A particularly generous approach to accounting and taxation requirements in Panama has made it the host country for many of the world’s biggest corporation’s 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 to reduce withholding tax on payments abroad. Additionally, there are FTAs with 11 countries including Mexico, Chile, Singapore, Taiwan and USA. This means that accounting and taxation requirements in Panama must follow international regulations strictly.
Despite the various fiscal advantages of operating in the country, there are many different bands and categories of taxation that can make proper management of company tax and accounting responsibilities complicated. Accounting and taxation requirements in Panama can be unusual for new entrants to the market, which is where Biz Latin Hub can step in to help out.
Accounting & taxation requirements in Panama: Two main types
The accounting and taxation requirements in Panama:
- Income Tax.
- Commercial and Import Tax.
1. Income 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 USD$11,000 are tax-free.
- Earnings from USD$11,000 to USD$50,000 are taxed at 15%.
- Earnings over USD$50,000 have a tax rate of 25%.
- By comparison, the USA has a maximum income tax of 37%.
- Onshore companies with annual revenue of less than USD$1.5million 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.
2. 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$36,000 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.
Are there any more accounting and taxation requirements in Panama?
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.
FAQs on accounting and taxation requirements in Panama
Based on our extensive experience these are the common questions and doubts from our clients when looking to understand accounting and taxation in Panama.
What is the corporate tax rate in Panama?
The corporate tax rate in Panama is 25% over the net profit.
How are businesses taxed in Panama?
Businesses in Panama are taxed according to the Panamanian Financial Reporting Standards, which works on the basis of paying tax on the difference between revenue minus deductible expenses.
What is the IRS called in Panama?
DGI (Direccion General de Ingresos).
What is the accounting standard in Panama?
Panamanian accounting standards require companies to prepare their financial statements in Spanish. Accounting registries and books of account must be recorded in Spanish.
What is the CPA equivalent in Panama?
The equivalent to CPA is “Contador Publico Autorizado” The license is granted by the Colegio de Contadores Publicos Autorizados en Panamá.
Does Panama report in IFRS?
All listed companies must follow IFRS Standards.
Biz Latin Hub can help with accounting and taxation requirements in Panama
Panama clearly offers an incredibly favorable jurisdiction to incorporate a company. If you require personalized information, please reach out to Biz Latin Hub. We can provide you with a range of tailored market entry and back-office services. Contact us now 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.
