It is common for local authorities to exceed their fiscal borders when levying construction taxes for the repair or construction of streets or roads.  We must distinguish among three different types of municipal taxes related to road construction: construction tax, construction permits, and the right to extract non-metallic minerals. While all of these are municipal levies permitted by law, construction tax is the only one where the work on which the tax is imposed does not exceed the boundaries of municipal lands.

A. The Construction Tax

The municipal tax authority is regulated by the Constitution, Law 55 of 1973, Act 106 of 1973 as amended by Act 52 of 1984, and in the Municipal Agreements, special laws and the rulings of the Supreme Court in constitutional and administrative proceedings.

Article 245 of the National Constitution is the rule that regulates municipal tax authority. This article indicates that "there are municipal taxes that have no effect outside the district, but the law may establish exceptions for certain municipal taxes despite having this issue ... . " (The emphasis is ours).

Articles 74, 75 and 76 of Law 106 of 1973 allows municipalities to raise taxes for the activities and services that are developed within a district. These articles follow the tax principle contained in Article 52 of the Constitution, which states that taxes may only be imposed by the state authority over its subjects under law.

In Panama, situations have persisted for decades where municipal authorities have insisted on the payment of taxes by the contractors who build roads. The municipalities in these cases, under the assumption of Article 75, paragraph 21 of Law 106 of 1973, have asked contractors to pay a tax for the construction of roads and highways that ranges from 1% to 2% of the value of the work.

Let us first define the taxing power. The taxing power is "the potential to coercively obtain cash benefits from individuals and to require performance of the duties necessary to obtain those benefits".  Following this vein, the municipal taxing power is derived and emanates only from the law and has been recognized by the Court in all of its decisions. While the government's taxing power is original, it is unlimited in the creation of taxes and emanates from the sovereignty of the State.

Municipalities cannot create taxes that do not exist in Act 106 of 1973, because its taxing power is derivative and not sovereign. In other words, the Constitution and the Act expressly state which activities or properties may be subject to taxes; not among them are infrastructure works carried out by the Central Government.

The Full Bench of the Supreme Court has indicated in several judgments dated February 26, 1993; February 8, 1994; March 20, 1997; September 19, 1997; October 22, 2009; and October 4, 2007; among others, that: "works that are national in character cannot be burdened by municipal taxes by virtue of the transcendence that they possess."

As a solution to the problem of municipal tax collection, the Court in a judgment of December 30, 2011, recommended that the corresponding Councils verify each individual case, especially where there are works of road construction with national incidence or outside districts. On the one hand, there may be a special law that covers this work, thereby exempting it from the payment of municipal taxes or national taxes; and on the other hand, only a special law would impose a municipal tax and allow the city to collect the tax, even when the works are outside districts.

For example, Law No. 89 of December 1, 2010, "That dictates measures to promote the development of Commercial aviation" and the Law of the Social Security Fund limit municipal tax authority, stating that the works performed by these entities are exempt from taxes.

In the case of the Civil Aviation Authority, the Attorney General of the Administration in Consultation No 24 of 2011, indicated that the works carried out by this entity (CAA) for their own account or through contractors, should be exempt from payment of municipal taxes.

B. The Construction Permit

The construction tax should not be confused with the payment for the construction permit. Regardless of whether or not the work is exempt from the construction tax, a contractor must obtain a construction permit. The building permit is a prerequisite for contractors to obtain prior to beginning construction and is regulated by the Administrative Code and Article 76 of Law 106 of 1973. By way of rulings of August 6, 2004 and December 30, 2011, the Third Chamber of the Supreme Court cautioned that "the construction permit must be processed for any building project, without exception whatsoever and without distinguishing whether the work to be performed is or is not of national importance".

A similar position has come from the Office of the Attorney General confirming that the processing of the building permit is a compulsory requirement for all types of construction projects, regardless of whether the work to be performed is of national significance. This means that although the work is exempt from the payment of construction tax, the project must deal with the building permit because they are separate and distinct issues.

It should be noted that the Municipal Council, through its Agreements, levies taxes on the construction of streets and highways at a rate ranging between 1% and 2% of the value of the work to obtain the building permit. The construction permit is a technical service of a municipal engineer, and this should not be priced in the same manner as the tax is calculated in construction.

C. The Tax For Non-Metallic Mineral Mining

Finally, there is a tax for non-metallic mineral extraction. This tax is based on Article 33 of Law 55 of 1973. This article imposes a tax for the removal of sand, gravel, quarry stone, clay or rough materials taken from public or private property. Article 37 of the same Act states in its last paragraph that it does not result in an extraction tax for non-metallic materials, where such removal is for the construction of national or municipal works, performed directly by the Panamanian State.

Private companies managing a concession that extracts non-metallic minerals for the construction of streets and highways must pay the tax referred to in Article 33 of Law 55 of 1973, as it is not the State that directly performs the activities of construction.

Conclusion

Private companies that participate in public tenders for the construction of roads that are of national character cannot be threatened to pay municipal taxes since they are works of national interest. However, they must obtain a building permit and pay the tax for non-metallic mineral extraction.

The repair or construction of internal roads that connect to the Inter-American Highway do not pay construction taxes. Likewise, the construction or repair of bridges on the Inter-American Highway are not taxed. This year has seen the Municipality of San Miguelito’s attempt to levy a construction tax collection by expanding the Via Domingo Diaz, which in our opinion is totally illegal.

The statements of objections in the Tenders should indicate where there is exemption from municipal taxes, as they do for example in the Social Security Fund and the Civil Aviation Authority.

It would be desirable that the Tax Administrative Court is independent of the Executive Branch, performing in second instance appeals relating to municipal tax issues, and to filter the fiscal proceedings of these entities before they reach the Supreme Court. That is an existing proposal that has not yet has seen the light.