GDP and Tax Evasion

A recent headline said that roughly 9% of the Gross Domestic Product (GDP) of the Republic of Panama disappears through tax evasion. Looked at coldly, this macroeconomic approach does not effectively capture the how, the where or the why of this "failure" in the system.

In this edition we present figures, analysis and tools based on 2024-2025 data, so we can understand the real size of the problem and learn to tell apart two words that are very often confused: evasion and avoidance.

Evasion vs. Avoidance: Which Is Which?

These two words are commonly confused. In both cases it is easy to say that someone is not paying taxes, and both involve, to some degree, paying less tax, but the mechanisms and the legal consequences are completely different:

• Tax evasion: carrying out illegal activities, such as hiding income or not declaring all of it, to avoid paying.
• Tax avoidance: aggressive tax planning that uses every method the law allows (special tax regimes, tax incentives), but that can affect tax fairness.

These are two completely different ways of eroding the tax base, and they must be measured separately.

So, to measure tax evasion effectively, we need more than a macroeconomic calculation. We need to analyze variables such as:

1. The real tax gap: the difference between what taxpayers should pay under the law and what they actually pay. It is calculated from tax returns, audits and financial analysis.
2. Consumption-based estimate (ITBMS): an estimate of how much should be collected if every household paid ITBMS on its declared spending; the difference from actual collection shows possible evasion.
3. Microeconomic analysis and audits: cross-checking declared income, spending and assets. If someone spends far more than they report earning, there may be evasion.
4. Tax intelligence: the real application and analysis of electronic invoicing, AI and big data, which will make it possible to identify evasion and avoidance patterns predictively.

Official collection data (January–April 2025, compared with the annual budget)

💼 Income tax (ISR)

Includes individuals and companies, although evasion is largely concentrated in income related to companies.

• Budgeted collection: B/. 1,154 million
• Actual accumulated collection: B/. 728 million
• Approximate evasion or non-compliance: 36.9 %

🍎 ITBMS (Panama's tax on the transfer of goods and the provision of services)

• Budgeted collection: B/. 776 million
• Actual accumulated collection: B/. 463 million
• Approximate evasion or non-compliance: 40.3 %

Key analysis

• In Panama, tax evasion is a concrete, measurable gap, not just a share of GDP.
• The DGI's preliminary collection report through April 2025 shows that sectors such as commerce, professional services and real estate account for much of the non-compliance.
• Electronic invoicing, although mandatory, does not yet cover 100% of taxpayers.

Conclusion

Repeating that X% of GDP is lost is not enough. We need to understand the reasons for evasion; with technology and administrative will, it can be quantified, enforced and reduced.

Sources

1. MEF/DGI – Preliminary Collection Report, April 2025 (budget execution table by type of tax): https://dgi.mef.gob.pa/Transparencia/IFP/INFORME%20PRELIMINAR-abr25.pdf