cyclical fiscal stance.
With the given assumptions on revenue growth and economic growth, the IMF considered the targets conservative. To bolster fiscal credibility further, the IMF advised adhering to targets and allocating any over-performance to a faster reduction of public debt.