This article appeared in the Panama Realtor newsletter. Roberto
2010 tax reform law
The 2010 tax reform law, known as Law 8 of 2010, amended Panama’s fiscal code in several ways. The most important and popular was the reduction of tax rates on both corporations and individuals. However, the loss of these tax revenues will be recouped by an increase in the sales tax from five percent to seven percent.
This new tax reform law takes effect on July 1, but the reduction of corporate and individual income tax rates became effective from January 1. Individual income tax rate is now 15 percent for net income between $11,000 to $50,000 and 25% above $50,000.
This is the second tax reform in the past year. Law 49 of 2009 took effect in September of 2009 which made the dividend tax apply to dividends paid out of foreign source profits and those paid by companies operating in one of Panama’s free zones.
Corporations are happy to see their 30% income tax rate lowered to 27.5%. It will will be further reduced to 25% in 2011. This applies to every corporation, limited liability company, partnership, and subsidiaries of foreign corporations. There are exceptions involving certain industries like insurance, banking, financial services, and casinos who will continue to pay the 30% rate for an additional two years.
Withholding dividend tax is now in effect. Companies operating within Panama having a “Notice of Operations” permit (which is a commercial license to do business in Panama) must withhold 10% of the dividends paid out from domestic profits and five percent from foreign source profits. Companies located in a free zone must withhold five percent of all dividends paid out.
There is an exception from paying the dividend tax. Companies operating here as a regional multinational headquarters, or working in the Panama Pacifico Special Economic Area and Panamanian companies operating abroad and not connected to the Panama market are exempt. Any tax treaty between Panama and another country specifying an exemption to these tax laws will prevail.
Deductions of business expenses are now limited. Presently, expenses encountered exclusively to generate taxable income or to conserve resources are deductible. The new law creates an allotment procedure where the percentage of the taxpayer’s domestic gross income to its total gross income will be calculated to allow deductions. This procedure will be clarified later by the government. Exceptions to this method include deductions for bad debts, charitable deductions, and the Notice of Operations permit fee, along with any other automatic deductions the government decides to grant at a later time.
The current system of making payments in advance will change. Presently, a company estimates the current year’s income tax based on the past year’s tax. Then the company makes equal quarterly advance payments. Any excess payments are credited towards the next year’s tax. The new law requires a one percent payment of the estimated gross yearly income every month. Adjustment for over or under payments will be made with the annual tax return. Excess taxes paid can be credited to the next month’s payment, or towards other government taxes, or be refunded.
Instead of raising taxes, the new government emphasizes lowering tax rates, limiting deductions, raising dividend and sales taxes, and requiring monthly advance tax payments which in the end is expected to increase the government’s revenues.