Is tax reform inevitable for fiscal consolidation in Panama?

Compliance with Panama's Fiscal Responsibility Law requires comprehensive tax reform. Reliance on public debt to sustain the state budget is an unsustainable strategy, highlighting the urgent need to adopt structural measures to increase tax collection.

The modernization of the state apparatus requires tax reform focused on three strategic areas: reducing tax evasion, increasing tax collection in proportion to gross domestic product (GDP), and aligning the tax system with international standards. Despite this need, the Executive has ruled out a major reform, basing its strategy on the incorporation of new technologies and the strengthening of tax culture.

However, the International Monetary Fund (IMF) Article IV Report for 2025

contradicts this view. The organization recommends comprehensive tax reform for Panama with clear objectives: broadening the taxpayer base, optimizing tax compliance, and strengthening administrative capacity to formalize more economic activities. This would include measures such as reducing exemptions, adjusting tax rates, and modernizing enforcement mechanisms to combat evasion.

The revenue potential of these reforms is significant. The IMF estimates an increase of up to 2.5% of GDP. The elimination of tax exemptions would contribute about 2.0% of GDP—mainly through income tax (ISR) and ITBMS—while increasing the ITBMS rate from 7% to 10% would generate an additional 1.5% of GDP. This yield could be even higher if the tax base were broadened and informality reduced.

The low yield of the ITBMS in Panama is concerning. According to the IDB's Tax Statistics in Latin America and the Caribbean 2025 report, this tax accounts for only 14.4% of total tax revenue, compared to the regional average of 28.5% for VAT. This difference is directly attributable to the low rate of 7% and broad exemptions, creating a regressive model that limits both redistribution and revenue collection.

A striking aspect of this year's IMF report is the absence of recommendations to apply the Global Minimum Tax, unlike in 2024. This omission could be related to the potential US tax reform One Big Beautiful Bill (OBBB) and its impact on the OECD's global rules.

Finally, the revenue projections in the General State Budget, based on economic growth estimates, do not appear sufficient to meet the

2026 revenue targets. Although the figures have improved, the IMF insists that only a tax reform will allow the debt-to-GDP ratio established in the Fiscal Responsibility Law to be met.

There are only two ways to achieve fiscal consolidation: increase revenue or reduce public spending. Given that an adjustment focused on reducing investment would negatively affect economic growth, the most viable and responsible option is to move toward comprehensive tax reform. It is not a question of if it will be done, but when.

Leer artículo original en La Prensa