Thu 20 Jan 2005
“The additional revenues generated by the changes to the tax system will be used to execute public investment programs in schools, health centers, housing, roads, drinking water systems which have been deferred and which demand immediate attention”
The Minister of Economy and Finance, Ricaurte Vasquez, presented before the National Assembly of Congressmen the Fiscal Reform bill aimed at reducing public spending and increasing the State’s revenues.
Aimed at salvaging public finances, the proposed fiscal equity bill is one of four great strategic objectives of the Government, Vasquez explained to the Legislature. The other three objectives are:
Boosting economic growth to generate jobs.
Reducing poverty and extreme poverty, which is 40% in the whole country with alarming indexes of 59% in the rural zones and 98% in the indigenous zones.
Developing human capital.
Vasquez pointed out that the Panamanian economic model is deficient, given that there is no relation between economic growth and income distribution. He said that this model “has inherent problems for generating jobs and it produces a low level of fiscal revenues”.
Expanding on the Panamanian model, he observed that the latter has been twofold since it is sustained by service exports, and linked to a protectionist policy based on the substitution of imports through the application of incentives. This condition has encouraged the corporations to prefer the internal market to the detriment of exports.
“This model is not generating enough growth to satisfy national aspirations, has inherent problems for generating jobs and produces a low level of fiscal revenues”, he specified. “The mid-term and long-term goal is to attain social mobility, as an important element to eliminate extreme poverty and to significantly improve income distribution, to achieve a country with first world equity standards”, he added.
Vasquez recognized that one of the obstacles for attaining an integrated development is the dire corruption problem. “Eradicating corruption and promoting transparency constitutes one of the higher objectives of the national government”, he said.
Referring to the deficiencies of the model and the tax system, he pointed out that this has brought as a consequence that currently the salaried workers pay proportionately more than the corporations.
After rating the current tax system as “regressive”, Vasquez explained that this is so because “the lower income groups effectively carry four times the tax pressure when compared to the higher income groups, as a result of the narrowness of the taxable base, since in the case of natural persons or individuals, taxes have a higher impact, while in the case of legal persons or corporations, the incentive systems and other fiscal evasion means allow a significant reduction of the payable tax”.
“For this reason, a change in Panama’s tax system must aim at correcting the fact that income tax is mainly a duty on salary income”, he underlined. “What we propose is a fiscal equity program, through which the State fulfills its responsibility of thrusting a better distribution of wealth”, he added.
Addressing the public spending issue, which is one of the bill’s components, Vasquez pointed out that the state payroll expenses, the debt service and the transfers currently exceed the State’s revenues, wherefore adjustments are needed in the revenues as well as in the expenses so as to generate savings.
“The savings produced by the proposed measures in public spending matters, added to the additional revenues generated by the changes to the tax system will be used to execute public investment programs in schools, health centers, housing, roads and drinking water systems which have been deferred and which demand immediate attention, he explained.
When referring to the public spending component, Vasquez specified the following measures:
A reduction of 30% in the payroll expense will be applied in 2005, 20% in 2006 and 10% in 2007 on the vacancy sums produced during those years as a result of resignations and retirements.
Norms are proposed to reduce the personnel level in the public sector, except for the essential services (education, health, security), in order to have on January 2008 a personnel structure that will not be higher than it was on December 31, 1999.
The public employees’ “representation expense” income will be treated as salaries and, as a consequence, it will pay income tax and Social Security fees.
Starting in 2006, the current spending increase shall not be greater than the percentage increase of the previous year’s current revenues.
The budget control rules will be strengthened, with the purpose of making investments more productive, both economically and socially.
Regarding the tax component, the MEF official underlined that the proposal will give real accountability content to the fiscal administration in order to place public finances on solid bases. Among the most important elements, he mentioned the following:
The alternate minimum income tax is established on legal persons with a 1.4% rate on taxable income (gross revenue minus foreign source revenue). The taxpayer must pay the Treasury the result from applying this formula or the result obtained by applying the traditional Income Tax calculation method, whichever sum is greater. This proposal gathers recommendations made by some sectors during the consultation process at the Executive Branch level.
In the case of persons with more than one income source and which exceeds $60 thousand per year, the income tax will be determined as the greatest of 10% of gross income and the tax calculated by the traditional method.
In the case of the Colon Free Zone, the rates for services rendered to the companies established in that zone will be increased in such a way as to contribute with an additional income of at least $30 million in 2005, and its growth will be linked to the increase in its operations.
A $100 increase is proposed on the single rate for anonymous societies (corporations), leaving the rate at $350 per year. The reactivation surcharge is also increased for corporations that have been suspended because of lack of payment, from $250 to $500.
A combined progressive tariff alternate to the real estate tax is established that is much lower than the current one, with steps of 0.70%, 0.90% and 1.0%.
A selective consumption tax will be applied to casino and gaming activities with a 5% rate on the prizes paid by slot machines and with a tax-exempt minimum of $5.
Instead of open incentives, the incentives applicable in the future will be limited by a specific application amount and time period. For example, the $2,000 subsidy for housing with a value per unit of less than $15,000 that has been implemented starting this year.
In general terms, incentives such as the tax deposit certificates (CAT by the Spanish acronym) and others will expire on the established dates. However, other incentives that have not been executed yet are left without effect.
Vasquez said that the Reform achieves an equitable tax system. The Government provides its share of sacrifice by reducing spending as well as by applying the income tax and contributions to the social security system to all its employees’ incomes, and wherefore it can require that the same treatment be given to the private sector, he pointed out.