Like many of its Central American neighbors, local taxes in Panama are based on a territorial system. In this system, residents and citizens only pay income tax on sources of income generated in Panamanian territory. However, foreign-earned income brought into the country and deposited into the country’s banks are not subject to taxation, making Panama an attractive destination for many multinational companies.
Panama is what’s known as a low tax burden country, and for this reason it has long been an ideal place for foreigners to retire. Is seems that for every rule about local taxes in Panama, there’s some exception. Some income technically generated in Panama is nonetheless tax-exempt, including interest on Panamanian government securities, interest payments on bank savings accounts, and term deposits within Panamanian banks.
Local and foreign companies with a presence in Panama are subject to a fixed corporate tax rate of 25 percent. But for companies that earn a taxable income of more than $1.5 million USD can calculate their taxes differently. These firms are taxed on which is the greater of two possible sums: the net taxable income of 25 percent, or 4.67 percent of gross taxable income (excluding tax-exempt foreign sourced income).
To know which kind of tax calculation your business should be using, it’s a best practice to hire a local tax experts for an entity health check in Panama to ensure compliance.
Since it’s Panama, of course there are exceptions. The second tax calculation mentioned above is known by its Spanish acronym CAIR, and companies can make a request to Panama’s tax authorities that they be exempt from paying the CAIR for a number of different reasons.
Other local taxes in Panama to be cognizant of are the Value-Added Tax (VAT), or what’s also known as a Goods and Services Tax (GST) in other countries.
Local taxes in Panama: VAT facts, figures and exemptions
What follows is a general overview of Panama’s VAT rates on goods and services:
- 7 percent VAT on all taxable goods and services, including imports
- 10 percent VAT on hotels and accommodations, and alcoholic beverages
- 15 percent VAT on tobacco products
- 0 percent VAT on all exports (or in other words, exports are VAT exempt)
We need to remember that with all things related to local taxes in Panama, the exception is the rule. The following goods and services are also VAT exempt:
- Oil-based products
- Basic foodstuffs
- Agricultural produce
- Medicines and pharmaceuticals
- Commissions made on foreign currency transactions
- Property leasing
See ALSO: Overview of Value Added Tax (VAT) in Latin America
Businesses in Panama are required to factor the VAT into the cost of the goods and services they sell. But the rules get a bit more stringent for all businesses (from large companies to the corner tienda) if they gross over a certain amount.
Local taxes in Panama: VAT registration and compliance
When it comes to local taxes in Panama, the following businesses are required to register for VAT and other indirect taxes:
- Businesses that sell goods or services and/or import goods, if their gross income exceeds $3,000 USD per month, or $36,000 USD per year
- Foreign businesses that import goods into Panama. These imports must be made by a local Panamanian company that has a taxpayer identification number
- Services performed by non-residents within Panamanian territory are subject to VAT withholding, included in the amount invoiced to client(s) in Panama
- For excise taxes on consumption, individuals or legal entities that act as a provider of taxable services or as a manufacturer, importer or provider of taxable goods
- Services performed by a non-resident supplier for a customer based in Panama that are rendered outside of Panama are not subject to VAT
How do businesses properly comply with the rules related to VAT and other local taxes in Panama?
- The VAT withholding is determined by multiplying the total amount of the invoice by the coefficient of 0.065421 in order to obtain the VAT included
- The VAT return must be submitted within 15 days after the month or quarter period
- Independent professionals are required to file on a quarterly basis
- Large tax payers with revenues of $5 million USD or more per year must withhold 50 percent of VAT due on their suppliers’ invoices, and be registered with Panama’s tax authorities
- The withholding agent (usually a Panamanian entity or a non-resident entity registered as a taxpayer in Panama) must file and pay the withheld VAT to the tax authority within 15 days of the transaction
The rules and regulations associated with local taxes in Panama can be daunting. So foreign companies, entrepreneurs and investors planning on opening a resident business in the country would do well to speak to local, on-the-ground experts before making any major decisions.
Biz Latin Hub can help you with local taxes in Panama
At Biz Latin Hub, we provide integrated market entry and back-office services throughout Latin America and the Caribbean, with offices in Bogota and Cartagena, as well as over a dozen other major cities in the region. We also have trusted partners in many other markets.
Our unrivalled reach means we are ideally placed to support multi-jurisdiction market entries and cross-border operations.
As well as knowledge about local taxes in Panama, our portfolio of services includes hiring & PEO accounting & taxation, company formation, bank account opening, and corporate legal services.
Contact us today to find out more about how we can assist you in finding top talent, or otherwise do business in Latin America and the Caribbean.
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