Central America, Panama and Dominican Republic tax controversy outlook

February 2023, 16

Latin Counsel has had the opportunity to talk with Randall Oquendo, Tax Partner and leader of the Tax Controversy practice for EY Central America, Panama, and Dominican Republic. Based in Costa Rica and with over 20 years of professional experience, Randall is a go-to person when tax controversy arises in the region and can provide a detail outlook on tax disputes in Central America, Panama and Dominican Republic (hereinafter "the Central American region").

Randall Oquendo is an EY Tax Partner, leader of the Tax Controversy practice for Central America, Panama and Dominican Republic, with over 20 years of professional experience. Randall has advised and represented multiple companies in complex cases in the region, including case planning, defense strategies and oral hearings in both administrative and judicial levels. Randall coordinates and manages EY clients’ relations with the Tax Administration, i.e., in subjects related to tax compliance and fiscal auditing processes.  Randall is the Chair in the Costa Rica - American Chamber of Commerce Tax Committee and he is an active member in other business chambers. He also has significant experience in tax policy issues and is a Tax Law professor at the University of Costa Rica.

What are the foreseen drivers of tax controversy in the region?

The Central American region continues to struggle with the stabilization of public finances and raising revenue to recover deficits caused by COVID-19 economic effects. There are some other external events such like high inflations rates and the war in Ukraine that have had a significant impact on the countries’ economies. In my experience, the need to raise revenue usually results in an increase in tax audits.

What can taxpayers expect from the tax authorities during audits?

Taxpayers must keep in mind that they are now dealing with more empowered and sophisticated tax authorities in Central America. Even withing the region, tax authorities have more capabilities and technology that in previous years, which increases the possibility of detecting tax risks and performing more detailed tax audits.

You mentioned more sophisticated tax authorities in the region, this includes tax authorities having more information on taxpayers?

Yes, and this is an excellent topic to discuss. Tax authorities within the region have more information available of the taxpayers which is used for cross reference reviews as well as during tax audits. Countries such as Costa Rica and Panama have demonstrated a strong commitment to international tax transparency standards, including the exchange of financial accounts information under the OECD Common Reporting Standard. Countries such as Guatemala have enabled the exchange of information between different local authorities. All of this facilitates the tax authorities’ efforts to verify the consistency of the information reported by the taxpayers, amongst others.

What about electronic invoicing as a source of taxpayers’ information?

Electronic invoicing, on the other hand, is a great source of information about taxpayers’ activities, and countries in the region where is not yet implemented or fully developed are moving at a fast pace towards its implementation.

How can you describe the tax authorities’ attitude towards the taxpayers?

With few exemptions, for example, in Panama, we have observed an increase in a challenging behavior by the tax authorities in most of the countries of the region, as well as an aggressive positions regarding the interpretation and enforcement of the tax law. This increases the taxpayer’s exposure to tax assessments and penalties, as well as reputational risks.

Are tax audits also more aggressive?

Indeed. Tax audits has become more aggressive in the sense that they are becoming more extensive and detailed, and in some cases with the tax authorities requesting significant amounts of information in short terms. In some cases, a tax audit may require the company’s tax team to attend this issue exclusively. Furthermore, we have observed that in some cases, tax authorities’ approaches are not necessarily grounded in commercial rationale or industry knowledge, which tends to complicate or mislead an audit.

Which trends do you consider that are significantly affecting the tax controversy picture?

There are global and local trends that are having a significant impact on the region’s tax controversies. To name a few, there is a lot of politicization of taxes and debates about whether companies are paying a fair tax, which leads to increased scrutiny and tax audits, tax authority digitalization is disruptive, and there is a continued high pace and complexity of tax reforms or new tax legislation.

Are tax authorities focusing on specific areas?

Tax authorities throughout Central America focus on areas that they consider more relevant based on their tax audit plans or risk management plans, so each country have specific areas of focus. However, we have identified in practice that there are some common areas that draw the attention of tax authorities for example, deductible expenses, tax refunds, transfer pricing and withholding taxes.

So, considering this controversy landscape, do you anticipate more audits in the region?

This may differ from country to country, but in general, we can expect an increase in tax audits in the region and in that regard a more challenging landscape for taxpayers in this regard. Taxpayers should be prepared not only for an increase in the number of audits but also an increase in the intensity of those audits.

How can the taxpayers be ready for a complex tax controversy scenario in Central America?

Personally, I consider that being ready and well prepared for more in-depth tax audits and greater scrutiny is the best course of action. Taxpayers need to proactively assess their tax risk, put in place a plan to control and reduce such tax risks and have a well-thought-out plan for handling tax audits and controversies that allows taxpayers to focus on the business.

Disclaimer: this interview reflects the interviewee’s personal views and positions and does necessarily reflect those of his employer.