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
[email protected]
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.
As Panama' real estate bubble was a shadow of the one in Dubai, lets hope the fall in real estate rentals does not suffer the same fate. As this article in International Property Journal points out, the fall has been hard with residential rates down 41% and commercial down 57%. I don't think Panama's commercial rentals will be hard hit as there was not nearly the bubble as in the residential condos. I understand from property managers in the city that rentals are still strong but how long that will hold when the many new towers come on the market is in question. On my visit to the city yeasterday I was impressed with the number of cranes I could count from the Cinta Costero and took this photo with my Iphone. 
I love trains and have always found the people that run them to be down to earth as a whole. The folks running the Panama railroad are no exception. I met the principals of the companies involved back in 1998 when they received the concession to build the new railway and port handling systems. I even had a few beers with one of the engineers who task it was to fly over the existing rail bed with a high tech sonar system to determine how much materials they would need to bring in by barge. 
So, what happened to the much ballyhood flat tax for Panama? Seems that was just rhetoric as there is no sign of it in the proposed tax bill recently unveiled. I guess the consultants hired by the new administration found it too difficult to implement or maybe they still plan on doing it to corporations. But as it is proposed, there is still a graduated income tax for individuals and various taxes for banks, airlines and services in the country. The idea of a flat tax is to make it simple and easy to know what the government take is on all income and it greatly eliminates cronyism and corruption in collections. With all these machinations come confusion and uncertainty which investors just do not like.
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