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.
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 thelaw 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...