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Panama Taxation: Economy, Tax Structure, Statutory Requirements, and Investing
The country of Panama was the main shipping hub to and from South and Central America during its occupation by Spain. In 1821, Panama joined Columbia under the Central American revolt against Spain. In 1903, with help of the United States, Panama declared their independence from Columbia making way for the construction of the Panama Canal. The United States turned the control of the Panama Canal over to Panama in 1999. Panama had a turbulent past, which shaped their current economy, tax structure, statutory requirements and investing.
Panama is one of the fastest growing economies in Central America due to low import and shipping rates and their control over the Panama Canal. Management of the Panama Canal is a big contributor to the economy offering the only route between the Atlantic and Pacific oceans. The current expansion of the canal could increase revenue of $1 billion per year to $4 billion per year by doubling the amount ships using the canal. Tourism, foreign investment, and manufacturing of alcoholic beverages, cement, and textiles have become important industry sectors.
The official currency of Panama is the Balboa and the US dollar. The utilization of US currency helped to establish Panama as an international banking center. Banking was the main financial system used in the country until the formal establishment of the stock exchange. The operations of the Panama Stock Exchange, and any listing made through it, are governed by Decree Law 1 of July 8, 1999, which regulates the Securities Market in Panama. Law 67 of September 2011, which establishes the system of coordination and cooperation between financial supervisory authorities; it creates SUMEVAL, as a more developed entity in place of the Commission Nacional de Valores (Rosas, 2013).
Fiscal advantages in Panama for offshore investors include no capital gains tax, interest income tax, and income tax. The dollarization of Panama’s currency contributes to the stabilized economy making it appealing for investors. Incorporation legislation provides flexibility for corporation wanting to establish a business in Panama. Stringent banking privacy laws are in place to prevent the unauthorized release of banking information with violators subject to imprisonment. The Panama Canal facilitates the trading industry providing access to export and import handling and transportation for both domestic and foreign clients.
In January of 2014, Panama attempted to replace the territorial income tax system with a worldwide tax system but it was repealed in the same month. The conversion would have damaged Panama’s role as a tax haven negatively affecting many multinational companies.
The Territorial Principle of Taxation means Panama-sourced income is taxed but income earned from activities outside of Panama will not be subject to further taxation or filing tax returns on the foreign source income.
Taxation rates differ for Panamanian residents and foreigners, a resident is person who has lived in the country at least 183 days. The first USD 11,000 is exempt; a 15% rate applies to income from USD 11,000 up to USD 50,000; and the rate on 25% for income exceeding USD 50,000 (Deloitte Touche, 2014).
Annual revenue from business activities in Panama is subject to income tax. Income tax brackets for companies are as follows: Regular 25%, Special 27.5%, and the state is owner of ≥40% of share stock 30% (Deloitte and Touche, 2014). Entities falling under the special rate are banks, insurance, gaming, gambling, telecommunications, and mining and electric power companies. Corporations can request to use the alternative minimum income tax rate of 25% in lieu of the regular income tax rate when the effective tax rate is higher or it has incurred net operating losses. Other taxes associated with businesses are dividends declared after the fiscal year end are subject to a 4% tax, an annual license tax of 2% on the company’s net worth maxing out at $60,000 and value added tax on all products sold and services rendered.
Statutory and Reporting Requirements
European traditions influenced the legal system in Panama on how businesses form requiring foundation documents including Regulations and a Foundation Charter. Companies must register with the General Income Administration and the Unique Record of Taxpayers to operate in Panama. The GIA established a law in 2011 requiring all businesses to have specific equipment authorized for all document printing to maintain control over businesses. Businesses can ask for exemption under certain economic, geographic circumstances.
Accounting records for local operations must be kept in the country of Panama. IFRS became the official accounting regulations for Panama in 2005. Banks are exempt from the requirements but all businesses must use IFRS in their financial statement preparation.
Audits must be conducted annually by all corporation according to law. An abbreviated balance sheet can be submitted if the company meets certain requirements: total asset value under $2.85 million, net annual turnover not to exceed $5.7 million and the average number of employee must not exceed 50. Certain types of corporation cannot submit abbreviated balance sheets due to the nature of their business activities.
The free zones established in 2011 were meant to increase economic opportunities in Panama. These specific zones offer companies custom duty and tax exemptions for certain operational materials. Preferential business activities for the fee zones are in healthcare, research, and technology, services, and goods production. Exemptions from income tax are available for company leases, subleases, education, research, and technology and complete exemption for a company’s foreign operations.
The largest free trade zone in the Americas is the Colón Free Zone and second only to Hong Kong in the world. The Atlantic entrance of the Panama Canal is the location of the free zone bringing together the Atlantic and Pacific Oceans. The Colon Free Trade Zone (“CFZ”) was created in 1948, the free zone houses 1,751 merchants, receives yearly more than 250,000 visitors from all parts of the World, mainly from countries such as Haiti, Jamaica, Costa Rica, Venezuela, Colombia, United States, Ecuador, and others. The CFZ generates exportation and re-exportation goods valued at more than US$ 11.4 billion in 2010 (Business Panama Group, 2014). Special tax rates apply to companies operating in the Colón Free Zone benefiting the Panamanian economy. Special tax exemptions exist on re-exportation profit, import and export duties, quotas, and billings. Panama Pacifico Special Economic Area is a free zone for technology, services, and goods production.
Panama offers many benefits to multinational companies based on their geographic location, U.S. dollar based economy, international banking center, the largest duty free zone in the Americas, and most importantly the maritime transportation hub known as the Panama Canal.
Taxation in Panama is designed to lure investors and multinational companies to establish business activities within the country of Panama.
Business Panama Group (2014). Investing in Panama-Colon Free Trade Zone. Business Panama
Group. Retrieved August 14, 2014 from http://www.businesspanama.com/investing/opportunities/cfz.php.
Deloitte Touche (2014). Panama Highlights 2014. International Taxation. Deloitte
Touche, Tohmatsu Limited. Retrieved August 13, 2014 from http://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-panamahighlights-2014.pdf.
Rosas, JC. (2013). Panama Stock Exchange – IPO. Rosas Y Rosas. Retrieved August 12, 2014