The approval of the 2025 Budget, together with measures such as the reform of the pension system, seeks to achieve fiscal sustainability objectives, which has generated optimism in the market. However, the pressure on public finances continues, which makes it necessary to increase tax collection.
According to the Budget Law, it is estimated that tax revenues will reach approximately $8.24 billion by 2025. Although no increases in tax rates or cuts in exemptions are anticipated, success in reaching this goal will depend to a large extent on strengthening the General Revenue Directorate (DGI).
The DGI faces the challenge of fighting tax evasion and improving collection in a system that includes multiple exemptions. Despite efforts to modernize the tax administration, the discrepancy between projected revenues and those actually collected remains a persistent problem, as noted by both the Inter-American Development Bank and the International Monetary Fund.
In this context, an increase in tax audits, especially focused on large taxpayers, is anticipated. The recent restructuring of the Large Taxpayers Office, now integrated into the Transfer Pricing Department of the DGI, reflects this trend.
The implementation of the Tax Procedure Code in 2024 has brought with it new regulations to combat tax evasion, although it has also generated legal uncertainty, especially regarding offsets in tax credits. New proposals to amend this legislation are likely to emerge in the future.
In addition, an increase in transfer pricing audits and verification of substance criteria for those taxpayers enjoying reduced rates in preferential tax regimes is expected. If these criteria are not met, a 25% income tax rate will be applied, which could result in cases of tax fraud under the Tax Procedure Code.
On the other hand, recent changes in the U.S. administration's tax policy have delayed the implementation of OECD Pillars I and II, particularly Pillar I, which was intended to tax the profits of large companies in their market place. These changes could have a significant impact on Panama's tax policy. In this regard, the creation of the Fiscal Council in 2025 represents an opportunity to address these new challenges and foster a tax system that is in line with the best practices of modern public finance.
The year 2025 looms as a crucial period for the Panamanian tax system. Despite positive initiatives, significant challenges remain related to tax evasion, the complexity of tax regulations and the need to adapt legislation to an increasingly competitive global environment.
Written by José Galíndez of GMtaxadvisors
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