Chapter 4. Improving the taxation system and promoting private sector involvement to support financing for development

The preceding chapters laid out an ambitious agenda for inclusive development in Panama. To finance this development, Panama will need to significantly increase public expenditure and mobilise private investment. Current taxation levels are relatively low compared with other Latin American economies and are well below those of Organisation for Economic Co-operation and Development (OECD) economies. A better-structured taxation system, coupled with a stronger tax administration, should yield greater fiscal revenues. In addition, improvements in the regulatory and institutional framework for public-private partnerships should promote private investment for development. This chapter first summarises the revenues necessary to finance development, then presents the current fiscal framework to guarantee the solvency of the state. Third, it proposes alternative ways of increasing tax revenues that could preserve competitiveness while making the tax system more equitable. It then proposes a new framework for public-private partnerships to mobilise private investment for inclusive development and finally closes with a conclusion and policy recommendations.


Ensuring the availability of sufficient financial flows to drive Panama’s continued national development and to foster social inclusion is critical to sustain the country’s rapid economic expansion. Beyond funding fiscal stability, as highlighted in previous chapters, raising additional revenues is fundamental to close the gap in several policy areas. It is a priority to improve the quality and coverage of key public services, especially those that affect individuals of low socio-economic background, such as education and skills (Chapter 2; OECD, 2017a). Furthermore, financing investments that promote regional development and reduce disparities across provinces and comarcas is also critical for long-term sustainable growth (Chapter 3).

Current levels of investment in key socio-economic areas for development are well below those of other Latin America and the Caribbean (LAC) countries and Organisation for Economic Co-operation and Development (OECD) economies. Social expenditure in Panama is considerably below Latin America and OECD averages. Social expenditures in health, pensions, family support and other social services in 2016 were just close to 5% of Panama’s gross domestic product (GDP), well below spending in LAC (around 8.6% of GDP) and in OECD countries (21.2% of GDP) (OECD, 2017a; OECD, 2017b). Investment in education also lags behind regional and OECD levels, at 3.6% of GDP in 2015, compared with close to 4.3% of GDP in LAC and 5.5% in OECD countries. Finally, investment in research and development remains well behind most Latin American countries and the gap has widened during the past decade. Panama spent only 0.07% of its GDP in 2013 in research and development, while the Latin American average was ten times higher (0.75% of GDP). The investment gap with OECD economies is even more striking, where it was 2.42% of GDP in 2013 (OECD, 2017a).

To ensure financing for development in Panama, citizens’ willingness to pay taxes – known as “tax morale” – is fundamental. Trust in institutions and satisfaction with public services go hand in hand and are a key element in the “fiscal pact”, understood as the agreement that citizens pay taxes to the state in exchange for certain public services and goods. It is one of the main components of the social contract. Although Panama remains slightly better than the region’s average in terms of citizens’ satisfaction with public services, it has shown a slight deterioration between 2010 and 2015. For instance, the share of the population that expressed being satisfied or very satisfied with public hospitals declined from 53% to 46% between 2005-15 (OECD/CAF/ECLAC, 2018). Reinforcing credibility of public policies and trust in institutions is fundamental since, similar to Latin American economies, only half of the population declares tax evasion as never justifiable. This erodes the capacity of states to raise revenues that are critical to finance good quality public goods and services, which are key to improve citizen satisfaction and respond to the greater aspirations of a larger middle class (OECD/CAF/ECLAC, 2018, OECD 2017a).

There is substantial scope to increase fiscal revenue collection in Panama. Total fiscal revenues are low compared with other countries at similar levels of development (OECD, 2017a). Tax revenues particularly are low compared with OECD and LAC averages. In 2016, tax revenues represented 16.6% of Panama’s GDP, compared with 22.7% in LAC and 34.3% in OECD economies (OECD/ECLAC/CIAT/IDB, 2018). However, non-tax revenues derived from the Panama’s Canal and – to a lesser extent – from other non-financial public-sector firms have accounted for 3.2% of GDP on average in the past decade; this compensates for the country’s low tax efforts, but these funds tend to be earmarked or are susceptible to volatility.

Improved tax revenue collection, through a broadened tax base and strengthened tax administration, could provide a stable, long-term source of income. This is particularly evident for the value-added tax (VAT), as the tax system currently forgoes approximately 2% of GDP due to exemptions and payment evasion. Within Panama’s wide array of tax exemptions, some affect the system’s efficiency by potentially providing incentives to firms within sectors that do not require these benefits. Environmental taxes are also an untapped source of additional revenue that would improve the environment at the same time. Finally, curbing evasion and fraud through technology and institutional strengthening could also raise revenues.

Mobilising private sector investment, through public-private partnerships, can also help finance development. Adopting and implementing a sound regulatory and institutional public-private partnerships framework is fundamental to build effective and efficient infrastructure.

This chapter focuses on improving domestic revenue mobilisation to support inclusive and sustained growth, and on reinforcing this effort with a public-private partnership framework to promote investment in Panama. It analyses tax policies for inclusive growth that minimise the efficiency and equity trade-offs within the tax system as a whole. This is achieved through three main methods: i) reducing the efficiency costs of equitable tax policies; ii) minimising the equity costs of efficient tax policies (OECD, 2015a); and iii) implementing policies that bolster both equity and efficiency (Brys et al., 2016). In addition, this chapter presents current gaps in regulatory and institutional frameworks for public-private partnerships compared with other Latin American and OECD economies. Finally, this chapter concludes with the resulting main policy recommendations.

Fiscal stability is key to ensuring macroeconomic stability and sustained investment

While Panama’s solvency has a good perception by capital markets and has contributed to reduced interest payments, capital expenditures have increased in recent years. Indeed, investment has been one of the main drivers of economic growth, with low debt cost a key factor. From 2011 to 2016, investment more than doubled from averages in the early 2000s, as public capital expenditure reached 8.8% of GDP in 2016 compared with 3.8% in 2000. Capital expenditure had an average annual expansion of 0.19 percentage points of GDP during the period 2000-16, while interest payments decreased by 0.14 percentage points during the same period. In the past, high debt levels meant high financial costs, which crowded out public productive investment. In the early 2000s, interest payments reached 4.3% of GDP. Interest costs were halved and averaged 2.0% of GDP during 2011-16 (Figure 4.1).

Reducing primary deficits through capital expenditure cuts can be costly in terms of economic growth and potential output. Capital and current expenditures have a positive and large impact on Panama’s long-term GDP trajectory. For each Balboa spent by the government on a long-term horizon, the multiplier effect amounts to PAB 2.3 (Garry and Rivas Valdivia, 2017).11 Therefore, fiscal consolidation through capital expenditure cuts is not a feasible pathway that can lead to high levels of sustainable growth despite contributing to the short-term reduction of primary fiscal deficits in the non-financial public sector (NFPS). In that context, further fiscal resources should contribute to achieving the fiscal rule and to financing capital expenditures.

Figure 4.1. Total revenue and expenditures of the non-financial public sector (NFPS)
Percentage of GDP

*Preliminary data up to September 2017.

Note: Other income is comprised of operational balances of public enterprises, non-consolidated agencies and donations to the NFPS.

Source: Based on IMF (2001), “Panama: Staff report for the 2000 Article IV consultation”; MEF (2017), “Fiscal balances for the years 2004-2017”.


Fiscal rules are a useful tool in guaranteeing fiscal stability. Fiscal rules have been shown to improve fiscal management processes and provide a stable fiscal horizon that leads to financial certainty. These rules have usually followed three main objectives: ensuring debt sustainability; strengthening stability; and improving expenditure composition (investment) (OECD/CAF/ECLAC, 2018; Arbeloa et al., 2016).

Panama’s fiscal rule promotes fiscal discipline by limiting the NFPS deficit and gross public debt. Panama’s fiscal responsibility law dates back to 2002, although suspension clauses have been applied and it was subsequently refined and modified between 2008 and 2014. Essentially, the Panamanian fiscal rule imposes a double condition on public finances. First, it restricts the expansion of the NFPS’s deficit as a percentage of GDP and, second, it limits the level of public debt the NFPS can acquire. The overall goal is to maintain fiscal discipline that protects public investment and provides adequate fiscal space to enact counter-cyclical policies to favour long-term fiscal sustainability.

Public debt is sustainable but rising. Economic growth and sound macroeconomic policy management have led to sustainable public debt levels. Public debt has decreased by 40 GDP percentage points from its highest peak in 1994 (82% of GDP) to the current level of 37% of GDP in 2017.2 However, the ratio of public debt to GDP has increased in recent years, in line with primary and total fiscal deficits, and public debt is nearing the limits established by the rule (Figure 4.2, Panel A). If left unmanaged, this is likely to pose potential risks to fiscal soundness in the medium term.

Recurrent fiscal deficits are pressuring the public debt to rise. At current borrowing costs this might not seem a threat in the short term. However, a debt sustainability analysis that modelled different scenarios employing the average observed primary balance deficit, in combination with annual growth scenarios below 6%, revealed that the gross debt could surge to between 52% and 60% of GDP by 2024. Similarly, local projections have shown that scenarios in which annual growth rates are two standard deviations below the historical GDP average could potentially increase the net public debt by 15 percentage points of GDP in a five-year span (2017-22) (OECD, 2017a).

Panama’s fiscal rule enforcement needs to be improved to avoid fiscal risks and ensure sustained growth. Assessing the adherence to the fiscal rule is difficult because of the numerous changes and the application of the escape clause due to economic downturns. An appraisal of the deficit clause shows that the condition was met in the years 2002 and 2008. In 2009, 2010, 2012 and 2014, the fiscal rule was met after modifications that outstretched the deficit targets (Figure 4.2, Panel B). The adjusted overall fiscal balance, which results from the difference between the unadjusted fiscal balance and the effective contribution from the Canal Authority to the Fondo de Ahorro de Panamá (FAP) and a constant of 3.5 GDP percentage points, has provided further leeway to increase expenditures and fiscal deficits without explicitly breaking the rule (Alonso et al., 2016).

Recent efforts to establish a fiscal council are a step in the right direction, as it will promote transparency and accountability of the fiscal framework, and will encourage informed public debate (IMF, 2017a).

Figure 4.2. Fiscal rule compliance measures

*Data for 2017 are preliminary up to September 2017.

Notes: Panel A: Fiscal balances for 2015-17 are adjusted as established by Law No. 38/2012. Panel B: Grey areas correspond to years in which the fiscal rule was in place.

Source: Barreix, Benítez and Melguizo (forthcoming), “Panama”, in Fiscal Rules in Latin American Countries.


Public revenues in Panama are low

Tax revenues in Panama have remained low compared with OECD and LAC averages. In 2016, Panama’s tax revenues amounted to 16.6% of GDP, compared with 22.7% in LAC and 34.3% in OECD economies (Figure 4.3). Furthermore, tax revenue collection has remained stationary during the last 27 years, averaging 16% of GDP, with a standard deviation of 1.07% of GDP throughout this period. Between 1990 and 2016, tax levels increased by 0.7 percentage points of GDP, an annual average growth of 0.03 percentage points, one of the lowest in LAC. In comparison, the LAC economies raised their tax collection by an average of 0.26 percentage points of GDP each year, a total increase of 6.8 percentage points of GDP (OECD/ECLAC/CIAT/IDB, 2018). During the same period, Panamanian GDP per capita at constant prices increased by a factor of 1.8, highlighting that Panama’s high levels of growth have not translated into higher tax revenues.

Figure 4.3. Panama’s tax revenue structure compared with benchmark countries
Percentage of GDP, 2016

*2015 data.

Notes: As in OECD/ECLAC/CIAT/IDB (2018), taxes refer to compulsory unrequited payments to the general government. Taxes are unrequited in the sense that benefits provided by governments to taxpayers are not normally in proportion to taxes paid by them. Compulsory social security contributions paid to the general government are treated here as tax revenues. Revenues from the Canal are not included

Source: Based on OECD/ECLAC/CIAT/IDB (2018), Revenue Statistics in Latin America and the Caribbean 2018; OECD (2017e), Tax Administration 2017 – Comparative Information Series on OECD and Other Advanced and Emerging Economies.


Non-tax revenues from public enterprises complement the intake from tax revenues, but they tend to be more pro-cyclical and volatile than tax revenues. Non-tax revenues, including fees and dividends from the Canal, rose an average of 4% of GDP during the last five years. Countries with high levels of income from non-renewable natural resources tend to exhibit a lower tax effort (IDB, 2013). Although Panama’s fees and dividends from the Canal are not a traditional non-renewable natural resource, they provide the government with a significant stream of non-tax revenue amounting to 11% of total fiscal revenues (fiscal revenue is the sum of total tax revenue and the dividends and fees of public non-financial enterprises) (Figure 4.4).

Figure 4.4. Fiscal revenue from the NFPS, 2000-16
Percentage of GDP

Source: OECD calculations based on OECD/ECLAC/CIAT/IDB (2018), Revenue Statistics in Latin America and the Caribbean 2018 and MEF of Panama.


Tax structure relies heavily on social security contributions while direct and value-added taxes are relatively low

Social security contributions (SSCs) represent 37% of total tax revenues (OECD/CIAT/IDB, 2016). Taxes on goods and services accounted for 30% of Panama’s total tax revenues, similar to the OECD share (32%) but significantly lower than the LAC average (51% of total tax revenues). At the same time, revenues from personal income tax (PIT) and corporate income tax (CIT) amount to 22% of total tax revenues, below the LAC average of 24% and far below the 33.7% average for OECD economies. Finally, property taxes accounted for 4% of total tax revenues, 2 percentage points higher than in LAC countries and 2 percentage points below the OECD average (Figure 4.5). 40% of total tax revenues are earmarked. SSCs are targeted to financing old-age, disability, work injury and healthcare benefits (OECD/CIAT/IDB, 2016). Taxes levied on alcohol, soft drinks and tobacco represent an additional 3.5% of total tax revenues and are also allocated to the Panamanian insurance fund (Caja de Seguro Social) (OECD/ECLAC/CIAT/IDB, 2018).

Figure 4.5. Tax revenue and composition in Panama, LAC and OECD economies, 2016

*Others: includes other unallocable taxes, including those on profits and capital gains, and payroll taxes.

Source: OECD/ECLAC/CIAT/IDB (2018), Revenue Statistics in Latin America and the Caribbean 2018.


Revenues from the VAT are one of the lowest in the LAC region. Panama raises 2.6% of GDP through VAT receipts. Amid LAC countries, only the Bahamas raises less (2.5% of GDP), while the averages for LAC and OECD economies are 6.3% and 6.7% of GDP, respectively.

Panama collects 62% of the VAT’s potential revenue and therefore loses 38% of its potential revenue. Potential VAT revenue is estimated by levying the generalised VAT tax rate on final consumption. Although VAT’s losses cannot be decomposed due to lack of information, these losses should be explained by several aspects including VAT tax expenditures, evasion, fraud and other factors that diminish the tax administration’s capacity to raise revenue.3 Estimates of the VAT revenue ratio (VRR), a measure of the amount of VAT actually collected (net of refunds) relative to the potential VAT collection show that Panama could increase tax collection by 1.6% of GDP if zero rated items, exemptions that diminish VAT collection, evasion, fraud and other forms of elusion were completely abolished. In comparison, on average, LAC countries for which data are available suggest that for each 100 monetary units of potential VAT revenue, tax administrations collect 56 units, forgive 13 units through reduced VAT rates, zero-rated items, exemptions and other benefits, and lose 31 units through other factors that cannot be explained through tax exemptions (Figure 4.6).4 This positions Panama above the LAC average in terms of VAT collection efficiency, but highlights there is still room to increase the availability of VAT resources to finance investments without raising tax rates.

Improving the comprehensiveness of tax expenditure data will provide a more accurate depiction of foregone revenues in Panama. Tax expenditures are “provisions of tax law, regulation or practices that reduce or postpone revenue for a comparatively narrow population of taxpayers relative to a benchmark tax” (OECD, 2010). Tax expenditure estimates published by the MEF employ a different methodology based on a different benchmark, i.e. not based on the foregone-revenue approach, presumably one in which VAT exemptions are considered part of the normal tax structure rather than a tax expenditure.

Figure 4.6. The VAT revenue ratio (VRR): Decomposing the VAT’s potential revenue
Share of total potential revenue, 2015

Note: The figure decomposes the potential revenue of the VAT in three categories relative to potential VAT revenue: 1) VAT revenue ratio (VRR) is the proportion of the potential VAT that is actually collected (net of VAT refunds) by the tax administration; 2) tax expenditures: are VAT tax expenditures expressed as a proportion of the potential VAT. These figures are compiled from countries’ tax expenditure reports and amount to the forgone VAT revenue due to reduced rates, zero rates and other fiscal benefits or reliefs; 3) other: the rest of the potential VAT revenue base that cannot be explained through tax expenditures, i.e. it groups all of the evasion, elusion, fraud or aggressive tax planning to avoid paying the tax.

Source: OECD/ECLAC/CIAT/IDB (2018), Revenue Statistics in Latin America and the Caribbean 2018.


Enhancing efficiency and equity in Panama’s tax system

Improvements in GDP per capita suggest a higher capacity than currently observed to mobilise tax revenue to finance development in Panama. The tax gap amounted to 9 percentage points of GDP in 2011 in Panama, implying that all else being equal, on average countries with similar characteristics collect 25% of GDP in tax revenues. This cross-country tax effort approach estimates the expected level of tax collection after considering the country’s per capita income, the importance of agriculture and the industrial sector within the economy, the levels of human capital, the dependence on natural resources, the openness of the economy and its exposure to exogenous shocks (Yohou and Goujou, 2017; OECD, 2017a).

This section analyses two key items to take into consideration to enhance the taxation system in Panama: efficiency and equity. First, it presents estimates on tax expenditures to improve the tax system’s efficiency. Second, it analyses the taxation system by income deciles in Panama.

Measuring tax expenditures is critical to fine-tuning the tax system’s efficiency

Broadening tax bases is critical to raising additional direct revenues and maintaining current tax rates. Panama’s tax bases are narrowed due to numerous tax exemptions provided to firms, individuals and special sectors through special economic zones (SEZs) to promote investment. A crucial issue lies in the quantification of the fiscal costs triggered by these benefits. According to available estimates provided by the MEF, in 2015 tax expenditures amounted to 0.8% of GDP. This does not seem high relative to the LAC average (4.6% in 2012) (Pecho, 2014); however, this figure contrasts with other estimates of tax expenditures presented for Panama, in which tax relief channelled through consumption taxes in the country amounted to 2.3% of GDP in 2012, behind only Nicaragua, Costa Rica, the Dominican Republic and Uruguay (Pelaez Longinotti, 2017; OECD, 2017c).5 This reflects the difficulty of international comparability since differences in tax expenditure benchmarks will lead to certain tax provisions being considered as tax expenditures in one country and not in another.

Panamanian tax expenditures have declined during the last two decades according to data provided by the MEF. However these data are estimates and do not include all items related to tax benefits, such as those of VAT and SEZs. In 1995, tax benefits amounted to 2.5% of GDP. Since then, they have fallen rapidly to current levels observed in 2015 (Figure 4.7, Panel A). The downward trend can be explained mostly by a substantial decline in subsidies to energy and fuels. During 2010-15, estimated foregone revenue due to tax benefits granted through tax policy averaged 1.3% of GDP and were concentrated in fiscal documents, a kind of tax benefit provided to firms (37% of total tax expenditures), relief on imports (21%) and energy subsidies (21%) (Figure 4.7, Panel B).

Figure 4.7. Panama: Tax expenditure evolution and composition by type of benefit

Note: Fiscal documents are issued by the government. These documents have a nominal value and can be used to pay taxes.

Source: Based on data from the MEF of Panama.


Tax expenditures are directed towards a myriad of economic goals, but it is necessary to measure their efficiency. They are aimed at social and environmental policy goals that include creating more and better jobs, boosting innovation, improving education and reducing inequality. These tax benefits are enacted and pursued through the fiscal code. Yet, it is necessary to quantify these tax expenditures to appraise their effectiveness and efficiency in achieving their intended goals (Box 4.1) (Redonda, 2016). This is particularly important since tax expenditures are automatically enforced year after year, circumventing controls and creating opportunities for tax avoidance.

Assessing efficiency draws attention to two crucial aspects of policy evaluation. First, it must be determined whether implementing a particular tax expenditure triggers effects that may impact other policy goals. For instance, there is strong consensus on the significant negative environmental impacts of tax expenditures granted to fossil fuel producers (and consumers) and, thus, on the urgent need to reduce their use. In other cases the side effects may not be as evident, but are nonetheless critical. The regressive nature of mortgage interest deductions or tax exemptions in the context of retirement schemes are examples of this (Redonda, 2016). Second, the efficiency of tax expenditures in comparison with direct spending must be determined. Under certain conditions, tax expenditures can have several advantages such as low administrative costs, low stigma for beneficiaries and/or increased political acceptability relative to direct payments from the government. In other words, tax expenditures often lead to an underestimation of their costs as well as an overestimation of their benefits (Burman and Phaup, 2012).

The design of these schemes is crucial to their effectiveness. Tax expenditures for investment are a case in point: these schemes should be well targeted so that they promote capital investment. This is not the case when a scheme has no impact at all on productive investment. For instance, whereas tax incentives targeted at export-oriented sectors and mobile capital are more likely to have the expected impact, those granted to sectors producing for domestic markets or extractive industries are significantly less effective (IMF et al., 2015). In this context, the next section analyses the equity of the tax system in Panama.

Box 4.1. Estimating and reporting of tax expenditures: International experiences

Estimating the fiscal cost of tax expenditures through sound cost-benefit analyses is a necessary step in scrutinising the effectiveness and efficiency of the different schemes implemented by the government. In addition, making those estimates publicly available through official reports is crucial to increase the government’s transparency and accountability.

Various approaches can be used to measure the cost of tax expenditures. The three main methodologies are:

  1. The revenue-foregone approach: estimates the amount by which taxpayers have their tax liabilities reduced as a result of a tax expenditure based on their actual current economic behaviour.

  2. The revenue-gain approach: estimates the additional revenue that would be collected if a tax expenditure were removed, accounting for behavioural changes resulting from this removal.

  3. The outlay-equivalent approach: estimates the government cash outlay required for an alternative direct spending programme replacing the tax expenditure that would have the same benefit for the taxpayers. As with the revenue-forgone method, it assumes no behavioural change.

Tax expenditure figures should be interpreted with caution. Not internalising behavioural changes and applying the same marginal tax rates to all tax expenditures are two of the most significant weaknesses of the revenue-foregone method. Nonetheless, and probably because of its relative simplicity, most countries base their estimates on this approach.

Whereas estimating the foregone revenue of tax expenditures for consumption taxes is based on national accounts and/or household expenditure data, and hence is relatively straightforward, the quantification of tax expenditures through direct taxes often requires the use of microsimulation techniques based on a representative sample of taxpayers. These models are static in the sense that the arithmetic simulation of taxes and benefits does not take the behavioural changes of individuals into account. Most countries have their own microsimulation model. For instance, the Institute for Fiscal Studies uses TAXBEN in the United Kingdom and the National Bureau of Economic Research works with TAXSIM in the United States.

Panama does not officially report on tax expenditures. There is significant heterogeneity in official reports across the 43 OECD and G20 countries. Whereas ten countries do not report on tax expenditures at all, ten other economies provide regular, comprehensive and detailed reports including additional information for at least some schemes – i.e. they surpass the simple revenue-foregone estimates to include, for example, cost-benefit analyses, distributive assessments, and estimates based on methods other than the revenue-foregone, such as the outlay-equivalent method (Neubig and Redonda, 2017).

Finally, whereas most countries include their tax expenditure reports within their government budgets, some have also created specific online platforms that considerably simplify accessibility to the information. Canada’s official Report on Federal Tax Expenditures, for instance, provides revenue-foregone estimates of the federal income tax system (corporate and personal) as well as the goods and services tax for the current fiscal year. It also provides a forecast for the following year as well as time-series data for the previous six years. The data are classified by tax base, subject (e.g. education, business, employment), and each scheme is published with a detailed description including the beneficiaries, the type of measure, the objective, the reason the measure is not part of the benchmark tax system (and hence considered a tax expenditure), and even a legal reference. Finally, specific tax expenditure schemes are evaluated each year, moving beyond the estimation of their fiscal cost. For instance, the 2017 Report includes a paper evaluating the “relevance, effectiveness, equity and efficiency” of the Children’s Fitness Tax Credit and the Children’s Arts Tax Credit.

Source: Redonda (2016), “Tax Expenditures and Sustainability. An Overview”, Discussion note 2016/3, Council on Economic Policies, Zurich,

Improving the tax system’s equity

Panama should improve the potential redistributive power of the tax system to foster inclusive growth. An adequately designed tax system is a powerful instrument to achieve more equality (OECD, 2015a). Currently, exemptions, deductions and other special treatments negatively affect both the vertical and horizontal equity of the tax system. On average, individuals with higher income pay a higher share of their income in taxes, but there are several deductions and exemptions that disproportionately benefit the well-off, diminishing the average tax rate and the progressiveness of the system. The elimination of these provisions could enhance equity and revenue as well as bolster the system’s redistributive power, which is currently on par with other LAC economies. Finally, informality and tax evasion diminish the system’s capacity to redistribute throughout an individual’s lifecycle (Brys et al., 2016).

Panama’s tax system is progressive but not redistributive enough

Panama’s tax system exhibits progressivity as a whole when measured by the concentration shares of tax collection.6 The top decile pays 46.7% of total tax revenues (including SSCs), while those in the lowest three deciles of income distribution only pay a combined share of 3.4% of total tax revenues (Figure 4.8, Panel A). In terms of GDP, this translates to the former taxpayers contributing 7.7% of GDP of Panama’s total revenues, while the latter group contributes 0.6% of GDP. The breakdown of the progressivity of the most important taxes shows the same pattern, although concentration magnitudes vary from tax to tax.

The Personal Income Tax (PIT) is highly progressive when viewed as a share of total revenue throughout the income distribution. The PIT is concentrated in the top two wealthiest deciles of income distribution (97% of total PIT revenue). The rest of the tax (3% of PIT) is paid by what can be considered a consolidated middle class (Easterly, 2001) (deciles 6-8)7 (Figure 4.8, Panel B). It should be noted that the levels of concertation of the PIT are similar to other countries in Latin America (OECD/ECLAC/CIAT/IDB, 2018; Barreix, Benítez and Pecho, 2017).

Excise taxes and the VAT are concentrated at higher levels of income. The top decile pays 43.9% of total VAT collection (1.2% of GDP). At the other end of the income distribution spectrum, the poorest 5 deciles pay 15.2% of the VAT (0.4% of GDP). The tax burden on individuals, as a share of their income, is considerably lower in the lowest deciles than those who are more affluent (Figure 4.8, Panel C). This is to be expected, since wealthier individuals have greater consumption capacity and thus will pay a higher share of these taxes.

Payments to the SSCs are concentrated at the top of the income distribution. On average, the highest quintile contributes 42 times more than those in the lowest quintile (Figure 4.8, Panel D).

Figure 4.8. Concentration shares of tax payments, by deciles of market income (2016)

Note: The figures depict the share that each decile pays to a determined tax or the share of benefit they receive through direct transfers.

Source: OECD and the Commitment to Equity (CEQ) Institute at Tulane University, based on national household survey (INEC, 2016).


The tax system as a whole, including SSCs, remains progressive when gauged by average tax rates paid throughout the income distribution (Figure 4.9). Under this metric, individuals in the poorest decile contribute 5.5% as a share of their market income in direct and indirect taxes and SSCs. The fifth decile pays 8.4% and the richest decile pays 11.6% as a share of market gross income (Figure 4.9, Panel A). The average tax rate is the ratio between the tax paid and the total income of the decile. It is useful as it provides a better depiction of the individual’s ability to pay. It can also be an approximation of the system’s or the tax’s fairness, as it shows the proportion of an individual’s income that is used to comply with tax obligations.

The PIT is progressive although average effective tax rates remain low. The wealthiest decile is liable for only 2.7% of its market income and the second-richest decile pays only 0.3% of its income, while the rest of the deciles pay close to zero as a percentage of their market income (Figure 4.9, Panel B).

Figure 4.9. Average tax paid as a share of market income in Panama, 2016

Notes: The figures depict the ratio of taxes paid to market income by decile. VAT and excise taxes are presented as a share of disposable income, which includes any direct transfer individuals might have received that affect their available income to consume.

Source: OECD and the Commitment to Equity (CEQ) Institute at Tulane University, based on national household survey (INEC, 2016).


The VAT remains regressive under this metric despite the numerous exemptions on food staples and other basic goods. On average, individuals in the lower-income deciles pay 2.1% of their disposable income on VAT, whereas high-income individuals pay 1.6% of their disposable income (Figure 4.9, Panel C). Like many other countries, Panama exempts food stuffs and other goods to benefit those at the lower end of the income scale. In this regard, evidence from Costa Rica, Mexico and Uruguay has shown that even though the poor spend a large proportion of their income on these exempted items (food), the more affluent are likely to spend more on these same items in absolute terms. Therefore, most of the foregone revenue accrues to the rich (Clements et al., 2015; Barreix, Bès and Roca, 2010; OECD, 2017c; OECD, 2007).

The middle class in Panama pays the least on excise taxes as a share of their disposable income. The average excise tax rate is slightly U-shaped (Figure 4.9, grey bars, Panel C): individuals in the wealthiest and the poorest deciles both pay 0.8% of their respective disposable incomes on ‘sin’ taxes. Indeed, the bulk of excise tax falls on beer, alcohol, tobacco and fuel.

The wealthiest decile’s effective average SSC rate is lower than that of the fifth decile, since SSCs are levied on labour income but not on capital income. Since those in the highest deciles on the income distribution tend to derive an important proportion of their income from capital, SSCs as a share of their total income will be reduced.

The tax system does not reduce inequalities enough compared with OECD countries. Similar to Latin American economies, the tax system’s redistributive power is low; it reduces the market income Gini coefficient by 0.021 Gini points (vs. 0.022 points in Latin America), while in OECD economies it decreases by 0.16 points (Figure 4.10). This does not mean that the system is not progressive, as the greater percentage change in after-tax income is in the more affluent individuals (Figure 4.9). However, average tax rates are similar among individuals across the income distribution, highlighting the available space to improve the redistributive power of the tax system.

The tax system’s low redistributive power stems from low effective average tax rates which translate into few revenues to affect the disposable income distribution. Low average tax rates indicate that the income distribution is heavily skewed towards the wealthiest individuals. Tax measures that lead to a narrower distribution of disposable income include a progressive PIT design, broadening the taxable base by eliminating or reducing regressive tax expenditures and by taxing all forms of income, and reducing tax avoidance and evasion opportunities available to the wealthy through aggressive tax planning (Brys et al., 2016).

Figure 4.10. Impact of taxes and transfers on income distribution in Panama, Latin America, the European Union and selected OECD economies

Source: OECD and the Commitment to Equity (CEQ) Institute at Tulane University, based on national household survey (INEC, 2016); OECD/CAF/ECLAC (2018), Latin American Economic Outlook 2018: Rethinking Institutions for Development.


Policy priorities in key tax dimensions in Panama

This section analyses and presents recommendations to improve the tax regime for several key tax dimensions in Panama. It includes the VAT, the corporate tax, the tax system for SEZs, the personal income tax and environmental taxes in Panama.

Increasing revenues from VAT

Increasing the VAT rate would yield additional resources to finance development. Panama could increase approximately 0.37% of GDP in additional revenues for each increased percentage point. A straightforward estimation of VAT shows that an additional 1 percentage point increase in the VAT rate yields USD 205 million. The analysis uses Panama’s general VAT rate (7%) and assumes that behavioural responses to the higher tax rates would slightly increase evasion. An increase in the tax rate would also increase the deadweight loss on consumption. Regarding the VAT and its effect in the firms’ production chain, tax paid on inputs can be credited against tax due on output at each stage of the value-added chain until the good or service reaches the final consumer. Furthermore, the VAT does not affect international competitiveness, and when it is applied on a broad-based scale it also avoids distorting consumption choices of economic agents. In fact, consumption taxes, such as the VAT, have been found to be one of the least harmful taxes to growth (Brys et al., 2016). In addition, they minimise compliance and administrative costs because economic agents can deduct the accrued VAT at intermediate stages. This increases the incentives to request receipts and hence triggers a positive effect on firm formalisation (IDB, 2013).

To increase tax revenues there is also a need to broaden the VAT’s base and to increase the VAT’s potential revenue. Low levels of VAT intake are a reflection on low VAT rates but also on a wide variety of tax benefits given to several products and services and high levels of evasion. Unlike other countries, Panama does not levy VAT rates that are lower than the general rate (7%). VAT rates on luxury items are levied at 10%, and on “sin” goods 15%. However, the VAT exempts several goods and services, affecting the VAT’s potential revenue (Figure 4.6). Conservative estimates based on the revenue-foregone approach show that the largest exemptions are for agricultural products (0.39% of GDP), food products (0.64%) and freight and passenger transport (0.86%) (Jorrat, 2014). Yet, as these estimates were partial (they only covered the most important 14 goods and services) and are not carried out in a systematic manner, they are not comparable to other existing figures.

To compensate the poorest individuals should be a priority and this should contribute to compensate the regressive nature of the VAT for the bottom decile. Targeted programmes are more effective to reduce disparities than untargeted tax benefits. In Panama, social assistance comprises four distinct programmes: Red de Oportunidades (2006), a conditional cash transfer; 120 a los 65 (2014) to support the elderly; Beca Universal (2010), a cash transfer for households with children to encourage school attendance; and Angel Guardian (2012), a programme targeting poor or vulnerable people with disabilities. Red de Oportunidades is the only programme that has been formally evaluated and its evaluation showed that this programme increased school enrolment and was able to reduce child labour in both indigenous and rural non-indigenous areas (OECD, 2017a). In the region, other experiences are useful to show the benefits of targeted programmes compared to tax policies to reduce inequalities. In Brazil, zero-rated and exempted products of its excise tax, the Imposto Sobre Circulação de Mercadorias e Serviços, cost BRL 18.6 billion and improved the Gini coefficient by 0.001, whereas transfers through the Bolsa Familia programme cost BRL 28 and improved it by 0.017. This translates into higher rates of efficiency for the Bolsa Familia as each billion spent in this programme reduces the Gini coefficient by a greater proportion than those spent through exempted products, highlighting the effectiveness of targeted transfers compared to untargeted tax benefits (Bittencourt, 2017).

Taxes on corporate domestic profits can be more efficient

The CIT is the third most important tax within the Panamanian tax structure. In 2000, it represented 10.9% of total tax intake. This share increased to 18.2% in 2016. In terms of revenue, the CIT increased by 2.1% of GDP in 2016, behind only the VAT (2.7%) and SSCs (6.1%) (OECD/ECLAC/CIAT/IDB, 2018). Relative to other countries in the region, Panama’s levels of CIT collection are below the averages of LAC and OECD economies, 3.4% and 2.8% respectively.

Companies’ profits are subject to income tax on their Panamanian-sourced income. Panama has a territorial system of taxation. The CIT is levied at a flat 25% nominal statutory rate on the net taxable income (after exemptions and deductions are subtracted from the taxable base). This is a similar nominal rate relative to rates applied on other neighbouring or Latin American countries (26.1%) (Table 4.1). Dividends are excluded from shareholders’ taxable income. Dividends and other profit distributions from companies that require an operation licence (aviso de operación) are subject to withholding and, in some cases, to a complementary tax. Non-resident companies are also subject to withholding taxes on dividends and interest (IBFD, 2017).

Table 4.1. Corporate taxation: selected indicators for LAC countries (2017)


Statutory CIT rate

Withholding rate on dividends

Withholding rate on interest

Number of treaties











Costa Rica





El Salvador








































Dominican Republic


























a. CIT rates vary by gross income; starting from CRC 105 241 000 (USD 182 128) the rate is 30%.

b. The general CIT rate is 30%; it is reduced to 25% only when taxable income does not exceed USD 150 000.

c. The general CIT rate is 25%; companies with taxable income that exceeds HNL 1 million (USD 41 975) are subject to a 5% surtax.

d. The general CIT rate is 15%; in addition, there is a social contribution tax of 9% and a 10% surtax for companies with taxable income above BRL 240 000 (USD 75 960).

e. The general CIT rate is 24%; dividends distributed to non-residents receive a tax credit for corporate income taxes paid and are subject to a 35% withholding tax.

f. The general CIT rate is 33% (for year 2018). In addition, companies with taxable income above COP 800 million (USD 282 600) face an additional surtax of 4% (for year 2018).

g. Withholding tax on dividends is 10% if the income distributed is Panamanian source, 5% if it is foreign-source income, and 20% in case of bearer shares. Withholding tax rates on interest are 25% on 50% of the gross amount.

h. Withholding tax rates on dividends and interest are 15% on 50% of the gross amount.

i. Withholding tax on dividends is zero if paid out of taxed profits and 15% otherwise.

j. Withholding tax on dividends is zero if paid out of taxed profits and 35% otherwise.

k. Withholding tax on dividends is zero if paid out of taxed profits and 22% otherwise.

l. A reduced rate of 4% withholding tax on interest is available for loans granted by foreign banks, insurance companies or financial institutions.

m. Withholding tax rates on interest are taxed at 15%; a reduced rate of 5% is levied on interest payments for loans exceeding an 8-year term for the funding of public infrastructure works under public-private partnerships.

Sources: OECD (2017c), OECD Tax Policy Reviews: Costa Rica 2017; DIAN (2018), “Structural tax reform”.

The complementary tax and the annual licence operation tax distort investment decisions. The complementary tax is levied on companies that do not distribute profits or distribute less than 40% of the after-tax profits. The complementary tax collected an average of 0.2% of GDP during the last five years. However, a feature of this tax is that it increases the costs of not distributing profits, thus affecting investment decisions. Similarly, the annual operation licence tax also affects investment decisions. It is levied at an annual rate of 2% on the capital invested in a company and increased by an average of 0.2% of GDP. The annual licence operation tax is capped at USD 60 000 and firms with investments of less than USD 10 000 are exempted from the tax. Firms established in SEZs are subject to an annual tax at the rate of 0.5% on the capital of the enterprise, with a minimum USD 100 and a maximum USD 50 000 tax liability.

Panama should consider removing disincentives to investment. Abolishing the annual operation licence tax and the complementary tax would improve the system’s neutrality and simplicity. It should be noted, however, that dividends should still be taxed. A credit can be given to the PIT for taxes paid at the CIT level to limit double taxation on corporate returns.

Differentiated tax treatments might benefit some sectors disproportionately

Differentiated tax treatment among productive sectors can lead to windfall gains in some sectors. Taxable sector profits are not proportional to the share of the CIT paid by firms. Firms that operate within the financial and insurance sectors earn 30% of all profits filed to the tax administration but only contribute 18% of the collected CIT revenue. Other sectors such as wholesale and retail face the opposite situation, as they earn 15% of total profits but contribute a quarter of total CIT revenues (Figure 4.11). The tax treatment received by firms can vary depending on the source of their income and their main activity. The tax code exempts several types of interest income (Article 708 of the Tax Code) and establishes that agricultural firms, international transportation firms, state-owned enterprises and firms that operate within SEZs are all subject to different tax rates and benefit differently from a myriad of income tax exemptions. In addition to differentiated tax treatments, firms earning more than USD 1.5 million are also required to use an alternative method to estimate CIT liability,8 which can also affect the CIT due. Admittedly, more micro-data is required to provide a thorough explanation of the mechanisms through which these different treatments affect each sector.

Figure 4.11. Shares of sectoral distribution profits and CIT revenues

Note: Only sectors with shares of profits of 5% or higher have been considered.

Source: Based on data from the MEF (2017).


Different tax treatment for small agricultural firms and micro, small and medium-sized enterprises (SMEs) provide incentives to remain small. Small firms engaged in agricultural and farming activities are exempt from their CIT liability provided that their gross annual income is below USD 300 000 and they avoid breaking into smaller inter-related businesses for tax avoidance purposes according to the tax code (Article 708). All SMEs also face a different tax treatment. They are subject to the standard income tax schedule and rules applicable to individuals on the net taxable income (after accounting for business-related expenses and other deductions) that is attributable to a gross annual income less than PAB 100 000. On the other hand, on the part of the taxable net income attributable to a gross annual income between USD 100 001 and USD 200 000, they are subject to the CIT tax rate (25%). In addition, SMEs are exempt from the complementary tax (IBFD, 2017).

There is no conclusive evidence showing that targeted tax expenditures or tax reliefs for small firms are more cost-effective than general tax relief for businesses. Special tax treatment may prevent small businesses from growing optimally to maintain their eligibility, i.e. the so-called small-business trap (IMF et al., 2015).

Generous tax benefits and special regimes reduce corporate tax revenues

Panama has implemented a wide range of SEZs to attract foreign firms and promote innovation. The most important are the Colón Free Trade Zone, Panama Pacific (Panamá Pacífico) and City of Knowledge (Ciudad del Saber) (Table 4.2). These three SEZs host approximately 2 000 firms and employ more than 43 000 workers – 2.4% of total employment in Panama. In 2015, the Colón Free Trade Zone alone accounted for 6% of the non-financial jobs in the country (Hausmann, Obach and Santos, 2016).

Table 4.2. Main features of Panama’s SEZs



Tax exemptions

Incentives to immigration

Other features

Panama –Pacifico

Industrial Park (2007)

251 companies (41% multinationals)

2 305 jobs

Income tax

Dividend tax

Import-export tax

Real estate transfer tax

Remittances tax

Commercial license

Patent & ITBMS tax

Special visa for:




Allowed to hire more than 10% of immigrants

Labour regime:

Overtime rate (25%)

Days-off-rate (50%)

Flexibility to operate Sundays and holidays

Special custom regime

One-stop shop

Cuidad del Saber

Technology Park (2000)

75 SMEs

1 290 direct jobs

Focus: innovation and technology

Import tax

Remittances tax


Real estate transfer tax

Special visa for:


Allowed to hire more than 10% of immigrants.

Colón Free Zone



Oldest in the world

Largest in Latin America

Second-largest worldwide

2 527 companies

29 766 jobs

Exports represent 4% of GDP.

Import tax

Remittances tax


Allowed to hire more than 10% of immigrants.

Source: Hausmann, Santos and Obach (2017), “Special economic zones in Panama: A critical assessment”.

The evolution of activity in the different SEZs is quite heterogeneous. In the Colón Free Trade Zone, the number of registered firms declined from 2 367 in 2010 to 2 058 in 2014 and total taxable income increased from USD 1 728 million to USD 2 058 million during the same period. In Panama Pacific, however, the number of registered firms significantly increased from 90 to 136 and total taxable income also went up from USD 1 778 million to USD 2 728 million during the 2010-14 period.

Labour productivity and wages are considerably higher within the SEZs. Indeed, firms within the Colón Free Trade Zone are 90% more productive than the average firm in Colón (Hausmann, Obach and Santos, 2016). Workers within SEZs earn higher wages, present lower levels of informality and a higher share of high-skilled jobs. This was observed in both the provinces of Colón and Panama. Whereas in the former wage differentials were low (USD 32 per month on average), wage gaps in Panama province were significantly higher at USD 511 (Figure 4.12).

Figure 4.12. Average monthly wages by type of job in firms within and outside of SEZs

Note: Employees outside and inside of the SEZ in Colón are 76 648 and 16 356. The corresponding figures for Panama province are 744 576 and 4 889.

Source: Based on Hausmann, Obach and Santos (2016), “Special economic zones in Panama: A critical assessment”.


The impact of the SEZs is less clear when it comes to foreign direct investment (FDI). Since the peak of 64% in 2007, the relative importance of SEZs in total FDI has decreased steadily while total FDI in Panama showed the opposite trend. There is no compelling evidence suggesting that without the SEZs total FDI would have been significantly lower (Hausmann, Obach and Santos, 2016). Indeed, focusing on the Colón Free Trade Zone, FDI appears to have had a minor and even negative impact on overall FDI growth in Panama during the 2011-16 period (Figure 4.13). In fact, other firms seem to have attracted FDI in higher volumes and in a more consistent manner throughout the analysed period.

For policy design and to correctly appraise the benefits or costs of tax incentives more information is needed. Striking the right balance between an attractive tax incentive for domestic and foreign investment and securing the necessary revenues for public spending is essential (IMF et al., 2015). Assessing the effective impact of SEZs on FDI is crucial as Panama is the top Latin American economy in terms of FDI inflows as percentage of GDP, a share that reached almost 10% in 2014. Unfortunately, as with tax expenditures in general, the lack of information on the tax benefits granted to firms operating in these SEZs – as well as on several target variables – prevents a sound evaluation of the effectiveness and efficiency of these schemes.

Figure 4.13. FDI growth decomposed by type of investments
Annual percentage change

Source: Based on data from INEC, “Economic situation: Foreign direct investment”,


In particular, SEZs yield direct and indirect costs that must be analysed in depth. The fiscal cost of these tax incentives arises from their direct cost as well as other indirect costs, such as making the administration of taxes more burdensome for the local authorities and creating opportunities for evasion and avoidance. These schemes are often used to reduce the tax liability from non-qualified activities – for instance by shifting taxable income to a related firm or subsidiary that resides in a tax-free economic zone (James, 2007). Indeed, the misuse of tax incentives can also result in additional leakages, further reducing public revenues. For instance, tax incentives provided to Export Free Zones were found to be redundant, created incentives to artificially readjust projects to keep receiving those benefits and favoured tax avoidance through strategic tax planning, taking advantage of subsidiaries located in eligible zones in Costa Rica, El Salvador and the Dominican Republic (Artana, 2015). Another study in the Dominican Republic showed that the greater employment created by firms within SEZs in the country came at a considerable fiscal cost, which in turn significantly hindered the government’s capacity to finance other investments and social services (World Bank, 2017).

Improving the structure of the PIT

The PIT is progressive, but effective average rates (the ratio of taxes paid relative to the share of income) are very low. While the wealthiest decile is liable for a higher percentage than the second-richest decile, and well above the rest of the deciles, its proportion compared to its market income remains low (Figure 4.9, Panel B). The PIT effective average rates for the highest deciles are low compared to the nominal rates of the PIT schedule (15% and 25%) and to the theoretical average tax rates on labour income.

Low effective average rates translate into low levels of PIT revenue collection. In turn, low effective rates are explained by three factors. First, the threshold of the PIT schedule exempts individuals with earnings below USD 11 000. This threshold is equivalent to 80% of Panama’s GDP per capita (USD 13 670) and exempts a large proportion of the population from the PIT. Second, deductions in respect of paid interest on mortgage loans or other interest paid on debt for improvements to the taxpayer’s dwelling tend to be appropriated largely by wealthy individuals. And third, capital income is taxed at lower levels. This decreases the average PIT since this type of income tends to be concentrated at higher levels of the income scale. Indeed, income from the sale of shares is taxed at 10%, as are dividends. Interest from bonds, and securities registered with the National Commission of Securities, are subject to a 5% rate. Royalties and all other forms of capital gains are taxed at the same progressive rates as labour income.

Panama should turn deductions and exemptions into a tax credit system as the value of allowances increases with marginal tax rates while the value of refundable tax credits is equal for all taxpayers. Taxing the “thirteenth-month wage” – an annual bonus – can also improve the system’s equity. These measures would improve tax revenue collection of the PIT while improving the progressivity and fairness of the taxation system.

Raising public revenues from environmentally related taxes

Environmentally related taxes in Panama remain low. On average, these taxes have collected close to 0.7% of GDP during the last five years. In 2014, LAC and OECD economies raised 0.9% and 1.6% of GDP respectively on these types of taxes (Figure 4.14).

Figure 4.14. Environmental and environmentally related taxes (2014)
Percentage of GDP

Source: OECD/CAF/ECLAC (2018), based on OECD Taxing Energy Use database.


Taxing environmental externalities can increase the government’s revenue availability and help improve environmental outcomes. Green taxes are an important asset to align private and social environmental costs to encourage the efficient use of resources, to reduce waste and to advance towards a sustainable economy (OECD, 2015f).

Panama should consider designing a carbon tax and a cap-and-trade system to curb greenhouse gases and comply with the Ministry for the Environment’s commitment. Panama’s per capita carbon dioxide (CO2) emissions amounted to 2.3 tonnes, below the world average of 4.97 tonnes in 2014 (World Bank, 2018). Despite its low carbon footprint, Panama is expected to increase its emissions of greenhouse gases in line with GDP growth (Bradt, 2017). Therefore, it would be useful to analyse different alternatives to taxes or enforce a cap-and-trade system among sectors such as transportation and energy. This would also reassert Panama’s commitment to mitigating climate change, as expressed in Law No. 8 of 25 March promoted by the Ministry for the Environment (Bradt, 2017).

Implementing international tax rules and strengthening tax administration in Panama

This section analyses the tax administration in Panama and recent measures taken in the country to improve international tax rules. First, it summarises the progress Panama is making on addressing base erosion and profit shifting as well as strengthening the exchanges of information for tax purposes. Second, it provides recommendations to strengthen the tax administration which should deliver better revenue collection and a more equitable and efficient tax system.

Panama is making progress on addressing base erosion and profit shifting

Protecting domestic tax bases against international tax avoidance and evasion is a priority. Domestic tax base erosion and profit shifting (BEPS) arises when businesses can exploit gaps and mismatches between different countries’ tax systems. BEPS negatively affects tax revenues as well as the efficiency and the ability of tax systems to provide a levelled field for all firms (OECD, 2017c). While BEPS is a worldwide concern, it is of particular importance to developing and emerging economies where tax legislation and administration are still weak and struggle with the complexities of modern business. Furthermore, anti-avoidance measures need to be strengthened in Panama, as multinational enterprises investing in the country may be able to obtain substantial tax advantages by engaging in strategies to shift profits out of the country. To prevent such tax planning and enable the collection of a fair share of tax on host-country profits from such enterprises, Panama should continue to strengthen its tax base protection rules.

Panama signed the BEPS Multilateral Convention in January 2018. This Convention updates the existing network of bilateral tax treaties and reduces opportunities for tax avoidance by multinational enterprises. It will allow Panama to integrate the results from the OECD/G20 BEPS project. To ensure a consistent global approach to the implementation of the OECD/G20 BEPS project, OECD and G20 countries have developed the Inclusive Framework on BEPS, which allows interested countries and jurisdictions to work on an equal footing with OECD and G20 members on developing standards on BEPS-related issues, and on reviewing and monitoring the implementation of the whole BEPS package.

All countries participating in the Inclusive Framework on BEPS are expected to implement the four minimum standards, and implementation will be subject to peer review. The four minimum standards relate to: harmful tax practices (Action 5) (OECD, 2015b); preventing tax treaty abuse (Action 6) (OECD, 2015c); Country-by-Country Reporting (Action 13) (OECD, 2015d); and dispute resolution mechanisms (Action 14) (OECD, 2015e). A robust process for peer review assessment of all countries’ implementation of the BEPS minimum standards is being developed by its Inclusive Framework (OECD, 2017c).

Box 4.2. A comprehensive package of measures to address BEPS

The OECD/G20 BEPS project produced a 15-point Action Plan including minimum standards, common approaches, best practices and new guidance in the main policy areas.

  • Minimum standards have been agreed upon in the areas of fighting harmful tax practices (Action 5), preventing treaty abuse (Action 6), Country-by-Country Reporting (Action 13) and improving dispute resolution (Action 14). All participating countries are expected to implement these minimum standards, and implementation will be subject to peer review.

  • A common approach, which will facilitate the convergence of national practices by interested countries, has been outlined to limit base erosion through interest expenses (Action 4) and to neutralise hybrid mismatches (Action 2). Best practices for countries that seek to strengthen their domestic legislation are provided on the building blocks for effective controlled foreign company (CFC) rules (Action 3) and mandatory disclosure by taxpayers of aggressive or abusive transactions, arrangements or structures (Action 12).

  • The permanent establishment (PE) definition in the OECD Model Tax Convention has been changed to restrict inappropriate avoidance of taxes through commissionaire arrangements or exploitation of specific exceptions (Action 7). Follow-up work undertaken in 2016 will also provide further guidance on the attribution of profits to PEs. In terms of transfer pricing, important clarifications have been made with regard to delineating the actual transaction, and the treatment of risk and intangibles. More guidance has been provided on several other issues to ensure that transfer pricing outcomes are aligned with value creation (Actions 8-10).

  • The changes to the PE definition, the clarifications on transfer pricing and the guidance on CFC rules are expected to strongly address the BEPS risks exacerbated by the digital economy. Several other options, including a new nexus in the form of a significant economic presence, were considered but are not recommended at this stage given the other recommendations, plus VAT will now be levied effectively in the market country facilitating VAT collection (Action 1).

  • A multilateral instrument will be implemented to facilitate the modification of bilateral tax treaties (Action 15). The modifications made to existing treaties will address the minimum standards against treaty abuse as well as the updated PE definition.

Source: OECD (2017c), OECD Tax Policy Reviews: Costa Rica 2017.

Implementing exchanges of information for tax purposes

Strengthening international tax rules in Panama, including the implementation of the recommendations of the BEPS project, will help create a more even playing field, which will enhance the reputation of the country. The recent move towards the Automatic Exchange of Information for Tax Purposes standard will help fight tax evasion and give greater scope to tax both domestic and foreign-source income earned by tax resident businesses and households. Panama should also strengthen its tax administration (see section below) to reduce tax evasion as part of a broader tax reform strategy that aims to increase efficiency and reduce inequality (OECD, 2017a).

In 2016, the Global Forum on Transparency and Exchange of Information for Tax Purposes rated Panama as non-compliant on the effective implementation of the international standard of exchange of information on request (EOIR). Consequently, Panama made many changes to its legal framework and practices for exchange of information to address recommendations made by the report. In 2017, Panama underwent a special fast-track review procedure by the Global Forum and was given an upgraded provisional EOIR rating of ‘largely compliant’.

A comprehensive second-round EOIR review will commence in the second half of 2018. This second round of reviews by the Global Forum, launched in 2016, uses enhanced terms of reference that require jurisdictions to ensure the availability of both legal and beneficial ownership information. Beneficial ownership information is a new requirement that calls for jurisdictions to have a comprehensive legal framework and supervision practices in place to ensure such information is available and can be exchanged in practice.

In May 2016, Panama committed to implementing the international standard of Automatic Exchange of Financial Account Information (AEOI), the Common Reporting Standard (CRS) endorsed by G20 leaders and the Global Forum, with exchanges expected to begin in 2018. With this commitment, Panama joined more than 100 other jurisdictions that committed to implement the AEOI standard by 2017 or 2018. Significantly, at the end of 2016 Panama passed domestic legislation regarding the implementation of the AEOI. In addition, in January 2018 Panama signed the CRS multilateral Competent Authority Agreement to put in place an international legal framework for automatic exchanges.

At the end of October 2016, Panama signed the multilateral Convention on Mutual Administrative Assistance in Tax Matters, greatly extending its information-exchange network. This convention is the most comprehensive multilateral instrument available for all forms of tax co-operation to tackle tax evasion and avoidance, a top priority for all countries. The convention was ratified in March 2017 and went into force in July 2017.

Panama should continue to ensure that its legal framework and practices comply with the EOIR and AEOI standards and that it can effectively exchange tax information with its treaty partners; this includes delivering on its commitment to automatically exchange information with intended treaty partners by September 2018. Panama will be reviewed again later in 2018 for EOIR, including the new requirement to have beneficial ownership information available, and it is important that it achieve a satisfactory rating of either ‘compliant’ or ‘largely compliant’, as doing so will result in increased international recognition and can help mitigate efforts by institutions engaged in listing non-co-operative jurisdictions.

Strengthening tax administration should deliver better revenue collection and a more equitable and efficient tax system

Panama’s tax administration is moving forward to consolidate tax transparency. Recent commitments to the BEPS multilateral convention and to the implementation of AEOI are decisive steps in this direction.

Yet, to maintain recent progress, it is necessary to further strengthen the tax administration’s processes, technology platforms and human capital to ensure effective exchange of information. These institutional improvements should be a priority as they will help preserve Panama’s position as a competitive and attractive destination for international financial and business services (IMF, 2017a).

Reducing evasion and fraud requires strengthening several processes throughout the tax management cycle. The registration of taxpayers, access and management of information, current tax accounts, billing systems, taxpayer services, risk management, audits, invoicing management, tax collection, and compliance initiatives can also be unified within a single platform to improve efficiency. In this area, the use of advanced technological solutions makes the difference in identifying high risks of non-compliance. Once identified, these areas should be classified and managed to prevent future occurrences. In order not to fail in the attempt, adequate planning and leadership is essential to co-ordinate within the tax administration and with other participants outside the tax administration (Arias, 2017; TADAT, 2015).

Applications of big-data analytics can combat tax evasion and promote progressivity within the system. The use and cross-reference of large datasets offer the potential to identify tax evaders by cross-referencing lifestyle patterns reflected on ownership of property and other assets on different registries with tax liabilities. This process can lead to individual audits by the tax administrations and to fine tuning risk-management models. Proper mechanisms should be enforced to safeguard individual rights to privacy, however. In addition to privacy provisions, effective tax dispute mechanisms need to be developed and enforced diligently. The Panamanian tax administration may join other government agencies to facilitate taxpayer registration or detect tax evaders. They may also work with other tax administrations in the region to identify successful strategies to broaden the tax base and reduce tax evasion.

In this respect, the Peruvian tax administration (SUNAT) carried out a project in 2015 identifying individuals who borrowed from the financial system and matched this data against taxpayers registered in the tax administration. Any individuals who had credit in the financial system and did not have a tax ID number, or for whom no payments could be identified, were flagged as potential tax evaders. The underlying assumption was that to access credit in the financial system, individuals would need to have a relatively stable income stream to pay off their credit obligations (OECD, 2017f).

Raising the likelihood of auditing can also increase tax compliance. Credible enforcement emails are a cost-effective strategy to foster compliance. A recent randomised experiment using data from Costa Rica showed that these emails doubled the income tax filing rate among previously non-filing firms (Brockmeyer et al., 2018). Similarly, messages sent to taxpayers that stated the actual fines and potential legal consequences taxpayers might face in the case of noncompliance raised enforcement perception in a municipality in Argentina. On average, tax compliance among those who received such a message increased by more than four percentage points (Castro and Scartascini, 2015).

Panama’s electronic invoicing is a step in the right direction to decrease tax evasion and fraud

Electronic invoicing for the VAT will reduce the costs of compliance as well as administrative costs to the tax administration, and will contribute to scaling back the high evasion rates in Panama. The design of Panama’s electronic invoice mechanism dates from late 2016. It is currently at the phase of developing adequate regulating laws and is testing a technological solution. The electronic invoice (e-bill or e-invoice) is a digital file that contains information pertaining to the sale of goods and services. The merchant transmits this e-invoice directly to the tax authority once the transaction has transpired. This enables the tax administration to exert better fiscal control in real time and at lower administrative cost.

Enforcing an e-billing programme requires a strong and modern tax administration. Ensuring a well-developed taxpayer registry and stronger departments in charge of collection, auditing and information and communications technologies will ensure that the returns to investments in e-invoicing schemes outweigh the costs to both the public and private sectors. From a public perspective, it is a process that requires investments and a modernisation strategy to deliver its benefits: increasing tax collection through reducing evasion, improving tax administration efficiency and fostering voluntary tax compliance. From the private-sector perspective, this process requires merchants to invest in training and specialised software and equipment; in exchange, merchants gain reduced filing costs for VAT payments and less unfair competition from informal firms.

Electronic invoicing encourages job and firm formality, reduces compliance costs, increases tax collection and creates positive externalities in other countries where it has been deployed. First, the e-bill increases the perception of auditing among informal firms that conduct business with formal firms. In doing so, it encourages informal firms to formalise as it becomes a requirement of their clients/suppliers to conduct business within an integrated system. For instance, in Brazil e-invoicing helped reduce informal employment from 55% to 40% in the last decade (MGI and IDV, 2014). Second, an e-billing system reduces human errors, eases access to taxing files, improves the tax administration’s response times and simplifies VAT filing and reporting. The net effect is an increase in tax revenues. In Brazil, the first LAC country to implement such an e-billing scheme, tax evasion dropped from 32% to 25% (Muñoz, MacDowell and Goes, 2017), and profits reported by firms increased by 22% over four years (Naritomi, 2015). Enhanced fiscal control from these measures increased revenues. In Uruguay, e-bill application raised VAT revenues by 5.3% (Barreix and Zambrano, 2018). In Mexico, e-billing increased the amount of VAT declared to authorities by 2.2% in 2011, 3.2% in 2012 and 7.1% in 2013 (Fuentes Castro et al., 2016).

Mobilising private sector involvement in financing for development: The case of public-private partnerships

Public-private partnerships can complement improvements to the tax system and help the state finance the provision of public goods. Addressing the traditional social gaps and emerging development challenges increasingly means that public and private actors must seek greater efficiency, quality and sustainability in the delivery of public goods and services. Budget constraint is a common feature in the public sector and it can become an important barrier for the implementation of infrastructure projects. Public-private partnerships are a way of bringing together both the public and private sectors to commit to the long-term investments required. They offer private sector investment capacity and can provide efficient results. Furthermore, concessions can help to solve agency problems in traditional public provision of services and fix important failures of the state resulting from the interaction between the political cycle and the decision-making timeline.

Yet, public-private partnership arrangements are not without risks. Public-private partnership projects on transport in Latin American countries have been inefficient and have led to increases in the total cost of these projects. The performance of concessions is determined by the contract, and by regulatory and institutional designs. Flaws in the design of concession contracts have caused excessive costs in Latin America (OECD/ECLAC, 2011). For instance, in the case of Chile, Colombia and Peru for the period 1993-2010, 50 out of 61 road contracts were modified at least once, resulting in more than 540 renegotiations. All modified contracts were changed for the first time less than three years after the initial signing of the concession (Bitran, Nieto-Parra and Robledo, 2013). Furthermore, based on more than 30 interviews conducted with different agents involved in 200 conflict-affected infrastructure projects across six infrastructure sectors in the past 40 years in Latin American economies, deficient planning, reduced access to resources, lack of community benefits and lack of adequate consultation were the most prominent conflict drivers (Watkins et al., 2017).

Taking public-private partnerships as a possible means of increasing fiscal space can end up being costly for future governments. Whether to opt for a public-private partnership or another modality to finance infrastructure projects depends on several criteria, including the expertise of risk management between the private and public sectors on the specific steps of a infrastructure project. Concessions should be chosen based on an evaluation of value for money. Cost-benefit analyses essentially aim to work out which infrastructure projects offer the best value for money (OECD, 2011), helping determine which mode of financing is most appropriate. Following a social feasibility analysis, policy makers can use value-for-money evaluations to assess whether or not a concession model is preferable to direct public-sector provision. In contrast, some countries in Latin America have used public-private partnerships to create fiscal space without undertaking a detailed value-for money-analysis, which in the end has been costly for future governments (Engel, Fischer and Galetovic, 2009).

Panama still lacks sound regulations and an institutional framework for public-private partnerships. The country awarded a total of 36 public-private partnerships in infrastructure projects worth approximately USD 10.1 billion during 1990-2016 (EIU and IDB, 2017). In addition, total investment committed to public-private partnerships since 1990 has been higher than in other Central American countries such as Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua. However, the potential of effective and well-implemented public-private partnerships is limited by outdated legislation and the need to establish new norms. The law regulating concession projects, including roads and airports, is from 1988 (Law No. 5 of 1988). In 2011, a law proposal was withdrawn from Congress due mainly to a misunderstanding on the part of public-sector workers who felt that their job security was threatened by greater private-sector participation. That law proposal included some useful elements for improving the regulatory and institutional frameworks for public-private partnerships in Panama, such as the analysis of value for money, transparency and competition in the auction process, fiscal responsibility and the creation of a public-private partnerships unit.

Panama performs below the LAC average. The Infrascope index evaluates the capacity of countries to implement sustainable and efficient public-private partnerships in infrastructure (EIU and IDB, 2017). Within its different components – regulations, institutions, maturity, investment and business climate, and financing – Panama performs below the LAC average in the first two. Panama is among the few LAC countries that lack an agency dedicated to public-private partnerships. This contributes to the lack of reports on public-private partnership projects and the absence of publication of assessment, monitoring and evaluation documents that affect transparency and accountability.

Regarding the regulatory framework, Panama should improve in key areas to make public-private partnership procedures more effective and efficient. A sound regulatory framework is crucial for mobilising private investment through public-private partnerships. This means having clear and systematised procedures for selection criteria, bidding, contract changes and renegotiations, as well as having a clear national policy and co-ordination among the institutions concerned. Panama lacks specific features in this regard, placing the country among the lowest ranked of Latin American countries (Figure 4.15, Panel A). For instance, the country lacks online manuals and policies for public-private partnership procurement that would allow for more transparent procurement processes. The legislation does not yet require sound economic assessments for project selection such as cost-benefit analysis or value-for-money assessment. Policies and procedures are not yet established for unsolicited biddings, and despite having a National Infrastructure Plan, explicit prioritisation of public-private partnerships is still unclear. Finally, effective and efficient participation of citizens in the grant process for environmental and social licenses and the execution of land permits should be implemented for concessions.

Additionally, Panama must improve its institutional framework for implementing public-private partnerships. In contrast to other countries in the region, Panama lacks an agency dedicated to public-private partnerships, and as a result the country has one of the poorest institutional frameworks for public-private partnerships (Figure 4.15, Panel B). This institutional arrangement is crucial for developing stable concession processes, and for having sound guidelines and project preparation facilities. Lacking such institutions affects transparency and accountability procedures that make it more difficult for the country to mobilise private investment.

Figure 4.15. Regulatory and institutional frameworks in Panama vs. Latin American economies (2017)

Notes: The Infrascope index evaluates the capacity of countries to implement sustainable and efficient public-private partnerships in infrastructure. This index is composed of five categories: Regulations, Institutions, Maturity, Investment and Business Climate, and Financing. The index assesses the capacity of countries in Latin America to carry out sustainable public-private partnerships in infrastructure. It ranges from 0 to 100, with countries ranked 0-29 classified as nascent, 30-59 as emerging, 60-79 as developed and 80-100 as mature.

Source: EIU and IDB (2017) “Evaluating the environment for public-private partnerships in Latin America and the Caribbean: The 2017 Infrascope”.


In contrast, some countries in the region have improved their regulatory and institutional frameworks in the past five years, thereby achieving more effective private participation in infrastructure. Since 2012, for instance, the contract term and resources committed to it in Colombia cannot be increased by more than 20%. The new framework also requires value-for-money analysis to justify executing projects through a public-private partnership instead of through regular public procurement. Further, a new National Infrastructure Agency was created with greater administrative capacity and technical expertise in designing, structuring, tendering and monitoring contracts (OECD, 2015g). In Honduras, a new independent Fiscal Contingency Unit within the Ministry of Finance has the explicit purpose of approving public-private partnership projects and conducting oversight. Quantifiable firm and contingent commitments by the non-financial public sector in public-private partnership contracts, calculated at present value, may not exceed a limit equivalent to 5% of GDP (Reyes-Tagle and Tejada, 2015). In Peru, recent efforts to increase efficiencies in environmental and land licensing should improve the timing and certainty of concession contracts (OECD/ECLAC/CAF, 2018).9

Following the experiences of some countries in the region, technical analyses can help increase the effectiveness of public-private partnerships. LACs are beginning to require deeper economic analyses, both ex-ante and ex-post the implementation of public-private partnership projects. Before proceeding with public-private partnerships, public institutions are requiring cost-benefit analyses that result in more informed decision making. Analysing the economic returns to users can inform good practices and the effects of public-private partnerships in infrastructure. Only Panama and Venezuela do not have these assessments properly codified in their public-private partnership legislation (EIU and IDB, 2017). In the case of Panama, while the National System of Public Investment (Sistema Nacional de Inversión Pública) was developed to evaluate and oversee public investment decisions, it has not yet been fully implemented.

Exploiting the benefits of concessions requires strong regulatory capacity in terms of evaluating, tendering and managing the concession contracts. Following a social-feasibility analysis, value-for-money assessments can be used to decide whether a concession contract would be more appropriate than publicly funded work. Most OECD economies do a cost-benefit analysis or use a public-sector comparator (OECD, 2008). Additionally, mechanisms must be put in place to limit the possibility of projects running over schedule or above budget.

A change in fiscal-accounting procedures could improve how contractors are selected by preventing the use of public-private partnerships purely because of tax incentives. Given that the state controls the economic results of the concession through regulations and is also the recipient of the work at the end of the contract, considering concessions as public projects can provide transparency to public accounts. Thus, if investment in concessions is accounted for within a comprehensive framework for public infrastructure expenditure, concessions would be chosen based on a value-for-money analysis.

In sum, Panama needs to adopt and implement a public-private partnership law that includes the regulation and institutional frameworks that improve private sector involvement in investment in infrastructure, and therefore contribute to financing development. Regarding the institutional framework, Panama needs to create a public-private partnership unit and thus improve the quality of institutional design, the design of public-private partnership contracts, and the management of hold-up and expropriation risks. In terms of regulation, better procedures are needed. These include value-for-money or cost-benefit analyses, transparency and competition in the auction process and public-private partnership fiscal accounting. As well, Panama needs to effectively and efficiently implement the participation of citizens in the grant process for environmental and social licences and the execution of land permits. Finally, due to the unsuccessful experience of the 2011 proposal law, it is crucial that a communication strategy with citizens be adopted, which highlights the socio-economic benefits of sound regulatory and institutional frameworks for public-private partnerships in Panama.

Conclusions and policy recommendations

Improving Panama’s tax collection should provide further financial resources for development, which are crucial to respond to socio-economic challenges and to sustain recent macroeconomic performance. Panama’s economy has performed relatively well compared with other Latin American economies. Sustaining this position demands continued growth through efforts to fund public investments in physical and digital infrastructure and social expenditure in human capital development at both national and regional levels (Chapters 2 and 3). In turn, ensuring higher fiscal revenues is critical to maintain macroeconomic stability, ensure compliance with the Fiscal Responsibility Law and fund the necessary investments to achieve development goals. In recent years, repeated primary deficits have begun to pressure the public debt and risk constraining capital expenditures to prevent the debt from rising.

Panama’s total tax revenues have remained stable during the past two decades. Total taxes and social security contributions in Panama (at 16.6% of GDP) remain well below those in OECD economies (34.3% of GDP) and in LAC countries (22.7% of GDP). However, revenues from the Canal and other public enterprises – on average 3.2% of GDP in the past decade – have in part compensated for low fiscal revenue intake.

Improved tax revenue collection, by broadening the tax base and strengthening the tax administration, could provide a stable, long-term source of income to finance inclusive growth through sustained investments without harming Panama’s international competitiveness or hampering growth. Revenues can potentially be increased by improving tax collection. For instance, the VAT forgoes approximately 2% of GDP due to currently excluded items, fraud and evasion (Jorrat, 2014). Furthermore, Panama provides a wide array of tax benefits: some of these affect the system’s efficiency by potentially providing incentives to firms within sectors that do not require these benefits. Rationalising these incentives and eliminating distortions to the allocation of investments can enhance both revenue and efficiency. Moreover, exemptions, deductions and other special treatments affect both the vertical and horizontal equity of the tax system, thus requiring further in-depth analysis. All of these exemptions diminish average tax rates, which in turn decreases the system’s redistributive power. Environmental taxes are also an untapped source of potential revenue that could provide additional revenue while improving environmental outcomes. Finally, curbing evasion and fraud through the use of technology and institutional strengthening can also provide additional revenues.

Private-sector involvement, through public-private partnerships, should help increase resources for development. However, Panama needs to adopt and implement a public-private partnerships framework to deliver effective and efficient infrastructures.

Box 4.3 summarises the main policy recommendations and requirements for each area covered in this chapter.

Box 4.3. Main policy recommendations to finance development through improved tax collection

1. Ensure macroeconomic stability and bolster international creditworthiness

1.1 Improve compliance of the fiscal rule and its transparency

  • Establish an independent fiscal council to promote transparency and accountability of the fiscal framework.

  • Revise the adjusted overall fiscal balance target to curb unnecessary current spending and increase contributions to the Panamanian Savings Fund.

  • Substitute annual budget targets for a multi-annual approach that aims to generate a cumulative adjustment of the primary and overall budget results that is enough to ensure the targeted public debt trajectory.

1.2 Increase fiscal revenues to achieve surplus in the primary fiscal balances and guarantee the solvency of the state in the future

2 Improve the efficiency, equity and revenue-raising capacity of the tax system

2.1 Enhance the tax system’s efficiency

  • Adopt a methodology to measure and report tax expenditures on an annual basis.

  • Review tax expenditures and incentives periodically to ensure they are achieving their intended goals and reaching their intended targets.

  • Revise benefits provided to economic sectors, as the tax system might be subsidising otherwise unprofitable businesses or firms within these sectors.

  • Broaden the tax base by scaling back tax benefits provided to well-established and consolidated industries within Special Economic Zones.

  • Abolish the annual operation licence tax and the complementary tax to improve the system’s neutrality and simplicity.

  • Adopt strong mechanisms to prevent firms abusing granted tax benefits and shifting profits.

  • Adopt environmental taxes that align private and social costs with the environment.

2.2 Increase the redistributive power of the tax system

  • Expand the VAT’s base to include currently exempted services while maintaining current exclusion of basic food staples and goods and compensating poorer households through direct transfers.

  • Turn PIT allowances into tax credits as the value of allowances increases with marginal tax rates while the value tax credits is equal for all taxpayers. Make the tax credits refundable.

  • Expand the PIT base to include the currently exempted ‘thirteenth-month wage’ since those that earn more benefit the most.

3 Modernise the tax administration.

  • Integrate critical processes (registration of taxpayers, access and management of information, current tax accounts, billing systems, taxpayer service, risk management, auditing, invoicing management, tax collection, and compliance) of the tax administration to improve efficiency and reduce administrative costs.

  • Raise the likelihood of auditing to increase voluntary tax compliance.

  • Employ big-data analytics to identify evasion and fine tune risk-management models

  • Continue the development of electronic invoicing to fight fraud and evasion, and to encourage compliance.

4 Adopt and implement sound regulatory and institutional frameworks for public-private partnerships

  • Create a public-private partnerships unit to improve the quality of institutional design, the design of public-private partnerships contracts, and the management of hold-up and expropriation risks.

  • Adopt regulatory procedures, such as value-for-money or cost-benefit analyses, transparency and competition in the auction process and public-private partnership fiscal accounting.

  • Implement the effective and efficient participation of citizens in the grant process for environmental and social licences.

  • Achieve a communication strategy with citizens, highlighting the benefits of having sound regulatory and institutional frameworks for public-private partnerships in Panama.


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← 1. The official currency in Panama is the Panamanian Balboa (PAB). This currency has been tied to the United States Dollar since 1904; 1 PAB equals 1 USD (US dollar).

← 2. Preliminary data. Updated by the Ministry of Finance up to September 2017.

← 3. Other factors that affect the VRR estimates are measurement errors of the GDP and final household consumption (Keen, 2013 and Diaz de Sarralde, 2017).

← 4. Exemption breaks the VAT chain. Whether this increases or decreases the net revenue raised by the VAT depends where the break occurs in the chain of supply. If the exemption occurs immediately prior to final sale, the consequence is a loss of revenue since value added at the final stage escapes tax. If the exemption occurs at some intermediate stage, however, the consequence is actually an increase in net revenues: the cascading of tax on inputs means that, as the price charged by downstream firms using the exempt item rises in order to cover their increased costs, so the tax on output downstream increases. Thus, value added prior to the exempt stage is effectively taxed more than once (Ebrill et al., 2001).

← 5. It should be noted that caution is warranted as countries employ different methods to estimate their tax expenditures and comparisons might be misleading.

← 6. The results and shares have been estimated by analysing information on the national household survey from 2016.

← 7. Refer to Easterly, W. (2001) for a detailed discussion on the classification of the middle class.

← 8. Companies whose annual taxable income surpasses USD 1.5 million must undergo additional procedures, as they must also determine their CIT through an alternative calculation (cálculo alterno del impuesto sobre la renta, CAIR). The resulting tax will be the highest amount resulting from the application of the traditional method (the net taxable income multiplied by the general rate) or applying the 4.67% rate to the total taxable income.

← 9. Furthermore, new legislation is being implemented in Argentina, El Salvador and Nicaragua, while other countries with more public-private partnerships experience, such as Chile, Brazil and Mexico, have opened up the public-private partnerships scheme to new areas beyond traditional infrastructure, to include sports arenas, parks, and educational and prison facilities (EIU, 2017).