Panama's Fiscal Reforms Take Effect

by Mike Godfrey, Tax-News.com, Washington

02 July 2010

Important changes to income, value-added and other taxes came into effect in Panama on July 1 as part of a major fiscal reform package designed to secure the country's revenue base.

Tax reforms were approved in September 2009 and again in March 2010 under Act No 8, subject to some amendments under Bill 178 this June.

New rates were introduced in respect of income tax on the sale of homes and commercial premises by developers. Other changes proposed in June were not adopted after debate in parliament.

On July 1, the following tax changes become effective:

• Value-added tax (ITMBS) assessed on the provision of goods and services, is increased from 5% to 7%, generating an extra USD220-240m a year;
• Excise taxes on cars will be further increased to make the effective increase of 5% (inclusive of extra ITMBS) for cars in the USD8,000-12,000 price range;
• An annual tax on total assets held by banking institutions holding a general license, will range from USD75,000 to USD1m. Banks with international licenses will pay a fixed tax of USD75,000; and
• Income of international transportation companies derived from freight, passage, cargo and similar services originating from or destined for Panama will be subject to a 1% turnover tax in Panama. As from July 1, 2010, related taxes paid in a foreign jurisdiction will be deductible against other income related to international transportation.

Other 2010 tax reforms which were retroactively effective, included:

• Reductions in the corporate income tax rate from 30% to 27.5% as from January 1, 2010. The rate will be further reduced to 25% as from January 1, 2011. The 2010 tax reform also eliminated the Panamanian alternative minimum tax (CAIR) for companies with taxable revenue of less than USD1.5m. The 30% rate stays in respect of insurance and reinsurance companies, banks, certain financial service companies, electricity utilities, telecommunications services, gaming and casinos, mining and cement producers, for whom the rate will reduce to 27.5% on January 1, 2012 and 25% on January 1, 2014. Companies with state holdings of more than 40% will remain subject to the 30% income tax rate;
• As from January 1, 2010, reductions to the highest individual income tax rate from 27% to 25% for incomes over USD50,000 and an increase of the tax-free threshold to USD11,000, above which a 15% rate applies.

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