Panama enacts law creating transitory tax-recovery measures and abbreviated audit procedures

The National Assembly of Panama has issued Law 401 of 5 October 2023, creating transitory measures for tax recovery, including a special transitory procedure for abbreviated audits and management of tax debts. The legal regulation was published through the Official Gazette on 9 October 2023.

Ex officio prescription of determined tax debts corresponding to FY 2015 or earlier

Generally, the new law declares debts resulting from the following to be extinguished: income tax, educational insurance tax, and notice of operation tax duly registered in the taxpayer's account, corresponding to 2015 fiscal year (FY 2015) or older, with the exception of certain cases contemplated in Law 401 of 2023 (i.e., debts covered by a sentence issued by the competent authority, that is duly executed, debts of taxpayers appointed as withholding agents, among others).

To benefit from the referred ex officio extinguished obligation declaration, the taxpayer must meet the following requirements: (i) have complied regularly with its tax obligations attributable to FY 2016 onward; (ii) not be subject to investigation or sentence due to tax fraud or evasion; and (iii) not be subject to an audit process.

Transitory Abbreviated Audit Procedure

The "Transitory Abbreviated Audit Procedure," introduced under Law 401 of 2023, establishes that any person subject to an ongoing audit at the date of entry into force of the Law (i.e., 9 October 2023), or by request of the taxpayer, may request that the abbreviated audit procedure apply with regard to income tax, educational insurance tax, the notice of operation tax or value added tax (ITBMS, for its Spanish name in Panama).

In this sense, the taxpayers may rectify their direct and indirect tax returns without applying the restriction terms provided in the Fiscal Code. To request that this procedure be applied, the applicant must be subject to an ongoing audit or a party must make a request, with regard to the income tax, educational insurance tax, notice of operation tax or value added tax.

To benefit from the process, the request must be formalized with the General Directorate of Revenue (DGI) and be accompanied by a certificate issued by an Authorized Public Accountant. Taxpayers subject to an audit related to the alleged commission of tax fraud or evasion are excluded from this procedure and must follow the ordinary procedure established in the Tax Procedure Code.

Additional tax regulation measures

Other tax regulation provisions introduced in the new Law include:

• 25% discount for all taxpayers that, at the date of entry into force of this Law (i.e., 9 October 2023) and prior to 30 November 2023, pay 100% of the real state tax corresponding to FY 2024

• 25% discount for all taxpayers that, at the date of entry into force of this Law (i.e., 9 October 2023) and prior to 30 November 2023, pay 100% of the annual franchise tax corresponding to FY 2025

• 50% remission of all fines registered or not on the e-Tax 2.0 system for taxpayers that, from the date of entry into force of this Law (i.e., 9 October 2023) and up to 30 November 2023, pay the remaining 50% of the fines

Late-filing fines applied by the General Directorate of Revenue will be completely exonerated if incurred with regard to Form 03 for FY 2022 and/or the Sales Form for FY 2022. However, any sums that a taxpayer has already paid under this concept will not be able to be returned.

It is relevant to note that the sums paid by the taxpayers as a result of the imposition of these fines will generate a nontransferable tax credit, which shall only be compensated with the same tax debt code that created the obligation.

A regularization period, until 30 November 2023, is established for all the natural or legal persons and defaulting real states, to pay the nominal amounts due, including fines. An exoneration will apply for the totality of the interests, surcharges and penalties related to the executive collection procedure. This period may be extended for 30 additional days by means of a motivated resolution issued by the General Director of Revenue.

Taxpayers appointed as withholding agents that maintain income tax withholding installments or educational insurance tax withholding for periods until June 2023 may extinguish their balances owed to the General Directorate of Revenue until December 2023.

Amendments to Panamanian Fiscal Code and other relevant legal regulations

Law 401 of 2023 introduces new amendments to certain provisions of the Panamanian Fiscal Code, specifically with regard to the real state tax.

In addition, the Law modifies certain articles of Law 76 of 2019, including the operation procedure for the compensation of tax debts. Specifically, the changes are introduced to establish as follows:

• Automatic compensation, in cases specifically included by the law (article 71 of Law 76 of 2019), will apply provided the taxpayers maintain credits that are not extinguished.

• Changes to compensation at the taxpayer's request (article 71 of Law 76 of 2019) would establish that the taxes subject to compensation are those that are due for a year, counted from the last day of the year in which the obligation should have been paid (prior to the amendment, the taxes subject to compensation were those that were due for two years or more). To finish the procedure and for due compensation to be made by the Current Account Section of the Tax Authority, the information must be formalized through motivated resolution issued by the General Director of Revenue.

• The date of entry into force for the Tax Procedure Code is modified to 1 June 2024 (previously 1 January 2024).

In contrast, Article 14 of Law 208 of 2021 was amended to provide more time for the General Directorate of Revenue to enable taxpayers to carry out payment agreements to comply with their tax obligations. These payment arrangements entail providing flexibility to allow taxpayers to make initial payments, waiving interest and surcharges and allowing up to 48 months for payment agreements to be cancelled. The new timeframe granted for entering into payment agreements runs until 31 December 2023 (previously the timeframe had ended on 31 March 2023).

Also, Law 401 of 2023 amends Law 337 of 2022, which creates extraordinary payment agreements as a temporary measure to dynamize tax collection. The change adds an alternate mutual consent procedure to encourage proper and voluntary compliance with tax obligations.

Law 337 of 2022 establishes that extraordinary payment agreements provide an administrative procedure through which tax obligations may be extinguished, as long as the agreements' requirements are met. After the amendment of Law 337 of 2022 introduced through Law 401 of 2023, the new deadline for taxpayers to carry out extraordinary payment agreements will be 30 November 2023 (previously, the deadline was 31 December 2022).

For additional information with respect to this Alert, please contact the following:

Ernst & Young, Panama

• Rafael Sayagués

• Luis Ocando

• Carlos Márquez

• Ana Clement

• Meitner González

Published by NTD's Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.