The degree of investment and tax reform, the outlook for Panama in 2026

The General State Budget has been set at $34.9 billion, based on a projected total revenue of $19.894 billion, of which $8.394 billion corresponds to tax collection. However, in recent years, tax revenues have tended to be overestimated. This practice is partly due to the difficulty of reaching consensus on adjusting public spending, which is conditioned by special laws. A clear example is Law No. 362 of 2023, which requires that no less than 7% of gross domestic product (GDP) be allocated to the education sector.

Total expenditures are estimated at $23.138 billion, of which $3.54 billion will be allocated to debt interest payments. In this context, meeting the fiscal deficit limit of 3.5% of GDP represents a significant challenge for the Executive Branch, especially considering that the budget does not include tax reform to strengthen revenues to offset rigid spending.

It is imperative to remember that tax collection in Panama stands at around 11.9% of GDP, according to data from the Inter-American Development Bank (IDB). This figure places the country in the penultimate position in the region in terms of tax collection. This structural lag is primarily due to two critical factors: the persistent scourge of tax evasion and excessive tax expenditure.

Faced with these challenges, which compromise the country's credit rating, the National Assembly's Economy and Finance Committee set up an Inter-institutional Working Group on “investment grade.” This forum addressed five key issues: fiscal transparency and the fight against tax evasion; subsidies; tax exemptions and incentives; foreign investment, public debt, and the state payroll; and institutionality, governance, and transparency.

Within the framework of this forum, we had the opportunity to contribute to the roundtable discussion on “Fiscal transparency and tax evasion.” This space was used to analyze specific actions that could be implemented starting in 2026 to combat tax evasion and avoidance, with the strategic objective of strengthening tax collection in Panama.

During the sessions, we raised the need to modernize the tax system through a comprehensive reform of the Tax Procedure Code. Among the proposals were: adapting income tax (ISR) to new digital business models; transitioning to a value-added tax (VAT) to replace the ITBMS; widespread adoption of electronic invoicing; and redesigning the free invoicing system.

At this meeting, consensus was reached that the fiscal strategy should not focus on increasing nominal rates, but rather on eliminating exemptions, standardizing income tax rates in special regimes, and broadening the taxpayer base. These measures are considered essential to reducing the fiscal deficit. However, a 25% gap in indirect tax collection compared to the 2025 budget was noted with concern. The poor performance of the ITBMS acts as a warning sign, as its decline usually anticipates a negative impact on income tax collection at the end of the fiscal period.

This effort by the National Assembly strengthens the confidence of credit rating agencies and citizens by institutionalizing a high-level fiscal debate. Although tax reforms are inherently complex, Panama has significant room to optimize its tax collection. The challenge for 2026 will be to transform this consensus into a robust legislative agenda. The path to sustainability must be gradual, but it is imperative to start immediately; tomorrow will be too late.

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