Taxation
in Panama, which is governed by the Fiscal
Code, is on a territorial basis; this
is to say, that taxes apply only to income
or gains derived through business carried
on in Panama itself. The existence of
a sales or administration office in Panama,
or the re-invoicing of external transactions
at a profit, does not of itself give rise
to taxation if the underlying transactions
take place outside Panama. Dividends paid
out of such earnings are free of taxation.
See Offshore Legal
and Tax Regime for details of the
(minimal) taxation of companies which
do not carry on business inside Panama,
and companies in the Colon Free Zone.
In
February, 2005, Panama’s
unicameral legislature approved a major
fiscal reform package in order to raise
revenues from new business taxes, and
reduce the country’s level of debt. The
legislature voted 46 to 28 in favour of
the measures, which include a new 1.4%
tax on companies’ gross revenues, and
a 1% levy on firms operating in the Colon
Free Trade Zone – the largest free port
in the Americas.
In
July, 2005, all firms which prior to 2005
were exempt from value added tax in Panama
are affected by a new interpretation of
the country's Tax Code by the tax authorities.
In a little publicised move, Panama’s
Revenue Office circulated a series of
opinions which stated that the recent
tax reform has abolished all VAT exemptions
and special treatment given prior to February
2005.
The
new interpretation centered on paragraph
26, article 1057-V of Panama’s Tax Code
which, although the wording is the same
as the original draft passed in 1976,
the Revenue Office has taken to be a new
law after it was reproduced in the major
reform approved in February 2005. Therefore,
according to the Revenue, it is effectively
a new law, which can be interpreted differently
to the 'old' legislation.
Consequently
output VAT could now be charged on clients
previously exempted. Similarly, input
VAT may also affect previously exempted
taxpayers.
Panama
Scope of Income Tax
Income tax is payable on the income of
a Panama or foreign corporation or other
entity derived from business carried on
within Panama; a corporation carrying
on business both inside and outside Panama
will pay tax on the proportion of its
income that arises within the country.
Capital gains are counted as income after
deduction of allowances.
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Panama Rates of Income Tax
The rate of income tax in Panama is 30%
on chargeable income up to PAB 100,000
rising to 42% on income over PAB 500,000
for companies that are registered with
the Official Registry of National Industry
or that have government contracts.
There
is a withholding tax of 10% on dividends
paid out of taxed income. If less than
40% of taxed income is distributed, then
Undistributed Profits Tax of 10% becomes
payable on the undistributed balance;
this therefore amounts to a maximum of
4% tax. In effect this is an advance withholding
tax, and it is creditable against the
10% tax on later distributions of the
taxed profit.
The
2005 reform package introduced a 'minimum
income tax' provision, under which the
net taxable income of a legal entity will
be the higher of the amount resulting
from application of the ordinary Income
Tax rules (gross income minus deductible
expenses minus deductible allowances equals
net taxable income), or 4.67 % of gross
income. Whenever the effective income
tax rate exceeds 30% of the net taxable
income earned by a taxpayer, a waiver
may be obtained from the Tax Administration
and no presumptive taxation will apply.
The same will apply in the event of losses
for taxable purposes. The waiver may be
granted for a maximum period of 4 fiscal
years (the year for which the waiver is
granted and the 3 subsequent fiscal years).
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Panama Calculation of Taxable Base
Taxable income is Panama-source income
less allowable deductions, except that
transportation sector companies may choose
to calculate their taxable income as 3%
of gross revenue; telecommunications companies
need pay tax on only 50% of their normally
taxable income.
Dividends
are not included in taxable income (either
because, if Panama-sourced they will have
been subject to withholding tax at 10%,
or because, if they are foreign, they
are exempt). Expenses associated with
receipt of dividends are not deductible.
Interest received from time-deposits in
Panama banks or from Government securities
is exempt.
Stocks
are valued at cost, with several different
bases being allowed, including FIFO and
average cost. 'Cost' means purchase price
including import duties, or the cost of
manufacturing including direct overhead.
Allowable
deductions include:
- Expenses
paid or incurred for the production
of income or the maintenance of a
source of income;
- Depreciation
of capital assets is mandatory, usually
by the straight-line method. The life
of assets is at the tax-payer's discretion,
subject to a minimum of 3 years (30
years for immovable property).
- Interest
on loans employed for the production
of income, but not if they are made
on the security of a term deposit;
- Bad
debt provisions are allowable up to
1% of sales, with a maximum reserve
of 10% of receivables;
Losses
can be employed over 5 years forward at
20% per year, but only to offset up to
50% of taxable income; any losses not
so employed are lost. There is no group
or consortium relief, although it is sometimes
possible to assign tax credits between
companies.
NB:
This brief summary of some of the more
important aspects of Panama income tax
law is given for general information only;
it should not be relied upon in actual
situations, for which professional tax
advice is necessary.
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Panama Filing Requirements and Payment
of Tax
The tax year is the calendar year, ending
31st December, although a different year
can be agreed with the tax authorities.
A tax return is due within three months
(can be extended to six). The previous
year's tax return must be accompanied
by a forecast of the current year's tax,
which is then payable in three instalments
after six, nine and twelve months after
the end of the previous year.
Any
under-payment of tax must be paid along
with submission of the previous year's
return.
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Panama Withholding Tax
Dividends paid out by Panamanian companies
are subject to 10% withholding tax; the
rate is 20% for dividends on bearer shares.
Dividends paid to a Panamanian holding
company however are not subject to withholding.
If less than 40% of taxed income is distributed,
then Undistributed Profits Tax of 10%
becomes payable on the undistributed balance;
this therefore amounts to a maximum of
4% tax. In effect this is an advance withholding
tax, and it is creditable against the
10% tax on later distributions of the
taxed income.
Branches
of foreign corporations pay the 10% 'deemed
dividend tax' on their full taxed income
(making their effective taxation rate
equal to 37%); but they are not subject
to withholding tax on eventual distributions.
Interest
paid or credited to the account of a foreign
lender is subject to a 6% withholding
tax. Interest on bonds, notes and other
registered securities is subject to a
flat 5% withholding tax unless traded
on a registered exchange in Panama. Royalties
paid to a foreign movie or television
production company or distributor also
are subject to a 6% withholding tax.
The
fiscal reform package introduced in 2005
includes a rule (Paragraph 1-B of article
694 of the Fiscal Code) that all payments
remitted abroad to beneficiaries not resident
in the Republic of Panama shall be subject
to withholding if the payments are related
to the generation of income within Panamanian
territory or the conservation of a source
of income located within Panamanian territory
and are considered to be deductible expenses
by the payer operating from Panama. As
examples, a non-exhaustive list of payments
subject to the new rule has been inserted,
including fees and income relating to
intellectual property rights, royalties,
know-how, technological or scientific
knowledge and the like.
The
taxable base for application of the withholding
tax (at income tax rates) is 50% of the
payment involved.
Individuals
or legal entities engaged in “international
business activities” and carrying
out operations outside Panamanian territory
are however exempted from the tax, ie
payments caught by the law are not considered
to be Panamanian source income. The definition
of 'international business activities'
is not very clear at this stage.
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Panama Real Estate Taxes (Capital Gains
Tax)
There are annual taxes on the value of
real estate, plus capital gains tax on
profits from the sale of real estate,
and a transfer tax arising on sale.
The
annual tax, under Article 766 of the Fiscal
Code, is based on official valuations,
and is levied on a sliding scale, previously:
- 1.75%
from $30,000 (lowered to $20,000 in
2005) to $50,000; plus
- 1.95%
from $50,000 to $75,000; and
- 2.10%
on values above $75,000
Valuations
under the 'cadastral' system were updated
in 2005, and from 2006 the tax was based
on the new values at the following rates:
Capital
Gains Tax is levied on real estate gains
under Article 701 of the Fiscal Code and
Articles 89 and 90 of the Income Tax Regulations.
The rate of tax is 30% on the taxable
gain after deductions, but the calculation
basis is quite complex, at least for persons
not otherwise paying much tax.
The
tax on the transfer of real estate (not
new homes) is 2%, payable by the seller,
which is credited against capital gains
tax.
Incentives
introduced in 2004 to encourage development
gave savings on a $200,000 home over 20
years of $69,250 – or about one-third
of the purchase price of a high-quality
home. But they were finally withdrawn
on August 31, 2005, with existing projects
needing to be completed within a year.
Residences
with construction permits issued after
September 1, 2005 , however, benefited
from the following exemptions:
- Value
up to $100,000: 15 years
-
Value from $100,000 to $250,000: 10
years
- Value
over $250,000: 5 years
Land
is not exempt and property tax would continue
to be paid on it if its value is above
$30,000.
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Panama
Stamp Duty
Most official and public documents in
Panama require stamping, including sales
invoices, receipts, legal submissions
and contracts. Fiscal stamps are on sale
in various denominations; pre-stamped
paper can be bought at PAB 4 the sheet.
It
is possible to account for stamp duty
on a quarterly or half-yearly basis to
the tax authorities.
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Panama Commercial License Tax
Companies carrying on business in Panama
(not Free Zone companies or offshore companies)
need to pay an annual Commercial License
Tax of 1% of the net worth of the business
(minimum PAB 10, maximum PAB 20,000).
Certain rural and/or small business are
exempt from the tax. In addition to the
national business license tax, municipalities
also levy similar taxes on businesses.
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