Panama Investor Blog

Panama property tax could net 1% of GDP

Panama's new tax reforms rely heavily on increased sales tax and collection of property tax. The challenge in the past has been collection as there really is not a system in place to do assessments and billing. There has always been a tax on land, but the powers that be in the past never valued it and rarely collected taxes on it. I am very much opposed to property taxes and would rather see a higher sales tax, but that would hit the general population harder and it is thought that property owners have more assets and can afford to pay property tax. Once a system is in place for assessment and collection, it becomes an easy matter to increase mil rates to cover spending by government. In any case, Alberto Vallarino, the head of MEF, expects the property taxes to generate a 1% of GDP. in 2010. Last year they collect about $100 million and in 2010 they expect it to be $250 million. That is a 150% increase in collections. Panama's GDP last year was about $25 billion.

Panama's Property tax ploy

An article from La Prensa (below) presents a picture of a government trying to make life easier by offering everyone the ability to lower their property tax rates by voluntarily reevaluating their property before a June 30th deadline. Whenever the government says they are doing you a favor you might want to look carefully at what is being offered.

As I have stated for several years now, Panama's aim is to have a property tax that is collectible and what better way to do this than to offer a discounted tax rate if you voluntarily up the value of your property. The scheme is that if you place a value closer to market, then when you sell the property your capital gains will be much lower. This is working great for the condo developers in the city who have just shifted their taxable income to the buyer without the buyer having anything to say about it. The affect on the buyer is a yearly tax on the value of the land which is much higher than it would have been and could be much higher than market value. It used to be that the developer would keep the land value at what he paid or its original value in the registry so he would not pay property taxes during the time he was building, but now there is all the incentive to bump it way up in order to lower his capital gains on the sale of the units in the building. This is a great deal for those developers who have pre-sold and are nearing completion, but could be a major trap for those still speculating.

What can the condo buyer do about this change in the rule book?

All of the buyer protesting will be for not, because the government and the developer are very happy about the deal. So, who are you going to complain to?

What the government is ultimately after is a valuation of all land in the country to market value or higher. This is why the government has been encouraging Panamanians with big signs on the highways to title their ROP land and why they have set the land values as high as they have for ROP. Even though the tax on property is 2% now they are collecting only a fraction of what they could collect because most property was valued at a very low rate. The fact is, it was not worth much just 8 years ago. and with the real estate market as it is may not be worth what they think it is today.

This is especially true when you get into the interior of the country where the land prices were only its agricultural production value. A hectare of cattle land was only worth two or three times the value of a cow and the same for crop production. If a coffee crop could produce $1500 in revenue per hectare its value might have been $4-$6000. But with all the buyers from outside the country coming to retire or buy vacation homes, the market value of the land has grown dramatically and the government sees a big opportunity to not only increase tax revenues, but to have an easy way to increase coffer incomes in the future by just increasing the mil rate.

Sounds just like a first world country doesn't it?  But this one is even more devious because the government sees a great way to shift the tax burden on the foreign buyer and not the voter. This is a win/win for everyone except the guy with the money, and in this case the golden rule does not apply. This is what happens when the rules  change in the middle of the deal.

So what to do?

For the farmer who may be sitting on beach front land, he may be tempted to reevaluate in the hopes he sells to a developer in the future. But if he does not get so lucky he will be stuck paying a tax based on his bet on how much he can get for it. That is a big gamble when you have not been paying any tax at all for generations and you still have a bunch of cows grazing for the next 20 years.

For the retiree living in the interior the question is the same. Most of the land is registered at mere pennies per meter which means even a fairly large tract is values at under $30,000 which is the minimum threshold for property tax. As their homes were tax exempt for up to 20 years they too have a bet to make. If they can go for 2,3 or five years without the government coming in and evaluating their land, they can save thousands in property tax. If they are planning to sell, they might find resistance from a buyer who looks at the latest numbers in Cadastral and finds a high valuation for the property, because the new buyer will then be subject to a yearly 1% on that value of the land where there was none before.

What is the likelihood of the government placing a new value on your land?

If the government were to value your land at $30 or $50 a meter then they will have to value your Panamanian neighbor at that same rate, and therein lies the stumbling block for the government. They will have a very difficult time saying that your land is worth ten times what your neighbors is worth and if they up the valuation on your neighbor there will be protests in the streets like you have never seen before. Also keep in mind that most Panamanian homes would be subject to evaluation  too as they did not get the benefit of the 20 year tax exemptions. I can tell you for certain that only developers, speculators and some unsuspecting foreigners will be voluntarily increasing the value of their land. Panamanians who own land they intend on keeping will not volunteer to start paying taxes when to them the value of their property is still what it was before all of these foreigners came and created a land rush.

But what about the capital gains when you go to sell?

Well this is another fine mess the government has put everyone in. It used to be that people put all real property into a corporation or S.A. (Society Anonymous) in order to provide privacy. Privacy while using and when selling. After all, there is no record of who owns a corporation, only who are the  registered agent, officers and directors and those can be changed anytime at the whim of the shareholders. Without a change in ownership there is no sale. Shareholders can change in a corporation everyday but the legal entity is the same.

But Panama has itself in a twist, because it offers this vehicle to the whole world in order to protect ones assets from other greedy governments and  that allows those in Panama to use them too. This was not such a big deal in the past because land was just not worth much and Panama was not on a big spending binge that required "fiscal responsibility" in order to get big loans at great rates.

But now things have changed. In order to close that loophole, the government has made it a crime for an attorney to knowingly help the sale of shares of a corporation owning assets in Panama without notifying the government. And because most people (especially foreigners) want an attorney to review any purchase and sale contract of an entire corporation, the door is supposedly closed. The government requires the buyer to withhold 5% of the selling price which of course discloses the real purchase price for capital gains as well as future property taxes. Such a deal!

Of course many folks just continue to sell their corporation the old fashion way, by not using a local attorney and doing the transaction outside the country. Of course this is questionably "illegal" under the law, but if a corporation is a legal entity, just as a person, then there is no law being broken.

From Wiki, "A corporation is an institution that is granted a charter recognizing it as a separate legal entity having its own rights, privileges, and liabilities distinct from those of its members."

So how can its members be legally penalized for its action?

Besides, the government has no way to actually find out if a sale took place. They have tried to implement a rule that when registered agents or officers and directors change this is a triggering event, but that will be a hard one to employ because no one knows what other assets are held by the corporation outside of Panama and many Panamanian corporate shareholders are themselves foreign corporations . They don't know how many shareholders there actually are and which ones are responsible to pay the tax. There are literally hundreds of thousands of Panamanian corporations registered and it is a major source of income at $300 a year plus registered agent fees for each and every one. The government cannot dictate to all of the corporation sold around the world to disclose all of their transactions and the names of their shareholders. They can't have their cake and eat it to, but they will try. Like all governments Panama will use fear and intimidation and schemes like this "special deal" in order to collect what it considers fair.

But, what is fair?

It certainly is not fair for the developers in the city to be able to reevaluate their land in order to greatly reduce or eliminate their taxable income. After all, they knew the deal when they started and went for it. So did the buyer, but now the deal has changed.

It is not fair to the foreign buyer in the interior because a tax should be for the betterment of the local infrastructure such as schools, hospitals etc. Most foreigners do not use the public schools or hospitals and although they may use the roads, they are already paying a gasoline tax that is supposed to cover that. The fact is, that no property tax is fair IMO. If you have to pay a property tax and don't pay, then the government can force a sale in order to collect and this is against all principals of property rights and ownership. You do not really own the land, but are paying a rent and can be evicted. Tax if you must, but not on real property and certainly not on those who have taxation without representation.

If the government of Panama or any country for that matter ,were to make a set of rules that did not change, then a reasonable tax commensurate with service would be acceptable, but once a mil rate is established on real property you can be sure it will go up as an ever increasing size of government and spending needs feeding and it finds an easy target. This encourages tax evasion and corruption. Unfortunately governments everywhere are in the business of wealth distribution as they never see free markets as a fair way of distributing wealth. This is why a flat tax would be a simpler and more palatable solution.

From La Prensa

Raul A. Bernal Bernal
  rbernal@prensa.com

Those who have not made the voluntary appraisal of their property have until June 30 next to immediately enjoy the benefits granted by Law 49 of 17 September 2009, among which includes the lower tax payment property.

  The rule, which came into force on 1 January 2010, offers tax advantage when a person want to sell your property, may increase the taxable value of your property and that it be taken as the base cost for calculating capital gains.  This implies the possibility of reducing, partially or totally, the tax payable by the gains on this transaction.

Directors of the Institute of Valuations and surveys of Panama (Ivappan) felt that the issue is not just a matter of "values", but that people will update their cadastral data before it reaches general cadastral sweep by the State and its property will giving the average value as deemed specialists.

  "The importance (to take advantage of this standard) is that people upgrade the rateable value of their property," said Jorge Beluche, Ivappan president.

  That is, if the area where the property is taken out an average, this will affect all properties that could have a higher value than that calculated.

  To avoid this, experts recommend that the first thing to do is get a business person or professional appraiser who is registered and licensed with the Directorate of Cadastre and assets (DCBP), Ministry of Economy and Finance (MEF).  Should contact that institution and confirm that the person who makes the valuation is on the list of companies or professionals empowered to carry out this process.

 Once that communicates with the expert appraiser, visit this property appraisals made relevant, and subsequently makes its reports made the necessary arrangements with the DCBP.

  According to Jorge Beluche, the costs of the appraisals are in line with the value of the property and that value is put a fee that varies from one dollar to $ 1.50 per thousand of the property value.  "For example, a property worth 200 thousand U.S. dollars at a rate of one dollar goes to the $ 200 valuation, plus ITBMS (5%) established by law", he said.

  Opportunity

Once approved the appraisal by the Directorate of Cadastral the MEF is achieved by an alternative rate to calculate the property tax, which is 0.75% for buildings with a value of up to 100 thousand dollars, and 1% for buildings with a value exceeding 100 thousand dollars.

  This benefit applies immediately if you have an application to Land Registry, by 30 June 2010 and from the time of approval.

However, if the process is performed after that date, the person shall enjoy the benefit one year after the approval thereof.

  One of the conditions for receiving the benefit is that the owner must be at peace and safe in the property tax payment at the time of approval of the appraisal by Land Registry.

  Elda Sanson, vice president of Ivappan, explained that the last Act 6 of 2005 many people were without the benefit of ignorance, but now opening the bar with the new rules.

  He explained that with the current progressive rate to calculate the property tax, this would amount to a 2.10% on the value of the property.

  However, with the benefit of Law 49 can be greatly lowered the amount to pay.

  "Many times people do not pay attention to this issue, sometimes not even know what the property tax amount to be paid, or how much your property is registered," said Sanson, calling on citizens to review and update the values of their properties so they can make a reavalúo be necessary and appropriate.

  The property tax is paid annually and a quarter, but there are properties that are exempt by law, such as new improvements and land with a rateable value less than 30 thousand dollars.  Sometimes there are people who are waiver period expires 20 years on improvements and new when they come to the Department of Revenue of the MEF, they discover that maintain a "astronomical accounts" to pay.

The appraisal trap for condo buyers in Panama

Osvaldo Lau is a tax consultant here in Panama and in an opinion piece published in La Prensa today he gives us some of his insight into the new property tax law and some of its pitfalls. One obvious one that many may not consider is the fact that under the new law the developer will find it more profitable to increase the land value  under a condo tower in order to reduce his capital gains when selling the individual units. Seems like this new law came just in time for the delivery of many of the new condominium towers being delivered this year. Great for the government coffers and the developer, but bad for the buyer who will be left paying the property tax on the land FOREVER even though they have a 20 year tax exoneration on new construction.  What can you do about it? Not much more than complain and ask to see what valuation he is placing on the land versus construction. When a deal seems too good to be true, it usually is.

This is not the best machine translation, but should be understandable. If not, write to Osvaldo at olau@csitaxpanama.com

OSVALDO  LAU C.
economia@prensa.com

OPINION. The real estate appraisals closed cases, that magic wand that was born with the Act 6 of 2005 and offered two tax incentives were put to good use by developers and private sellers of real estate because the value of such appraisals became the basic cost or sales to reduce or even eliminate the tax on real estate profit. Some, which failed to sell, were trapped in the property tax net to be valued according to the prevailing market value at the time when the housing sector was in decline.  With the post-crisis boom and a rateable value increased, the property was undergoing the rigors of a tax which in normal times is not recoverable.

  The tax benefits granted in due course of Law 6 / 2005 have now been reinstated with Act 49 of 2009 which provides incentives, with some variations, of the same two taxes.  First granted the right to take the appraised value as the base cost by transferring or selling property, and second, a new alternative rate for calculating the land tax, which in turn replaces the preferential tariff which was given in the first law.  The offer is good overall, but it must be appreciated in its proper dimension to not retake the same, and many properties are burdened with additional taxes. Good appraisals contain two tax incentives, but it must make a preliminary cost analysis / benefits to determine the right time and the after effects of valuation. The precise time depends on the transaction of the building project because the property tax tends to increase from the time the Land Registry Directorate approved the appraisal.  And this can make a big difference in the property tax that will be painful for the owner if a sale is not perfected.

  But there's more: with special rate that incorporated the Law 49/2009 of land for detached vertical condos, from January this year, these properties will be subject to pay property tax on the proportional value of the appropriate terrain. And as every developer is a businessman who looks after his own interests, will be careful to use the offer to reduce or eliminate their tax burden by increasing the value of the land by the appraisal formula. So this resolves the tax problem for the developer, but the innocent buyers of condos bare the side effect of the increased appraisals of the land value for each apartment.

While these are the effects of the appraisals, the cause of everything is in the Law 49/2009 which covered the same blanket with all the condos built, and resources that punished their owners without any social class discrimination.  This new property tax rate tends to end the old game of assigning the value of the land of new condos  a value below 30 thousand dollars to get the benefit of total exemption of the property. 

It's best to not title ROP land

The much debated land law regarding coastal and islands right of possession (ROP)  land has been approved by the national assembly and will most likely be signed off by the president. As the article in today's La Prensa points out, many farmers will not be able to afford the cost of buying and titling the land so they will most likely leave things as they are. even if they hold less than 5 hectares this may be best for them as once the property is titled at these much higher values, a property tax will be required on a yearly basis. Unless you have an intention to sell the land I see no advantage at all to title it

A provision in the law is that in order to title, the applicant must have held ROP for at least 5 years which makes me question what happens to any recent purchases and transfers of ROP. Must the land revert back to the original holder, or can the new holder wait out the needed time and then apply for title. In either case it is going to cost them a lot more than they bargained for and I would imagine many will just do nothing. 

The price of coastal and island land will undoubtedly go up dramatically just at a time when the market is in the tank. If a farmer wants to sell this land in the future, he will first need  pay for it according to the newly establish values to get title. This will greatly reduce the amount he would receive from a sale as the government is now his partner in any transaction. If he wants to make a profit he will have to add to the government established price. With these new higher prices most likely very little land will be titled at all. Only low value land where no property taxes will need to be paid each year will probably get title, bringing little or nothing to the government for all its efforts in making this law.

This is really coming at a bad time in the real estate business as sales of new projects is very slow and money for development is extremely hard if not impossible to come by. Although I am sure there will be many unhappy foreigners who bought land in good faith from ROP holders, I hope this brings a close to the controversy and questions surrounding rights of possession land in Panama. The lesson here is don't trust what people tell you about transferring land they do not own and if you cannot get a title don't buy.

La Prensa: JOSÉ GONZÁLEZ PINILLA
  jagonzalez@prensa.com

  The Assembly passed last night, third debate, the bill to reform the law on certification of islands and coasts, recognizing, in particular circumstances-possessory rights.

  The proposal, which requires the sanction of the executive to become law of the Republic, received 41 votes for and 21 against.

  The Minister of Economy and Finance, Alberto Vallarino, said the document was opposed to "big money interests who wanted to monopolize the nation wasteland for a song, but this law has been put on a high."

  The project owner may land on the nation's heritage assets, national waste lands, coasts and islands.  Who has more, shall pay to the State, as a fee.

  The proposal included a price chart divided into three zones-Pacific, Atlantic and Island-and, depending on the area, established a price range per hectare which is a thousand to 700 thousand dollars.

  This price table is valid for three years and will be updated after public consultation.

  Furthermore, if a person with a possessory right to the holder, must show that occupied the land for a continuous period of five years. Same is true for investors who have acquired land under that figure.

  The bill provides that all applications for land purchases to be made publicly accessible state.

  Opposition deputies criticized the proposal, after sustaining many farmers title to their lands shall not because of what they called "unaffordable prices.  "People with humility over 5 acres with possessory rights holder can not," said Rep. Elijah Castillo.

S However, Vallarino said that the prices provided in the table are "well below market prices.

For many ROP land just got real expensive

Although the final word won't be heard until this week, it is certain the there will be a significant cost to titling rights of possession land, especially along coastal areas. La Prensa came out with the story below which explains what the costs are expected to be and it will surly bring gnashing of teeth to many who have already paid for the land. From the governments point of view, they have always owned the land and were letting folks use it. Now they can buy it, but pay the market rate. There only advantage I see for those who bought ROP from the original holder is they are getting first right of refusal. For many that will be an expensive option.

New rules for land owner

José González Pinilla 1312866

  jagonzalez@prensa.com

  The bill recognizes the rights of possession and regulates the degree in coastal and mainland on Wednesday approved in second reading, brings bad news to investors.

 People who hold over five hectares of land in coastal areas-under the guise of possessory right, under this law will have to pay a considerable sum of money to the government.

The congressman Jose Blandon said the proposal includes a price, and that is that the degree of the first five acres of right of possession will be free.  Those with more than five will have to pay between 3 thousand 500 dollars to 625 thousand dollars per hectare.  But that depends on the area where the lands are located.

  The price table, driven by the Direction of Cadastre of the Ministry of Economy and Finance (MEF) provides three regions. The first includes the Pacific coast, where there are developed tourism projects and hotels.  The second is the Atlantic coast and the third includes the insular region (see table).

  The opposition MPs rejected the proposal saying it that the Government intends to expropriate land. Freidi Congressman Torres said many farmers who have more than five hectares of land owner may not.

 But according to Blandon, many individuals and investors  hold hundreds of acres  for very little money.  He explained, for example, owner 10 hectares in the Pacific area by Act April 23, 2009 adopted by the PRD and repealed by this administration-would cost $ 500,000.  But with the new proposal, the investor will pay for those 10 acres 300 thousand U.S. dollars.

  The project will be approved on third reading next Monday, when the National Assembly begin a new session.

Ministry promises "fair" prices for ROP land

The battle over ROP land along coastal areas has heated up as many gathered at the ministry yesterday to air their concerns about the new law. Although there are many details involved, the bottom line for the state is money and how much they can  charge per hectare to those who want to retain and title the land. For many foreigners who purchased ROP from local farmers this comes as a complete shock as they did not expect to have to pay more than they already have. For many it could mean the end of their dreams of retirement in Panama as they may not have funds enough to buy the property from the state. Many investors who bought ROP as speculation may also find it difficult especially in these tough real estate times. Although the Ministry of Finance promises to be fair in the pricing structure, one has to wonder what "fair" means to them. If they want to charge fair market value for the properties it cold be devastating to those who have already paid once for the property. If the ministry does make the payment small so as not to adversely affect the local farmers they will surely put in place an evaluation for the property that will be much higher in order to begin taxing the property on a yearly basis. After all, this is the real reason ROP land is being titled, IMO. In any case, we should find out pretty soon what the price structure will be.

La Prensa:

José González Pinilla
jagonzalez@prensa.com jagonzalez@prensa.com

  The draft law regulating the title, in coastal areas will be modified.  Deputy Finance Minister, Dulcidio Guard announced yesterday that presented to the Assembly a draft reform package, which had passed the first debate, which has been questioned by locals and investors.

Among the changes is the establishment of a date for conducting a public consultation in order to pass a table of prices for the purchase of land with possessory rights.

  The price table is the main concern of local people and investors, who yesterday attended a forum organized by the Ministry of Economy and Finance (MEF).

  This event was attended by investors and retirees of the United States, Canada and other countries, who defended their right to the land owner who bought in the form of possessory right in coastal areas.  "I want to know how much more I have to pay," she said.

 As the land have no title but possession rights, must be purchased at State, Publius said Cortes, director of the Cadastre of MEF.

  For foreign investors, most have bought land with possessory rights to the locals.

  Cortés explained that in order not to affect them, the MEF aims to recognize the purchase by foreigners as well as the years locals have lived on the site, so that prices are fair.

  During the forum, Vice Minister reiterated that seeks to stop the land grab.

  A report by the Directorate of Land Registry points out, for example, that in Bahia Honda in Veraguas, some 700 hectares with possessory rights were bought at bargain prices: a one cent per square meter.

Understanding the new Panama property taxes

The new Panama tax laws #49 were implemented in September and I have been waiting for someone with a good understanding of Panama Tax law to give me a write up in English. The law firm of ICAZA,  Gonzalez-Ruiz & Aleman have done a great job of doing it. I have used this law firm for about 10 years and very reputable and capable.

The bottom line is that the government is moving to tax all property in the country and although there have been tax exemptions for improvements on the land (homes and other construction) as an incentive to build and buy, the land itself is not exempt and will be subject to a rather high mil rate by comparison to other countries, both in the first and third worlds. Although the income tax rate on the sale of properties has been clarified and lowered it still is significant when coupled with the 2% transfer tax at the public registry. Like countries everywhere in the world Panama has determined that property taxes are the easiest and most efficient way of generating revenue for the state.

Personally I abhor this kind of tax for two reasons. First of all, what happens if you don't pay the tax? Usually your property can be sold by the state to pay it. Although I have not seen this in the Panama tax code yet, if it can happen then you really don't own the property and are in essence just leasing from the state. Don't pay the rent and you get thrown out! Secondly it becomes very easy for the government to increase the mil rate as they find they need more revenue which is ALWAYS the case. In other words, once the camel's nose is under the tent, he will soon be sleeping with you.

This is a PDF file of 6 short easy to understand pages.

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