There are a number of important changes to the tax code that have been implemented in the recent tax reform that directly affect anyone living or investing in Panama. The legal firm Pardini and Associates has done a fine job of distilling these changes down to an easily understood English format.
Panama’s New Tax Law Reform
By means of Law 8 of March 15th,
2010, the Panamanian parliament members approved a substantial
modification of our tax legislation in accordance to the guidelines
established by President Ricardo Martinelli and its Minister of Economy
and Finance, Mr. Alberto Vallarino.
The
existence of some sort of enthusiasm to modify the tax legislation was
known since the beginning of the new government, which based their
initiative in the interest of raising funds for developing and
fulfilling social projects promised in the political campaign, such as
the construction of the subway, scholarship for all students, extending
pension programs, among others.
The modifications were developed by the Ministry of Economy and Finance with the assistance of international consultants that together modified the following aspects of our legislation tax.
- Reduce the income tax applied to middle class population
- Reduce the income tax applied to small/medium enterprises
- Increase large enterprises contributions
- Increase tax rate to other business sectors
- Increase VAT from 5% to 7%
- Extend VAT to other products and services
- Create new rules for income tax declarations (Deductions and others)
Transportation
1. 1. From now on the income from freight charge, passenger transportation and cargo performed by an international transportation companies will be taxable if the origin or destination of business is the Republic of Panama.*
Note:* Except for companies from countries that have a special transportation treaty with Panama.
The
government is also amending the article due to the fact that in later
articles the freight charge, air cargo, land cargo and maritime cargo
is considered as tax exempted.
2. 2. Companies* described in paragraph 1 may apply as a credit the income tax paid abroad in regards to the part that correspond to freight charge, passenger transportation, cargo and other services performed out of Panama territory. Nevertheless, this credit must not be used in other fiscal periods nor requested for return.
3. Air tickets will no longer pay the tourism authority tax. (US$ 4.00 for each US$ 100.00),
4. As of July 1st, 2010 air tickets will be charged with 7% VAT
5. Automobile vehicles (tractors, cars, electric vehicle, motorcycles, jet-skies, yachts) will pay 7% VAT and depending upon their category and CIF value, it will also pay a selective tax that starts from 5% up to 25%
6. The income resulting from international maritime trading with vessels registered in Panama will not pay taxes, even though the transportation agreement is executed in Panama.
7. Boats, yachts and motor vessels for private use will require having a navigation license. The cost of the license is US$ 5.00 per year.
8. Boat, yachts and motor vessels for private use navigating in national waters will pay a navigation tax depending upon their length:
Up to 6 meters length US$ 24.00
From 6 meters up to 10 meters length US$ 120.00
From 10 meters and above US$ 240.00
9. Boat, yachts and motor vessels for private use and from a foreign registry navigating in national waters will pay a navigation tax depending upon their length as well. This rate is valid for the renewable temporary visit of 1 year:
Up to 6 meters length US$ 45.00
From 6 meters up to 10 meters length US$ 90.00
From 10 meters and above US$ 180.00
Telecommunications
1. 1.
The total income generated by international telecommunications service
will now be considered as taxable. Before, telecommunication companies
deducted from their income a portion of the income generated by the
service due to the fact that part of the service was from abroad and
therefore considered as non taxable.
2. Satellite, microwave and cable and cell phone telecommunication will now pay 7% selective tax
Income Tax
Companies
1. 1. Cost and Expenses will now require to be assigned upon the origin of the income.
1.1. Type of Income: taxable income, exempted income and foreign income
1.2. Nevertheless
to avoid excessive deductions, the government create a formula to
measure the maximums deductable cost and expenses.
The government policy for small business consists in the idea of reducing progressively the rate of income tax within a period of 2 and 4 years respectively. Some industries will benefit of this measure later due to the type area of their business.
2. As of January 1st, 2010, income tax for businesses will be 27.5%
3. As of 2011 income tax for business will be 25%
4. Companies
such as: Electrical distribution, reinsurance, financial activities
described in law 42 of 2001, cement production, gambling industry,
mining industry, banks will pay income tax in accordance to the
following schedule:
Fiscal year Rate
As of January 1st, 2010 30%
As of January 1st, 2012 27.5%
As of January 1st, 2014 25%
5. Companies were the Nation has a participation of more than 40% will pay 30% of income tax.
6. Companies with a taxable gross income above US$ 1,500.000.00 will be contribute as the schedule described above, however the amount will also be compared with a parallel formula of 4.67% of the gross income, and whatever amount result as bigger, will be considered as the income tax to pay.
The raise of US$ 1.5 millions gross income removes from excessive tax rates and complicate formulas to the small/mediums business that in the past were affected by having to create expensive tax declarations as larger companies. The government realized this fact by learning that US$ 1.5M is not longer an exclusive income of larger companies.
7. As of January 2011 companies will have to pay a monthly advance income tax of 1% of the total taxable income of a month.
8. Income tax declaration can be corrected only one time per fiscal year within 36 months from date that the law fixed for presentation.
9. Government rights to collect taxes prescribes in 7 years and the natural persons or companies rights to claim devolutions prescribes in 3 years.
Natural Persons
The income tax for natural person suffered a major change with the new law by decreasing the rate as well as excluding a number of people that no longer will pay income tax based on their salary.
1. As of July 1st, 2010 the new income tax rate for natural persons will be:
Taxable income Tax rate
Up to US$ 11K 0%
From 11K up to US$ 50K 15% for the exceeding of US$ 11K up to 50K
More than 50K US$ 5,850.00 for the first 50K and a rate of 25% for any amountabove of US$ 50K
2. The income receive in concept of “representation expenses” will be subject to income tax as follow:
Amount Tax rate
Up to US$ 25K 10%
Above 25K 2,500 for the first 25K and 15% of the excess
3. Married couples are entitled to deduct only US$ 800.00 when they filed the tax declarations together. The deductions were larger; however the government sustains to reduce the deductions and their amounts based on the new reduction of the income tax rate.
4. Natural persons and companies involve in agriculture and cattle will not require paying income tax when their income does not exceed the amount 250K per year.
5. Income tax declaration can be corrected only one time per fiscal year within 36 months from date that the law fixed for presentation.
6. Government rights to collect taxes prescribes in 7 years and natural persons or companies rights to claim devolutions prescribes in 3 years.
7. Any
foreign non-resident natural person or company that receive an income
(expect for dividends or participations) must pay 50% of the regular
rate of income tax. The rate will be as follow:
As of January 1st, 2010 – 13.5% and,
As of January 1st 2011 – 12.5%
Dividend Tax, Free Zone & Commercial License Tax
This modification came from previous law modification on 2009 (Law 49-2009). The new law just confirms the fact that exempted companies in free zones are now bind to contribute with a portion of their profits.
This aggressive decision was based on the fact that the low dividend tax rate applied does not affect the attractive and profitable activities in free zones
- Loading,
unloading, transporting of goods inside a free zone or special trading
zone will not have to charge VAT, nor the maintenance and repairs of
vessels in transit
- Companies
with no special law and with commercial license will pay 10% tax for
dividends receive, however when dividends is product of foreign
activities this amount will be of 5%
- Companies located in Colon Free zone or others free zones will only pay a fix dividend tax of 5%
- Companies located at the special zone of Panama-Pacifico will subject to particular considerations, specifically for commercial activities described in the Panama-Pacifico law.
- Commercial
license tax: Companies will pay 2% of their business capital with a
minimum rate of US$ 100.00 up to US$ 60,000.00. This tax does not apply
for companies that have as business capital less than US$ 10,000.00
- Commercial license tax: Free zone companies will pay 1% of their business capital with a minimum rate of US$ 100.00 up to US$ 50,000.00
Real Estate
- Companies
dedicated to the buy and sell of real estate will pay an income tax
rate of 3.75% of the sale or cadastral value of the property and it
will be due before the registry of title transfer at the public
registry
- Property Tax rate
Value of the property Property Tax Rate
US$ 0.00 up to US$ 30K (exempted) 0%
US$ 30K up to US$ 50K 1.75%
US$ 50K up to US$ 75K 1.95%
US$ 75K and above 2.10%
Note: This value is considered based on the value of the land + value of the constructed improvements
- When
it comes to condominium regime properties (apartment buildings) the 30K
exemption will not apply if the property is enjoying a property tax
exemption regarding the improvements and therefore a property tax rate
of 1% will apply in this cases. Nevertheless once the property
exemption is over the property will only pay property taxes in
accordance to the schedule above.
- Although the abovementioned, the new law has created an alternative calculation for property tax rate when we it comes to condominium regime properties:
Value of the property Property Tax Rate
US$ 0.00 up to US$ 30K (exempted) 0%
US$ 30K up to US$ 100K 0.75%
US$ 100K and above 1.0%
Again, when it comes to condominium regime properties (apartment buildings) the 30K exemption will not apply if the property is enjoying a property tax exemption regarding the improvements and therefore a property tax rate of 1% will apply in these cases. Nevertheless once the property exemption is over the property will only pay property taxes in accordance to the schedule above.
- To
enjoy the benefits stated on paragraph 4, taxpayers must file a sworn
declaration declaring the new property value, along with a
countersigning of a Real estate appraisal company before June 30th, 2010.
- The
government guarantees not to vary the cadastral value of properties for
5 years, once the new declared value is formally accepted by the
cadastral office.
- Any new value declaration filed after June 30th,
2010 will only be accepted an entitle to enjoy benefits on paragraph 4
as long as the new value presented is higher than the previous
registered cadastral value
- The benefits of paragraph 4 will apply for any development that receives its construction permit as of this law enters in force (March 15th, 2010).
Corporate (Companies & Private Interest Foundations)
This section was created in the new law just to clarify the fact when surcharges and penalties must be applied as well as extending the VAT to other legal services.
1. Companies & private Income Foundations that does not pay the annual franchise tax will pay a surcharge of US$ 50.00
2. Companies & Private income Foundations with 3 consecutive years without paying the annual franchise tax will be charged with a penalty of US$ 300.00
3. As of July 1st, 2010 Resident agent service, nominee directors services as well as any recurrent service provide by law firms will pay 7% VAT.
7% VAT (I.T.B.M.S.)
The
VAT along with the income tax modification is considered as one of the
most significant changes created in the new law. The 2% increase was
created with the purpose of fulfilling the government social plans for
the future. Although the new rate is a significant change, economist
believes that the negative impact will be small and compensated through
the income tax rate reduction.
The new VAT will enter into force as of July 1st, 2010.
The VAT remains for all services that were already paying it, however it now also extends to others such as:
1. Air tickets, recurrent legal fees, bank commissions, etc.
The VAT percentage varies when it comes to:
· Import and sell (retail or wholesale) of alcoholic beverages – 10%
· Import and sell (retail or wholesale) of tobacco and its derivates – 15%
· Accommodation service -10%
· Commercial and services activities with a gross annual income less than US$ 36K are not required to charge VAT
Miscellaneous
- Government stamps for legal documents and applications will be US$ 8.00 instead of US$ 4.00
- A tax court has been created in order to settle taxpayers claims
- Instructions for the issuance of national currency (coins) have been set.
- Fire arms and jewelry selective tax is now 10%
As many tax policy modifications, we will see plenty complaints coming from accounting firms, corporations and people, looking to clarify concepts and interpretations. Nevertheless it is premature to define the real impact (benefit) that our society will face from this reform.
Eduardo Achurra M.
Pardini & Asociados
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