Overview of Tax Compliance and Auditing in Panama
Panama is a Central American country on which connects North and South America. There are several benefits of doing business in Panama. Panama has a territorial tax system where only those incomes are taxed which accrue or arise in Panama. Any income arising outside Panama is not subject to tax in Panama. The companies which carry out commercial activities and services in the Republic of Panama are subject to tax only to the extent of their income from activities within the Panamanian territory. Even incomes including fees, interest, or royalties arising to the non-residents from services or activities that benefit persons or companies located in Panama are taxed in Panama.
The Political Constitution of Panama is the legal and regulatory framework that defines the tax system in Panama. Panama has a civil law system. The judicial authority vests with the Supreme Court. The local authority administering the collection of tax and revenues from public under the control of the Ministry of Economy and Finance is the General Revenue Department (Direccion General de Ingresos or DGI).
Indirect Tax Compliance in Panama
Panamanian tax law applies to the entire territory uniformly. In Panama VAT/GST is called the ITBMS which stands for Impuesto de transferencia de Bienes Muebles y Prestacion de Servicios. It applies to imports and sale of products or services in Panama. Apart from ITBMS, stamp duty, selective consumption tax or ISC (Impuesto selectivo al consumo), and insurance tax is levied. Stamp duty is levied on the issue of certain documents. ISC is an excise tax levied on imports of specific goods including luxury vehicles, jewelry, tobacco products, and alcoholic beverages. Insurance tax is levied on insurance premiums.
What are the rates at which the ITBMS and other indirect taxes are levied?
ITBMS and other indirect taxes are levied at a standard rate of 7%. A higher rate of 10% applies to alcoholic beverages and hotel services and 15% applies to tobacco products. No zero-rated rules apply for supplies. An Input tax credit can be claimed by the exporter of goods and may recover a certificate in that regard.
What are the transactions exempt from ITBMS?
- Agricultural products
- Export and re-export of goods
- Goods are supplied in free zones and custom precincts as well as in warehouses or any other similar place.
- Newspapers, magazines, notebooks, and stationery items for school purposes including educative magnetic media.
- Fuel and similar products other than oil and lubricants.
- Cement, additives, and sub-products used by subcontractors relating to the construction of the third set of locks for the Panama Canal expansion.
- Medicines and pharmaceutical products.
What are the special indirect tax rules?
Certain special indirect tax rules not applicable in any standard VAT jurisdiction are:
- No refunds can be requested if ITBMS is paid in excess.
- No ITBMS is charged for services provided to the Panamanian state.
- The special ITBMS regime applies to concessions granted by the government to infrastructure projects.
- Contracts with the government are subject to ITBMS where the government withholds 50% of the VAT charges by the contractor upon payment.
Who is eligible to register for ITBMS and other indirect taxes?
- Individuals and legal entities providing professional services and selling or importing goods including state-owned industrial and commercial enterprises with a monthly gross income of more than USD 36,000 per year.
- Registration in the Panamanian taxpayer's registry is done for only those individuals and legal entities who are registered as taxpayers operating domestically within the Panamanian boundaries.
- In the case of foreign companies importing goods in Panama, where the import is made by a company located in Panama and has a taxpayer identification number.
- Services performed by a non-resident within the Panamanian territory.
- An individual or legal entity who acts as the provider of taxable services or as a manufacturer, importer, or provider of taxable goods.
- A foreign company that wants to file an ITBMS return before the tax administration.
Registration as a taxpayer
The registration process involves the identification of relevant taxable persons. The identification number is valid for all tax purposes from invoicing to filing of tax returns and other reports to the tax administration. Panamanian Taxpayer's Registry includes ITBMS taxable persons as well as other types of taxpayers or taxable persons subject to Panamanian tax laws.
Penalty in case of failure to register as a taxpayer with DGI
In case of failure of an entity to register as a taxpayer with DGI while using invoices as well as irregular documentation or non-fulfilment of formal obligation can attract a fine of USD 100 to 500 for the first offence and USD 500 to 5000 in case of more than one offence.
An ITBMS return is submitted within 15 days after the end of the month or quarter period. For filing, ITBMS quarterly returns, independent professionals are required. ITBMS in case of supply of goods becomes due either at the time of delivery of goods or issue of invoice, whichever is earlier. ITBMS in case of the supply of services becomes due at the moment of issue of respective invoice, completion of services, or receiving either partial or full payment for the services rendered, whichever is earlier. However, selective consumption tax is paid at the time of customs clearance at the final product placement or every month.
Direct Tax Compliance in Panama
Income Tax or direct tax payment is done on the bias of income tax return which is filed not later than 3 months from the closing of the corresponding accounting period. Taxpayers are estimated to pay taxes at the end of the 6th, 9th, and 12th month after the end of the corresponding accounting period. The taxable period for which the company prepares its accounts shall not exceed 12 months. For most companies, the taxable period is from 1st January to 31st December. The due date for filing the taxable return is at the completion of 3 months from the end of the fiscal year which can be further be extended for a period of 1 month.
When is the tax audit done?
A tax audit is done by tax authorities. The tax authorities select the taxpayers who shall be subject to tax audits based on internal criteria. An audit can be done of the income tax returns filed within the last three years from the date on which the last tax return was filed. Further, the tax administration has the authority to charge income tax within 5 years from the last day of the following month in which the tax was due to be paid.
An audit is not mandatory. It is carried out on a discretionary basis by the tax authority. In the event of failure to comply with the audit requirement, penalties in the nature of interest and the late filing fee are imposed. Late filing is done at the rate of 10% of the VAT amount due. The interest is calculated at an annual rate of 12%. For amending the return after three months of the original form, USD 500 is charged. For late return filing over 60 days and no liability, a fine of USD 10 is imposed.
All taxable persons are required to maintain records and invoices at least for the period of reassessment by the tax administration. The limitation period for VAT is 5 years. The period of limitation begins from the first day of the month succeeding the month in which the VAT tax should have been paid. Certain taxable persons are permitted to carry out other types of transactions subject to different taxes. In these circumstances, the records and invoices of the business should be kept for at least a period during which the tax administration is permitted to issue reassessments against taxpayers. The records and invoices relating to the supplies within Panamanian territory should be kept within Panama subject to an exception that the taxpayer can store documentation using technological archives which can be accessed remotely.