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.
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).
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.
Article 13 of the TPC establishes that the non-retroactivity must be understood in a double sense:
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.
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:
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).
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:
Article 88 of the TPC adopts a new statute of limitations for taxes, namely:
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:
In our opinion, this regulation will provide more legal certainty to the operations of taxpayers.
A new tax administrative jurisdiction is created, according to the wording of articles 316 to 356 of the TPC, and will be composed by:
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:
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.
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