Panama is a country globally recognised as being one of the most welcoming and attractive countries in the world with respect to commercial activities. A particularly generous approach to taxation has enabled Panama to become the host country for many of the worlds biggest corporations headquarters, including BMW, Heineken and many more. This is perhaps best demonstrated by the following fact: Offshore companies will only pay an annual tax of USD 300!
It is also a country with a growing influence worldwide. Panama has signed DTAs with 10 countries including Holland, Luxembourg, Singapore, South Korea and Spain to reduce withholding tax on payments abroad. Additionally, Panama has signed FTAs with 11 countries including Mexico, Chile, Singapore, Taiwan and USA.
Despite the various fiscal advantages of operating in the region, there are many different bands and categories of taxation that can make proper management of company tax and accounting responsibilities complicated.
Types of Tax in Panama
By far the most important tax for prospective investors, income tax, is the percentage paid to the government on your earnings. Panama utilises a progressive tax system where the income tax is directly related to the amount you earn and utilises a band system to split the population into three:
- Earnings up to $11,000 are tax-free
- Earnings from $11,000 to $50,000 are taxed at 15%
- Earnings over $50,000 have a tax rate of 25%
- By comparison, the USA has a maximum income tax of 37% (for taxes due April 2019)
- Onshore companies with annual revenue of less than USD 1.5 million will pay corporate income tax at 25 %. All other onshore companies will be taxed at 28%. Only income earned in the local territory will pay taxes.
- Branches will pay an additional dividend tax of 10% of their after-tax income.
Another significant advantage of the Panamanian tax system is the fact that it is territory-based. This means that only profits registered in Panama require payment of income tax, with any profitable business that takes place outside of the territory being untaxed. This is the ‘magic’ policy that has granted Panama the status of “tax haven” throughout the globe.
Furthermore, there are many further tax reductions that investors can enjoy:
- Small businesses and companies that work in the agricultural sector can apply for lower income tax rates.
- Married couples can receive a reduction of USD$800 on their joint tax return.
- All resident companies can forward up to 20% of their losses for a maximum period of 5 years.
DON’T FORGET: Monthly Income Tax Advances (MITA) must be paid by the 15th of the month!
Commercial and Import Tax
With an incredibly strong import and export-based economy, boosted by a strategic geographic location (providing a natural bridge between the huge North and South America markets, and having access to two oceans), knowing the commercial and import taxes is useful for international investors.
Any company looking to conduct business or trade in Panama must be granted a ‘Panama Commercial Operation Permit’. Tax on this permit for most companies is set at 2% of net worth with a maximum of USD$60,000, whilst companies within certain free trade zones (FTZs) pay a reduced rate of 1% with a maximum payment of USD$50,000.
In terms of a VAT, known as the ITBMS (Impuesto de Transferencia de Bienes Muebles y Servicios) in Panama, the country offers some of the lowest rates in the world. For most goods, a meagre 7% is added to the retail price, whilst for alcoholic drinks and tobacco products, there are slightly higher rates (10% and 15% respectively). These intensely competitive sales tax rates mean that there are large amounts of retail tourism, with thousands of tourists travelling to Panama to purchase electronics, clothes and more in the largest shopping centre in the Americas, Albrook Mall. All local onshore companies with annual turnover exceeding USD 36K must pay VAT at the standard rate of 7%. Companies will be required to file monthly VAT returns.
DON’T FORGET: VAT is an indirect tax and is often added on to invoices for clients.
Accounting Standards and Extra Information.
Despite all the very favourable tax rates in Panama, there are occasional doubts about the ethics of tax havens such as Panama. However, it is very important to remember that offshore companies are legal and are a great method to manage your wealth and protect your assets.
Additionally, Panama is a registered member of the IFRS (International Financial Reporting Standards) foundation. This is an organisation that helps to promote and enforce transparent, “globally accepted accounting standards”. The organisation believes that given the growing number of transactions being done across borders, estimated to be ⅓ around the world, it is of increasing urgency to have a uniform standard that ensures a fair and equal application of accounting and banking standards. Panama’s membership in this organisation can be seen as an effort to wipe out illicit money laundering and as a sign of commitment to a fair and trustworthy international business.
It must also be noted that having offshore accounts in Panama does not exonerate you from complying with any local tax obligations that exist in your country of origin.
Do you Require Personalised Information Regarding a Potential Panamanian Investment?
Panama clearly offers an incredibly favourable jurisdiction to incorporate a company. If you require personalised information, please reach out to Biz Latin Hub. We can provide you with a range of tailored market entry and back-office services. Get in contact with our Country Manager, Patrick at [email protected] to see how we can support you in Panama.
Need accounting and taxation support in Latin America? Watch the following video and stay compliant when operating in Latin America.