16 March 2020

Rafael Rivera , Tax Partner |

Recently, the Panamanian Government decreed a national state of emergency to address the coronavirus pandemic (19 - nCoV) by adopting Executive Order No. 11 of March 13, 2020 (that authorizes special contracts to address the pandemic), issued by the Cabinet Council and published in Official Gazette No. 28,979-B of the same date.

Similarly, several ministries have issued regulations such as Executive Decree No. 472 of March 13, 2020 issued by the Ministry of Health (adopting specific health measures to address the pandemic), Executive Decree No. 114 of  March 13, 2020 issued by the Ministry of Commerce (establishing a maximum gross margin of 23% for distributors of essential products of personal hygiene to address this crisis) and Executive Decree No. 71 of  March 13, 2020 issued by the Ministry of Labor and Labor Development (authorizing and regulating the adoption of reduced working hours).

In this document, I would like to address the measures that from a fiscal policy perspective I believe should be evaluated by the Panamanian Government in order to face the adverse effects that this pandemic will have on the development of the economy in Panama, and which will undoubtedly affect negatively large companies, small entrepreneurs, workers, and professionals alike.

The effects of the pandemic and also the effects of government countermeasures, both in Panama and in the rest of the world, will generate a reduction in productive activities, for the following reasons: (i) closing of production facilities or suppliers in countries heavily affected by the virus, (ii) the enforcement of government barriers or restrictions on the entry of people or transportation from abroad, (iii) quarantine or isolation measures decreed by the health authorities and even those voluntarily adopted by the population on the basis of recommendations from the Panamanian Government; and (iv) the suspension of mass events such as concerts, sport events and others.

Undoubtedly, the consequences of this decrease in productive activities will be represented in a considerable reduction of sales, cash flow problems, availability of inventories and also, possibly affect, all economic sectors including airlines, banks, and the tourism sector, including hotels, restaurants and others, the retail industry, the provision of services and the economy in general. 

It is important for the Panamanian Government to consider the seriousness of this scenario and to propose measures, some of a temporary nature and others permanent, that will help to mitigate in some way the economic effects of this pandemic. I would like to list some measures as examples, but I have no doubt that others can be included that are more effective and have the same objective: 


  • Reduction of the progressive income tax that impacts individuals, and/or the authorization of an annual special basic deduction because of the coronavirus pandemic, which would allow for the reduction of the monthly withholdings that companies apply to their employees and that would also reduce the estimated income tax owed by independent professionals;


  • Reduction of the 25% income tax rate that applies to legal entities (e.g reduce it to a rate of 20%);


  • The elimination of the dividend tax which is currently 10% and, as an alternative have an unified dividend tax of 5%;


  • The elimination of the alternative calculation of income tax (CAIR) or, otherwise, an increase in the threshold that requires companies to undergo this verification procedure. Presently, the threshold is USD 1.5 million and my suggestion is to raise this threshold to USD 5 million so that a large number of medium-sized companies can be waived of the internal costs involved in this verification procedure; 


  • Adopt changes in the ITBMS system, allowing the tax to shift from an accrual system to a cash system, whereby businesses and professionals are only required to pay the tax when they have actually received payment from their customers without affecting the businesses' cash flow; and


  • Financial support measures for banks and local borrowers, which I understand has been the primary focus of the Ministry of Economy and Finance at this time. 


Of course these proposals and adjustments clearly have a financial and fiscal cost that will need to be solved as tax measures that operate as substitute incomes, but given the nature of this crisis, the adjustments that would operate as substitute incomes could come into effect for tax period 2021 (once we have overcome the crisis), as well as, a comprehensive evaluation of the elimination or tiered reduction of existing tax exemptions and incentives.

It should be kept in mind that any fiscal measures that are adopted must have particular objectives: (i) to serve as a palliative for the private sector in these times of crisis and protect employment sources and (ii) to enable citizens, workers, independent professionals and small entrepreneurs to retain their source of income and have more availability of economic resources. 

I hope that these ideas will serve to illustrate the seriousness of the economic and financial situation that can be generated by this health crisis that health authorities have fought outstandingly with the tools and knowledge available. However, it is up to the authorities in charge of fiscal policy to deal with the economic effects of this pandemic.