Panama Supreme Court on tax arbitration

By Rafael Rivera Castillo (Managing Partner, BDO, Panama)


In an August 8 decision, the Panama Supreme Court of Justice declared unconstitutional several sections of the Tax Procedure Code (TPC). These provisions granted special adjudicating powers to private arbitration panels to solve tax disputes between the Directorate General of the Revenue (DGI) and taxpayers, including those related to international tax issues (such as the application of tax treaties and transfer pricing issues).

The court’s decision

The court’s decision declared the nullity based on violations to specific constitutional provisions of sections 357, 360, 361, 363, 364, 365, 366, 367, 368, 369, 370, 371, 372, 373, 374, and 375 of the TPC (as approved under Law No. 76 of 2019 as amended). It may be mentioned that these provisions were not in effect due to a vacatio legis measure inserted in the PTC and were expected to enter into force on January 1, 2023.

Legal discussion

Since the enactment of the TPC, there were recurring discussions as to the viability of these private arbitration panels to effectively exercise these adjudication powers because it would exclude tax matters from actual judicial review as required under the Constitution.

Specifically, Article 206 of the Constitution grants exclusive rights to the Supreme Court of Justice to perform judicial review any, and all, disputes arising between Government entities and particulars (ranging from authorizations to perform or exploit certain activities controlled by the Government, to environmental regulations, public contracts, tax matters and all sort of topics under Government review and/or authorizations).  

Objective and rationale of the TPC on private tax arbitration

The rationale behind the proposal to adopt the private arbitration panels was to expedite the solution of tax disputes, that in general may take five to seven years to be decided under the current system, which entails a first administrative review at the level of the DGI, a second administrative review at the level of the Administrative Tax Court of Appeals (TAT) and subsequently the judicial review at the Supreme Court of Justice (Third Chamber). The other argument in favor of these private arbitration panels was related to the possibility of bringing tax expertise on certain complex tax disputes that is not generally found at the level of the Supreme Court of Justice.

Constitutional provisions on tax arbitration

From a strictly constitutional law perspective, despite the judicial review requirement as mandated under the Constitution, the legal debate should have been focused on Article 202 of the Constitution, which provides certain specific rules that must be observed by the Government whenever a legal dispute would be settled under private arbitration panels, requiring approvals by the Executive Cabinet and the General Public Attorney’s office.

The TPC provided that these private arbitration panels were to be established and agreed upon solely at the taxpayer’s choice. In order words, the DGI had no capacity to evaluate or determine the convenience or not to submit a specific dispute to these panels or to use the ordinary legal review procedure, which evidently is at odds with Article 202 of the Constitution. But, most importantly, the TPC did not require the approval of the Executive Cabinet and the General Attorney of the Republic to submit these tax disputes to these private panels.


The Supreme Court of Justice concluded that the taxpayer relationship with the Government is to be considered as a legal relationship of public order and shall not be subject to private arbitration. According to the court, private arbitration can only be accepted on matters involving the Government only on matters involving disputes of a private legal nature (such as obligations contained in contracts and other bilateral matters that can be disposed by contracting parties).

It is interesting enough that despite the argument of the Supreme Court of Justice that the collection of taxes belongs to a public order category, because taxes satisfy the citizen’s needs from a collective standpoint or a public law relationship between the state and the individual, it was also clarified that any arbitration clauses or provisions adopted or approved by the Republic of Panama based on international tax treaties or other international public instruments shall be complied with and would not be deemed as unconstitutional. This clarification follows from the rationale that public agreements or international instruments entered into between sovereign states also belong to the public order category.

Consequently, no domestic private arbitration will be authorized to solve tax disputes following the decision of the Supreme Court of Justice, as was the original design included in the TPC but any arbitration agreed upon by the Republic of Panama under tax treaty or other international public instruments will be valid and binding following the criteria laid down in the decision.

Panama Supreme Court of Justice declares that Adjudicating Powers granted to Private Arbitration Panels under the Tax Procedure Code are Unconstitutional

The author is Managing Partner at BDO in Panama.