Information about Western Hemisphere Hemisferio Occidental
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Panama: Selected Issues and Statistical Appendix

International Monetary Fund
Published Date:
January 2006
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Information about Western Hemisphere Hemisferio Occidental
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III. Tax Policy and Performance18

A. Introduction

32. Panama’s tax-to-GDP ratio declined between the early 1990s and 2003–04, from close to 11 percent to less than 9 percent, reflecting low and declining buoyancy of the tax system. As a result, central government revenue also weakened relative to GDP, contributing to a deterioration in the fiscal balance since 2001. A tax reform adopted in December 2002 allowed for a combination of tax reductions and increases, whose net revenue yield was insufficient to bring the fiscal deficit onto a declining path. As the need for a fiscal reform aimed at restoring sound public finances became pressing, the authorities adopted a further tax reform in February 2005 as part of a medium-term fiscal reform that also included expenditure measures.

33. This chapter analyzes the agenda for tax reform based on past performance, seeks to assess the extent to which the 2005 tax reform meets this agenda, and discusses possible needs for further strengthening. Taxation in Panama is characterized by a low tax-to-GDP ratio—the lowest in Central America—and a lack of buoyancy. A significant part of the revenue needs are met by nontax revenues, which have risen to over 40 percent of central government revenue, mainly as new sources of nontax revenue have emerged19 (Figure 1). At the same time, there remains scope for an increase in tax effort, which could be used to meet needs for social spending and investment in infrastructure, or to reduce the fiscal deficit. In this chapter, an analysis of the tax structure and tax performance before the 2005 reform will shed light on weaknesses to be addressed. The 2005 tax reform will be assessed in terms of its capacity to raise the level of tax revenue relative to GDP; increase the system’s buoyancy and elasticity; strengthen tax collection efficiency; improve the tax structure; and enhance its equity. Areas for a possible further strengthening to achieve fiscal targets will then be discussed.

Figure 1Composition of Current Revenue, 1994–2004

(In percent of total revenue)

Sources: Ministry of Economy and Finance; and Fund staff estimates.

B. Recent Evolution of the Tax Structure

34. The 2002 tax reform reduced the share of personal income tax in total tax revenue, while raising the share of sales taxes (Figure 2 and Table 1). Between 1997–99 and 2000–02, personal income taxes rose by 5 percentage points, to reach 27 percent of total tax revenue, while taxes on businesses declined by 2 points, to 17 percent. Reform plans drawn up in the late 1990s reflected the view that personal income was excessively taxed, in particular low incomes; and that the base of domestic taxes on goods and services was too narrow. A 5-point drop in the share of personal income tax in 2003–04 reflected tax cuts under the 2002 tax reform. The latter provided for increased collections of the ITBMS,20 whose share rose by 4 points.

Figure 2Composition of Tax Revenue, 1997–2004

(In percent of total tax revenue)

Sources: Ministry of Economy and Finance; and Fund staff estimates.

Table 1Panama: Tax Revenue, 1997–2003(In millions of balboas)
Tax revenue1,109.31,129.11,243.61,156.51,067.51,088.31,163.1
Direct taxes536.0479.9600.4583.4546.9545.3555.0
Income tax457.0399.5508.4494.2454.1451.7435.2
Supplementary tax7.99.413.313.311.511.214.4
Panama Canal Authority (wages)49.150.354.554.754.048.753.3
Colon Free Zone14.
Property sales tax9.
Wealth tax53.351.759.652.760.956.184.0
Real estate tax30.935.241.533.942.039.652.3
Business licences16.216.618.118.818.916.431.8
Inheritance and donations0.
Education insurance25.728.632.436.431.837.635.8
Indirect taxes573.3649.2643.1573.2520.6543.0608.1
Domestic sales63.170.474.469.066.765.795.1
Import duties211.0243.9238.4200.3170.5181.0197.8
Export duties6.
Selective consumption taxes150.2169.9173.8159.8157.0165.7174.0
Insurance fees14.514.816.616.616.716.617.8
Sparkling drinks1.
Jewelry, weapons0.
Cable TV, microwaves, mobile phones0.
Legal commercial acts2.
Other legal accounts37.338.538.542.335.234.833.7
Other taxes2.
Tax revenue100.0100.0100.0100.0100.0100.0100.0
Direct taxes48.342.548.350.451.250.147.7
Income tax41.235.440.942.742.541.537.4
Supplementary tax0.
Panama Canal Authority (wages)
Colon free zone1.
Property sales tax0.
Wealth tax4.
Real estate tax2.
Business licences1.
Inheritance and donations0.
Education insurance2.
Indirect taxes51.757.551.749.648.849.952.3
Domestic sales5.
Import duties19.021.619.217.316.016.617.0
Export duties0.
Selective consumption taxes13.515.014.013.814.715.215.0
Insurance fees1.
Sparkling drinks0.
Jewelry, weapons0.
Cable TV, microwaves, mobile phones0.
Legal commercial acts0.
Other legal acts3.
Other taxes0.
Source: Tax Directorate, Ministry of Finance and Economy.
Source: Tax Directorate, Ministry of Finance and Economy.

35. The share of sales taxes remains below the Central American average (Figure 3). Domestic taxes on goods and services (ITBMS, selective consumption tax, excises) were well below the average of other Central American countries, even after the 2002 reform, reflecting in part the low rate of the ITBMS (5 percent general rate, 15 percent for tobacco). By contrast, Panama is more dependent on import duties than its Central American neighbors, reflecting in part trade liberalization in Central America.

Figure 3Tax Structure in Central America

(In percent of tax revenues)

Sources: IMF, Government Finance Statistics 2004; and IMF, International Finance Statistics.

C. Evolution of the Tax Effort

36. Owing to a lack of tax buoyancy for many years, the tax-to-GDP ratio went down between the early 1990s and 2003–04 (Figure 4 and Table 2). This decline was temporarily offset by rising nontax revenue in 1999–2000, but with the fiscal deficit deepening since 2001, there was an increased need to enhance the buoyancy of the tax system and sustain revenue growth.

Figure 4Tax and Nontax Revenue, 1994–2004

(In percent of GDP)

Sources: Ministry of Economy and Finance; and Fund staff estimates.

Table 2Panama: Central Government Revenue, 1992–2004(In percent of GDP)
Revenue and grants17.417.
Current revenue17.417.
Tax revenue11.410.910.811.410.610.310.
Direct taxes5.
Income tax4.
Tax on wealth0.
Indirect taxes6.
Trade taxes2.
Other taxes on domestic transactions2.
Nontax revenue6.
Dividends 1/
Panama Canal fees1.
Other nontax revenue5.
Capital revenue0.
Memorandum item:
GDP (millions of balboas)7,2737,9428,4698,6589,32210,08410,93311,45611,62111,80812,27212,86213,793
Sources: Office of the Comptroller General; Ministry of Economy and Finance; and Fund staff estimates.

Including the Panama Canal Authority, starting in 1999.

Sources: Office of the Comptroller General; Ministry of Economy and Finance; and Fund staff estimates.

Including the Panama Canal Authority, starting in 1999.

37. Almost all categories of tax revenues in relation to GDP have declined over time (Table 3). Until the 2002 reform, the corporate income tax, import duties21 and domestic taxes on goods and services, including ITBMS, weakened relative to GDP. However, taxes on personal income and on wealth were relatively stable. Owing to efforts to widen the tax base in the framework of the 2002 tax reform, revenue from the ITBMS and the wealth tax strengthened in 2000–04. As a result of the reform there was a marked decline in the ratio of personal income tax to GDP in 2003–04.

Table 3Panama: Tax Revenue(In percent of GDP)
Tax revenue11.410.910.811.410.610.310.
Direct taxes5.
Income tax4.
Personal income2.
of which: Panama Canal0.
Indirect taxes6.
Taxes on foreign trade2.
Taxes on domestic transport.
Petroleum products1.
Tobacco and beverages0.
Sources: Office of the Comptroller General; Ministry of Economy and Finance; and Fund staff estimates.
Sources: Office of the Comptroller General; Ministry of Economy and Finance; and Fund staff estimates.

38. Panama is a low-tax country in Central and Latin America (Figure 5 and Table 4). Panama’s tax—to-GDP ratio ranks among the lowest in Latin America. In 2000–03, this ratio was the lowest in the Central American region, well below Honduras’s and close to Guatemala’s. Panama’s decline in the tax-to-GDP ratio since the early 1990s stands in contrast with developments in the rest of Central America, where tax ratios have risen.

Figure 5Central American Countries: Tax Revenue, 1990–2003

(In percent of GDP)

Sources: Authorities documents; and Fund staff calculations.

1/ Last column refers to 2000–02.

2/ First column refers to 1992–94.

Table 4Panama: Tax Effort in a Regional Context, 1998–2003 1/(Tax revenue in percent of GDP)
Western Hemisphere Countries:
Argentina 2/
Bolivia 2/19.718.618.718.118.018.3
Brazil 2/29.832.233.033.935.836.1
Costa Rica 2/11.912.413.313.213.1
Dominican Republic15.014.714.815.816.0
El Salvador10.210.210.511.111.6
Trinidad & Tobago13.512.914.513.715.7
Unweighted average15.815.716.116.716.6
Source: IMF staff reports.

Central government unless otherwise noted.

General government (central and local governments).

Source: IMF staff reports.

Central government unless otherwise noted.

General government (central and local governments).

D. Tax Buoyancy Analysis

39. Tax buoyancy appears to have declined during the period 1994–2004 (Figure 6).22 Tax buoyancy has fluctuated with the growth cycle, sometimes with a lag, but over the period as a whole it appears to have trended downward. It peaked above unity in 1995 and 1999, owing mainly to strong collections of direct taxes; and in 2003, reflecting enhanced revenue from ITBMS. Buoyancy reached a trough in 1996 and 2000–01, following marked decelerations in GDP growth. The lack of buoyancy reflected in part the low elasticity of the tax system,23 owing to loopholes in tax legislation and regulations, special tax regimes,24 tax evasion, and deficiencies in tax administration, which shielded fast growing sectors from taxes.25 Moreover, tax policy changes during the 1990s to simplify the tax system may have contributed to the decline in tax buoyancy, including several tax-reducing measures, some of which were taken in the context of the WTO accession. (Box 1).

Figure 6Panama: Tax Revenue Buoyancy, 1994–2004

Sources: Office of the Comptroller General; Ministry of Economy and Finance; and Fund staff estimates.

Box 1Tax Policy Changes in the 1990s

The main tax policy changes implemented during the second half of the 1990s included:

  • June 1995—Approval of the Tax Incentives Harmonization Law, which phased out or scaled back tax breaks and subsidies; decreased the maximum corporate income tax from 34 percent to 30 percent; increased the income tax for exporters in the Colon Free Zone from 2.5–8.5 percent to 15 percent; generalized a tax credit of up to 25 percent of income tax liabilities for investment in modernization or expansion of production until 2000; extended to the whole manufacturing sector a preferential import tariff of 3 percent on raw materials; and reduced home mortgage subsidies through better targeting to low income beneficiaries.
  • January 1996—Phased elimination of the banana export tax by January 1, 1999.
  • September 1996—Elimination of the income tax for exporters in the Colon Free Zone.
  • July 1997—Reduction in import tariffs for nonagricultural products from 0–90 percent to 0–40 percent in the context of WTO accession. Reduction of import tariffs on certain construction materials and basic foods from a range of 27–40 percent to 10 percent.
  • January 1998—Elimination of certain tax deductions for investment in tourism.
  • January 1998. Reduction of maximum import tariffs from a range of 40–60 percent to 15 percent, except on rice, lactose, automobiles, and sugar.

40. Tax exemptions are significant but their cost appears to have been fairly stable in recent years (Figures 7 and 8). Exemptions, in particular from custom duties, corporate income tax, real estate tax, and ITBMS have been granted under a variety of incentive schemes and modalities.26 Their fiscal cost through forgone revenue has been relatively stable in recent years as a percentage of GDP or the specific tax base.27 An elimination of tax exemptions has the potential to increase tax collections by at least 1 percent of GDP, assuming the elimination of the various incentive schemes.28 However, notional tax buoyancy, adjusted for tax exemptions and deductions, was less than unity on average in the last decade. This seems to indicate that eliminating tax exemptions may not by itself lead to a permanent increase in tax buoyancy; it may be necessary to widen the tax base to include sectors under special tax regimes.

Figure 7ITBMS and Import Duties, 1996–2004

(In percent of their tax base)

Sources: Office of the Comptroller General; Ministry of Economy and Finance; and Fund staff estimates.

1/ Notional imp ort duties are defined as the sum of import duties actually collected and the cost of exemptions under Laws 2/86 and 3/86.

Figure 8Income Tax, 1996–2004

(In percent of GDP)

Sources: Office of the Comptroller General; Ministry of Economy and Finance; and Fund staff estimates.

1/ Notional income tax is defined as the sum of income tax actually collected and the cost of exemptions under Law 28/95 and 20/99, and CATs.

E. The 2002 Tax Reform

41. The Interamerican Center of Tax Administration (CIAT) made proposals in 1999 to simplify Panama’s tax system. Simplification of the tax structure was recommended to increase efficiency in tax administration, strengthen tax collections and reduce tax evasion. Regarding direct taxes, a key proposal was to limit tax incentives and other exemptions on corporate income, while decreasing personal income taxation. On indirect taxes, the report recognized that the rate of the ITBM (5 percent) was the lowest VAT-type rate in Latin America. However, since raising the rate was deemed politically difficult, it recommended widening the base to include selected services (Box 2).

Box 2Recent Changes in Panama’s Value-Added Tax

The Impuesto a la Transferencia de Bienes Corporales, Muebles con Credito Fiscal (ITBM) was a value-added-type tax levied on imports of goods and domestic sales of goods and a few services. The rate of ITBM was 5 percent, the lowest VAT rate in Latin America. The taxpayer could deduct the ITBM paid on inputs, including investment goods, from the tax liable on sales. Small businesses were exempt from the ITBM, and a large number of goods were exempted, including food, medicines, specified fuels, specified agricultural raw materials, and processed agricultural and fishing products.

Owing to the ITBM’s low rate and narrow base, this tax accounted for only 14 percent of tax revenue in 2000–02, of which 8 percentage points was on imports and 6 percentage points was on domestic sales. This represented only 1.3 percent of GDP, well below comparable ratios elsewhere. Moreover, tax evasion was estimated to be high, representing 40 percent of collected ITBMS on domestic sales, or 0.3 percent of GDP, according to the CIAT report.

The 2002 tax reform (Law 61 of December 26, 2002) broadened the ITBM to services (Box 3). The ITBM was accordingly renamed Impuesto a la Transferencia de Bienes Muebles y Prestaciones de Servicios (ITBMS). The 2005 tax reform extended the exemptions from ITBMS to fast-food businesses, a social measure targeting low-income households, and otherwise did not modify it.

Following the introduction of the ITBMS, revenue from this tax rose to 18 percent of tax revenue in 2003–04, or 1.6 percent of GDP, with most of the increase related to domestic sales. Further increases in the yield of ITBMS would require narrowing the scope of exemptions, improving tax administration to reduce evasion, and possibly raising the rate.

42. The 2002 tax reform included some of the measures proposed in the CIAT report, with a positive impact on collections (Box 3 and Table 6). Tax policy changes allowed for a combination of tax reductions and increases with a net revenue yield estimated at 0.3 percent of GDP in 2003 and subsequent years. Regarding direct taxes, the annual exemption under the personal income tax was raised, which led to an estimated revenue loss of 0.4 percent of GDP. This was offset by other direct tax measures, which affected mostly businesses, including the introduction of a minimum tax on banks. On indirect taxes, the widening of the ITBM base to include selected services, and taxes on a broader array of luxury goods, increased revenue by 0.3 percent of GDP. There was also some effort to improve tax administration and grant the tax directorate more autonomy. However, little was done to reduce exemptions. Moreover, the Industrial Incentive Act (Law 11/2004) adopted in February 2004 granted new tax incentives to industry while temporary incentives to construction were introduced in 2003, and extended through 2005.

Table 5Panama: Cost of Import Duty Exemptions, 2000–03(In millions of U.S.dollars)
AExemptions from import duties 1/49.2747.4040.0744.39
Public sector5.916.735.46
International organizations0.310.950.40
Public transportation0.660.490.50
BTax payment certificates 2/24.6141.4333.4023.93
CTax annulment certificates 3/0.650.960.980.47
DSpecial tax annulment certificates 3/
EImport duty refunds 4/0.620.430.400.43
Source: Ministry of Economy and Finance.

Excluding ITBMS (a value-added tax) and other duties.

Incentives for nontraditional exports (Certificados de Abonos Tributarios, or CATs).

Tax credits, accumulated ITBMS.

Article 9, Law 3 of March 20, 1986 (Incentives to industrial export enterprises).

Source: Ministry of Economy and Finance.

Excluding ITBMS (a value-added tax) and other duties.

Incentives for nontraditional exports (Certificados de Abonos Tributarios, or CATs).

Tax credits, accumulated ITBMS.

Article 9, Law 3 of March 20, 1986 (Incentives to industrial export enterprises).

Table 6Panama: Impact of the 2002 Tax Reform, 2003–05 1/(In millions of balboas)
2003 2/20042005
Income taxes-38.1-49.3-50.2
Of which: on wages-39.9-54.5-55.8
ITBMS (Value-added tax)28.242.544.6
Selective consumption tax7.49.910.4
Business registration fee (Tasa Unica)18.415.115.2
Bank licenses7.27.27.5
Commercial and industrial business licenses14.313.914.1
Memorandum item:
Total, in percent of GDP0.30.30.3
Source: Ministry of Economy and Finance.

Law 61 of December 2002.

Some articles of the law went into effect in April 2003.

Source: Ministry of Economy and Finance.

Law 61 of December 2002.

Some articles of the law went into effect in April 2003.

Box 3The 2002 Tax Reform

The main components of the December 2002 tax law were:

  • The annual exemption under the personal income tax was raised from US$3,900 to US$10,400.
  • Banks’ income, previously largely exempt, became subject to a minimum tax.
  • The annual business registration fee (Tasa Unica) was raised from $150 to $250.
  • The business license fee was raised from 1 percent to 2 percent of capital.
  • Some fiscal incentives, authorizing deductions to corporate income tax, were to be phased out over five years.
  • The corporate income tax rate was scheduled to be lowered from 30 percent to 29 percent in 2005, and 28 percent starting in 2007.
  • The ITBM (renamed ITBMS) base was widened to include services, albeit with many exceptions (health, education, transportation, electric power, fixed telephone, press, mail, insurance, and various other services). Small businesses are exempted (annual sales less than $36,000).
  • The 5-percent consumption tax levied on a selective basis was extended to include luxury goods.
  • Tax exemptions for the housing sector were modified for better targeting to low-income housing.
  • A law to reform the revenue directorate to give it more operational autonomy was approved in 2002, supported by regional technical assistance to improve tax administration.

43. The 2002 reform appears to have done little to increase the elasticity of tax revenue. After adjusting tax revenue for the effects of the 2002 tax policy change, tax elasticity in 2003–04, at 0.85, was below unity, notwithstanding the strong economic recovery. This indicates that the existing tax system was structurally not able to ensure tax collections in proportion to the growth of the economy.

A. The 2005 Tax Reform29

44. In February 2005, the National Assembly approved a reform plan to address the tax system’s weaknesses (Box 4). Tax policy changes were a major component of the medium-term fiscal adjustment program, which also included cuts in current expenditure. Increasing the yield and buoyancy of the tax system through equity-enhancing tax policies was a major objective of reform. Moreover, the reform sought to raise the tax system’s elasticity to sustain permanent revenue performance; and improve its efficiency. To reduce tax evasion, all businesses beyond a certain size were included in the tax net, through an alternative minimum income tax, starting in 2006, amounting to 1.4 percent of sales. Taxable income of wage-earners was broadened to include representation expenses, and a minimum income tax of 10 percent was imposed on nonwage earners above a certain threshold. Moreover, to involve Colon Free Zone businesses in the fiscal effort, the cost of public services provided to businesses in the Zone was raised and indexed to the level of activity in the Zone. The ITBMS was maintained at 5 percent with some exceptions, including an exemption for fast-food businesses that was granted for social reasons. Some tax incentives were repealed or gradually phased out, the expiration of CATs by end-2005 was confirmed, and the Industrial Incentive Act (which had not yet taken effect) was abrogated. Sanctions for noncompliance with the tax law were increased. Low-yielding taxes were eliminated.

Box 4The 2005 Tax Reform

The fiscal reform package adopted in early February 2005 aims at reaching a sustainable fiscal position through a reduction in the fiscal deficit, to 1 percent of GDP in 2007 or an adjustment of about 4 percentage points of GDP in three years. This adjustment would be achieved through cuts in current outlays, especially the wage bill, while raising spending efficiency, and through increased revenues from tax policy changes that target improved buoyancy and enhanced equity.

Main Tax Policy Measures

  • The corporate income tax rate is maintained at 30 percent in 2005 (against a scheduled lowering to 29 percent under the 2002 tax law).
  • The maximum income tax rate for individuals is reduced from 30 percent to 27 percent.
  • Effective 2006, introduction of a minimum tax on income, amounting to 6 percent of gross income for individuals earning at least $60,000 annually. Individuals earning solely wages are exempt from this tax.
  • Effective 2006, limits on deductions for businesses result in a minimum income tax of 1.4 percent of sales. Loss-making businesses can appeal to the Tax Directorate for exemption from these limits on deductions.
  • Sales of services to businesses in the Colon Free Zone are liable to income tax.
  • Increase in the annual business registration fee (Tasa Unica) from US$250 to US$300.
  • Amounts in excess of $300 won in casinos are subject to a Selective Consumption Tax of 5 percent.
  • Inclusion of representation expenses in taxable income.
  • Narrowing of the definition of tax exempt income of foreign origin.
  • Reduced property transfer tax schedule combined with an incentive to update assessed values.
  • Exemption of VAT (ITBMS) for fast-food businesses; increase in ITBMS rate on tobacco to 15 percent.

Other Measures

  • Increase in fees paid by businesses in the Colon Free Zone, by an additional US$30 million in 2005.
  • Cancellation of the 2004 Industrial Development and Incentive Act (Ley 11 de 2004).
  • Elimination of reforestation tax incentives starting in 2005.
  • Tax incentives to nontraditional exports (CATs) would be eliminated by end-2005.
  • Continued tax incentives for home improvement.
  • Heavier sanctions for noncompliance with tax laws.
  • Businesses will have to adopt international accounting and auditing standards.

45. The 2005 tax reform is an important step toward a more buoyant, elastic, and equitable system. Tax policy changes incorporated in the 2005 fiscal reform are projected to yield about 1–1.2 percent of GDP in extra revenue; projected expenditure savings are in the range of 0.8–1.0 percent of GDP. There would be some limited increase in tax collection during 2005, mainly as taxes on representation expenses would start to be withheld, and fees for services to corporations in the Colon Free Zone would be raised. The majority of extra revenue would come on stream during 2006, with the introduction of the minimum tax, in particular on businesses (projected at 0.8 percent of GDP), and the reduction in tax exemptions. In addition to raising the tax-to-GDP ratio, the broadening of the tax base resulting from these measures would increase the elasticity of the tax system while enhancing its equity, as some categories of income and sectors previously outside the tax net or exempted would be liable to taxation. Also, the elimination of low-yielding taxes would increase the system’s efficiency.

G. The Remaining Agenda

46. The need for additional tax policy measures to achieve the government’s medium-term fiscal targets could be assessed after experience has been gained in implementing the 2005 reform. Looking forward, the contribution of tax reform to fiscal adjustment may need to be strengthened through additional action in several areas.

  • Tax pressure. Taking into account the increased revenue from the 2005 tax reform, the tax-to-GDP ratio, at a projected 9½ percent of GDP by 2006, would still be below the levels achieved in the 1990s and low compared with neighboring countries.
  • Tax structure. The prospective free trade agreement with the United States would result in a significant loss of import duties, likely to be incurred early on in the liberalization process.30 This would -call for compensatory tax policy measures beyond the 2005 tax reform, possibly in the area of indirect taxation since the share of domestic taxes on goods and services is markedly lower than in Central America.
  • Tax administration. Assessments of governance indicate that there is scope to reduce tax evasion and improve tax administration.31 The 2005 tax reform raised sanctions to taxpayers for noncompliance, a step in the right direction, which should be supplemented by a strengthening of the institutional capacity of the tax directorate, including through stepped-up training of staff and possibly the hiring of additional tax officers.
18Prepared by Eric Verreydt (WHD).
19In particular, dividends from the Panama Canal Authority and from the government-owned National Bank.
20The ITBMS (Impuesto a la Transferencia de Bienes Muebles y Prestaciones de Servicios) is a value-added tax.
21A reduction in exemptions contributed to a temporary improvement in collections of import duties in 1998 (see paragraph 9 and Figure 7).
22Buoyancy is defined as the ratio of the annual growth rate of tax revenue to the annual growth rate of nominal GDP. A value greater (smaller) than unity implies rising (declining) tax-to-GDP ratio. Disaggregated estimations were carried out of the buoyancy of direct taxes, indirect taxes, the ITBMS, and import duties, based on measures of their respective tax bases. They support the same conclusions as the aggregate analysis.
23Tax elasticity measures the buoyancy of the tax system with unchanged tax laws and regulations.
24In particular for businesses set up in free trade zones, and income of foreign origin, which are exempt from income tax.
25For example, the Colon Free Zone.
26These include incentives to nontraditional exports, small businesses, residential construction, tourism, petroleum products trade, agroindustry, reforestation, foreign direct investment, exports, leasing, Panama’s historic district rehabilitation, public transportation, and several other sectors. Some exemptions are granted in the form of tax certificates, in particular industrial export incentives (Certificados de Abono Tributario, or CATs).
27Table 5 gives a breakdown of exemptions from import duties.
28CATs are scheduled to expire by end-2005.
29A summary of the tax system prior to the adoption of the 2005 reform is presented in the 2003 Selected Issues and Statistical Appendix (March 4, 2004).
30See Chapter VI.
31See Chapter I.

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