Tax Highlights Awards: Biggest Tax Fiasco of the Year

Reflecting on a busy year for international tax developments, we look back at some of the more notable cases in our inaugural Tax Highlights of the Year Awards, and over the next few weeks present the case for winners of the following categories:

  • Biggest tax fiasco of the year;
  • Best cake case of the year;
  • Best supporting food case of the year; and
  • Naughtiest tax litigant of the year.

Biggest Tax Fiasco of the Year

This came even before 2014 kicked off – the government of Panama’s announcement on New Year’s Eve that it was reversing an unheralded but revolutionary change in the country’s tax legislation that had been signed into law just one day before.

For a century, it has been the core principle of the Panamanian tax system that it taxes only Panama source income, irrespective of residence status. Naturally, this has made it an attractive residence for businesses (over 300,000 corporations are based in Panama) – until, that is, late on December 28, 2013 when, without any prior notice let alone consultation, the National Assembly passed legislation, approved by President Ricardo Martinelli on December 30, imposing taxation on worldwide income with effect from December 31. Since the normal Panamanian tax year is the calendar year, this meant that worldwide taxation would have applied even to income in the 2013 tax year.

Businesses, many of which have moved to Panama precisely because of its territorial system of taxation, were appalled.  “As an organization that represents the largest representatives of the Panama stock market,” said the country’s Chamber of Securities, “we should have been consulted on this modification.” Others were less restrained. A “law like this”, blogged one businessman, “would utterly cripple the Panama economy! Taxing shipping companies, logistics companies, foreign companies that do business in Panama and all other smaller companies and residents who choose to do business here because of its tax friendly policies would cause a mass exodus. These companies would close, move their money out of the country and leave thousands without jobs.”

Almost immediately, the government began to backtrack, but at first without running up the white flag. “On territoriality and taxes”, tweeted President Martinelli on the morning of New Year’s Eve, “if we need to repeal, we’ll repeal, or what needs to be defined will be defined.” Nevertheless, he added, “ample debate must take place” – though none, apparently, had been thought necessary before the change had been made in the first place, slipped in as last-minute amendment to a bill originally dealing only with a single economic zone in a single district of a single province.

Within a couple of hours, the disciplined retreat signalled by the President turned into a headlong flight when the head of Panama’s tax authority, Luis Cucalón, tweeted a remarkable mea culpa. “I was the one who proposed [the new law] and I made a mistake. We are not prepared for taxation of worldwide income. I have requested Mr President to repeal [the new law], which he accepted.”

By January 10, it was all over. The worldwide income rule was consigned to the legislative dustbin, with the repeal legislation given retrospective effect from December 30. So not only was the new rule repealed, it was as if it had never existed at all.

As for the contrite Snr Cucalón, he was asked by the President to be “more cautious” in future.

Dr Craig Rose, Technical Editor, Global Tax Guide

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