Local Taxes in Panama: An Overview of Value Added Tax (VAT)

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 earnings brought into the country and deposited in the country's banks are not subject to taxation, making Panama an attractive destination for many multinational companies.

Panama is what is known as a country with a low tax burden, and for this reason it has long been an ideal place for foreigners to retire. It seems like there is an exception to every rule about local taxes in Panama. A few income technically generated in Panama is nevertheless tax-exemptincluding interest on Panamanian government securities, interest payments on bank savings accounts and time deposits in Panamanian banks.

Local and foreign companies with a presence in Panama are subject to a flat corporate tax rate of 25 percent. However, for companies that earn more than $1.5 million in taxable income, USD may calculate their taxes differently. These companies are taxed for whichever is the larger of two possible amounts: the net taxable income of 25 percent, or 4.67 percent of the gross taxable income (excluding tax-exempt foreign income).

To know what type of tax calculation your business should use, it is a best practice to hire a local tax expert for a entity health control in Panama to ensure compliance.

This being 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 to be exempt from paying CAIR for a number of different reasons.

Other local taxes in Panama to be aware of are the Value Added Tax (VAT), or what is also called 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 accommodation as well as alcoholic beverages
• 15 percent VAT on tobacco products
• 0 percent VAT on all exports (or in other words, exports are VAT exempt)

We must remember that with all things local taxes in Panama, the exception is the rule. The following goods and services are also exempt from VAT:

• Oil-based products
• Basic foods
• Agricultural products
• Medicines and drugs
• School/education
• Commissions on transactions in foreign currency
• Property rental

See also: Overview of value added tax (VAT) in Latin America

Businesses in Panama must include VAT in the cost of the goods and services they sell. But the rules are getting a little stricter for all companies (from large companies to the corner tienda) if they amount to a certain amount.

Local Taxes in Panama: VAT Registration and Compliance

Regarding local taxes in Panama, The following companies must register for VAT and other indirect taxes:

• Foreign companies importing 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 billed to client(s) in Panama

• For excise duties on consumption, individuals or legal entities acting as a supplier of taxable services or as a manufacturer, importer or supplier of taxable goods

• Services performed by a foreign supplier for a customer based in Panama and performed outside of Panama are not subject to VAT

How do businesses properly comply with VAT and other local taxes in Panama?

• The VAT content is determined by multiplying the total invoice amount by the coefficient 0.065421 to obtain the included VAT

• The VAT return must be submitted within 15 days after the monthly or quarterly period

• Independent professionals must register on a quarterly basis

• Large taxpayers with revenues of US$5 million or more per year must withhold 50 percent of VAT from their suppliers' invoices and be registered with Panamanian tax authorities

• The withholding agent (usually a Panamanian entity or a non-resident entity registered as a taxpayer in Panama) must submit 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 to open a resident company in the country would do well to talk to local experts on the ground 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 reliable partners in many other markets.

Our unparalleled reach means we are ideally suited to support multi-jurisdictional market entry and cross-border operations.

In addition to knowledge of local taxes in Panama, our portfolio of services includes employment & PEO accounting & taxation, company formation, bank account opening and corporate legal services.

Contact Us today to find out more about how we can help you find top talent, or otherwise do business in Latin America and the Caribbean.

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