Although in December I posted an article from La Prensa stating that the exoneration on new home construction as being extended until 2012, it is still unclear whether this is really the case. As can be seen from the article below, the bill is waiting to be signed now by the assembly because the president did not sign it in the appropriate time. Why, I can only speculate, but you can be sure it did not just slip his mind. For developers and construction companies this is the most important issue facing their industry, as the tax exoneration is helping to drive the construction boom. The developers are the ones who helped finance the presidents election and he is beholden to them while at the same time he has to clean up Panama's fiscal house in order to fund the canal expansion. With billions of dollars at stake in lucrative Canal contracts to be given out over the next few years, the president finds himself in a difficult position. Screw those who got him elected or screw those who stand to gain on the canal expansion. In many cases they are the same people.
Two ugly rumors have surfaced about the tax exoneration on new construction. First is that it will only extend to those buildings that had their building permits issued before September 2006. Why do they need an extension? It is because the construction of projects have fallen so far behind that they could not get completed in time to get their occupancy permits by the September 2007 deadline. If this rumor is true it will stall all future sales as the advantage of paying no property tax on the new construction will not be extended. With Panama's property taxes being some of the highest in the western world, what foreigner would want to go from the frying pan where they live now into the fire of Panama's taxes?
The second and much uglier rumor has to do with the DGI, Panama's version of our IRS. It seems they want to begin collecting taxes on all construction, even those that have received the 20 year tax exoneration. How dare they? Well, they interpret the law to exonerate home construction values based upon the building permits. According to the DGI, property taxes should be paid for values over that amount. What??? The builder always wants the lowest possible building permit fee and usually gets it in well below the actual cost of construction. The price paid by the home buyer is significantly higher (market value) and the DGI considers this difference to be taxable.
How would they know if you are selling a property if it is in a Panamanian corporation? Well, if you have been following this blog, you know that a new law was enacted last year to facilitate the sale of BanIstmo to HSBC which lowered the capital gains on corporate sales from 30% to only 10%. Great you say! But, they also made it a law that the buyer of any corporation withhold 5% of the selling price and turn it in to the government. All attorneys in the country are bound by law to advise all their clients to do just that when they buy a corporation. The buyer says, so what, I am not paying the 5%, the seller is, but actually the buyer is being set up for long term property tax shearing. His attorney by law is acting as an agent for the DGI. This 5% withholding triggers the tax authorities to collect the other 5% from the seller. Now, that is 10% of the gross sale. The seller has to prove his profits were lower than the 10% collected by the DGI and even so will not get a refund, but a credit against future tax bills. That really sucks for the seller but it gets worse for the buyer.
Now the DGI knows the amount paid on the property and can assess a property tax bill on the difference, even though the buyer is expecting to be exonerated for up to 20 years. Devious bastards aren't they?
Now I am sure many of you will say, they would not be so devious or stupid to do this, but my experience is that they believe no one will figure it out until it is too late and the frog is boiled. I can assure you that we will expose it here if indeed the scenario turns out as these rumors portray and we should know soon enough.
As developers and promoters of Panama aren't we hurting our business? Are we crazy for putting out such speculation? We do this in the hopes that we can wake up the developers to demand these new decrees and laws not be implemented. The buyer needs to be aware of the action they take when they withhold 5% of the price they are paying for a property and consider alternatives. It does no one any good to roll over, not say anything in hopes we can make a sale in the short term and then have no way to turn back the actions the government has enacted. This is short term thinking that will kill our industry. Keep your ear to the tracks and be ready demand change before it is too late or we all may end up being boiled frogs.
Torrijos fails to sign bills
President Martín Torrijos has failed to meet a deadline in which to sign two bills passed by the Asamblea Nacional late last year.
The action means that Asamblea Nacional President Pedro Miguel González now has the power to sign them and publish them in the government's Gazette, at which point they would become law.
The first bill establishes a National Day of Mourning on Dec. 20 to recognize the people kileld during the 1989 invasion of Panama by U.S. troops which toppled dictator Manuel Noriega.
The second extends the government's tax exemption program for new residences, which goes up to 20 years.
The bills were both passed by the Asamblea Nacional in December. According to the country's Constitution, Torrijos had 30 working days to either sign or veto the bills. That deadline expired last Monday.
A presidential spokesperson said that the bills are on the president's agenda, but did not comment on why they haven't been signed.
Asked about the fate of the bills, González said he will wait for a "reasonable" time to pass before making a decision on whether to sign them or not.
The bill to establish the National Day of Mourning has been harshly criticized by the country's business leaders because it will add another mandatory day off for all workers.
Workers currently receive 10 days off for holidays a year.
