A Look at Panama’s Tax Reform
by Adolfo Campos, Associate Attorney, Morgan & Morgan, Panama City
Published: October, 2011
Submission: October, 2011
The new norms generally include changes to tax rates, tax collection means, efforts to improve the administration of justice in tax matters (a responsibility of the tax authority, the Dirección Nacional de Ingresos (DGI)), as well as the adaptation and inclusion of regulations in our fiscal code regarding the interpretation and application of income tax treaties. The latter have been promoted by the current administration in order to exclude the country from blacklists.
In some cases, these reforms pose interesting questions for practical and theoretical analyses and, at times, even a dose of social controversy. Such is the case with the increase of the percentage applicable to the ITBMS (impuesto a las transferencias de bienes corporales muebles y la prestación de servicios),
The reforms also extend the dividend tax with a 5 percent rate on taxable income from a foreign source or export revenues and exempt revenues (that is, bank deposits), to those legal entities having a notice of operation (commercial or industrial license to operate in Panama), or that at the same time also generate local revenues (such as a company operating within a special regime).
The companies located and operating within special regimes such as the Colon Free Zone, export processing zones, City of Knowledge (Ciudad del Saber), or the Panama-Pacific Special Economic Area are also affected with the equity tax (notice of operation tax — with a 1 percent rate and a minimum limit of US $100 and a maximum of US $50,000).
Regarding income tax, legal entities with operations generating taxable income within
These reforms have also changed the fiscal administrative procedure. For instance, an administrative tax court, responsible for ruling on appeals against resolutions issued by the DGI, was created; the assumptions of facts and types were hardened by the classification of new activities as tax evasion, as well as stronger penalties applicable on this matter; and a base was laid for a more reliable administrative tax procedure.
Finally, Law 33/2010 introduced changes to the fiscal code regarding the interpretation and application of regulations for income tax treaties. One of these changes concerns the rules related to transfer pricing.
LAW 31 OF
The most important changes in Law 31 of
A new method is developed to apply the dividend tax to every loan or credit that the corporation grants to its shareholders. The applicable tax rate will be 10 percent, including those cases in which the tax rate is 5 percent (that is, corporations under the Colon Free Zone regime). The percentage will vary in the case of bearer shares, in which the corporation must withhold 20 percent as a dividend when a loan is granted to the bearer shareholder. In cases not related to bearer shares, it is understood that the dividend tax with applicable 10 percent rate can be liquidated and paid to the DGI when the loan is granted to the shareholder or when the period’s net income is distributed to the shareholders.
The regulation indicates that the sums of money reimbursed by shareholders to the corporation in cases of loans or credits, to which the dividend tax had been applied, may be distributed among the shareholders without having to withhold the dividend tax again. The regulation was implemented to put an end to tax evasion that existed when companies granted loans to their shareholders that were later never repaid. This was done to avoid the dividend tax on the period’s net profits and ‘‘conceal’’ the real distribution of net profits through loans without any commercial justification or repayment guarantee.
• that the subscription of the preferred shares is paid in cash and that the shares increase the capital of the legal entity;
• that the issuance of the preferred shares does not exceed 40 percent of the capital of the legal entities;
• that the interest rate (dividend) on the preferred shares does not exceed the reference rate set forth in article 1072-A of the Fiscal Code; and
• that the capital of the legal entity has not suffered a reduction during the two years immediately before the date of issue and as long as the shares are outstanding, except if it is to pay dividends.
Law 31/2011 states that the transfer of cement, additives, and their derivatives made by subcontractors to the contractors of the Panama Canal Authority (ACP) in the expansion works of the waterway are exempt from the ITBMS. The same applies to the future construction of the third bridge over the
The rationale of this new exemption lies in the exemption the ACP has at the constitutional level. The ACP cannot be taxed at all, and this includes the ITBMS. Since the contractors of the canal expansion works were not able to charge the ACP for the ITBMS they paid for their subcontractors, the contractors had to assume it and include the ITBMS within the costs of the interoceanic works.
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