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  • Service: Tax, Global Indirect Tax
  • Type: Regulatory update
  • Date: 7/1/2013

Panama: VAT essentials 

Essential information regarding VAT as it applies in Panama.


Scope and Rates

What supplies are liable to VAT?


Value-added tax (VAT) in Panama is a tax on the transfer of tangible goods and the provision of services called ITBMS (Impuesto a La Transferencia de Bienes Corporales Muebles y Prestación de Servicios). In general, all transactions involving the transfer or transmission of tangible personal property (commodities and products), and the provision of services within the Republic of Panama are subject to this value added-type tax.


Therefore supplies which are liable to VAT include the following transactions:


Transfers such as:


  • the sale or contract implying the exchange of ownership
  • the personal use of corporate or non-corporate property by the owner, partner, directors, legal representatives, board of directors, or shareholders
  • the promise of a sale (contract) on goods to be transferred physically and
  • transfers of goods to owners, partners, or shareholders as a result of the definitive closure of an enterprise.

Supply of services, such as:


  • works with or without the delivery of materials
  • intermediation in general
  • personal use by the owner, partners, directors, legal representatives, board members, or shareholders of the enterprise of the services rendered by it; also considered as such, the inventory differences and,
  • the rental of real property and tangible property, or any other convention or act that implies or is intended to give the use or enjoyment of the property
  • importation of tangible goods or merchandise used either for personal consumption, charity, educational, scientific, or commercial purposes or for the transformation, improvement, or production of other goods.

What is the standard rate of VAT?


Since 1 July 2010, the standard VAT rate is 7 percent of the amount of the professional fees or of the value of the transfer of the personal property or commodities except for the import, wholesale, and retail sale of alcoholic beverages whose rate is 10 percent and, for the import, wholesale, and retail of all kinds of cigarettes and cigars for which the tax rate is 15 percent of the taxable base.


Are there any reduced rates, zero rates, or exemptions?


There is no zero VAT rate but there are exemptions. The following services are exempted from VAT:


  • services related to human health
  • rental or sub-rental of real property with exclusive purpose of being the house or room of the person who leases it, when the rental agreement is signed for more than 6 months
  • services related to education
  • loans from the state
  • transportation, except airfare tickets bought in Panama for either national or international flights
  • electric energy
  • public and semi-public fixed telecommunication
  • media (social communication) except for the grant of advertising space
  • mail provided by the state
  • gambling in casinos and racetracks
  • insurance and reinsurance services
  • exportation services
  • internet access service for houses and education entities
  • sewer system and garbage collection
  • sport events and shows free of charge developed by nonprofit associations recognized by the Panamanian Sport Authorities
  • stock exchange activities
  • retail sales of food in commercial premises in which no alcoholic beverages are sold
  • services rendered by persons that during the last year had an average gross monthly income not higher than USD 3,000 and a gross annual income not higher than USD 36,000
  • services based on a dependency relationship, as defined in article 62 of the labor code, as well as the activities of directors, managers, and administrators.
  • the payments, including interest paid and received, arising from financial services, performed by entities duly authorized for rendering such services; except charges and commissions for banking services which are considered as taxable supplies of services.
  • leasing contracts under Law 7 of 1990 are considered financial contracts, and as such, are not subject to VAT
  • the use of intangible goods (such as trademarks, patents, copyrights, know-how, formulas, technical processes and similar intangibles).

The following transfers of goods are VAT exempt:


  • agricultural products in their natural condition. Goods that are already altered by chemical processes or by any treatments are not covered
  • export and re-export of goods
  • supplies of goods that are inside free zones and those inside customs precincts, as well as warehouses and similar places
  • alimentary products
  • fuel and similar products, except oil and lubricants
  • all kinds of seeds for agricultural purposes
  • hand used tools for agricultural purposes
  • newspapers, magazines, educative magnetic media, notebooks, pencils, and other items for school purposes, like books and general publications
  • cement, additives and sub products used by the subcontractors in connection with the execution of design and construction of the Third Set of Locks of the Panama Canal as well as the services related of its preparation and delivery in site.
  • drinkable water provided by IDAAN (Instituto de Acueductos y Alcantarillados Nacionales), and other state institutions
  • medicines and pharmaceutical products, as well as baby bottles, baby chairs devices for automobiles, diapers and buggies
  • foreign currency, stocks, and public/private securities
  • insecticide, disinfectant, and similar goods used for agricultural and cattle raising purposes.

What are the other local indirect taxes beside VAT?


Stamp tax is levied on the issuance of certain documents.


Selective Consumption tax (ISC as per its abbreviation in Spanish) is an excise tax on the import of specific goods such as luxury vehicles, jewelry, firearms, alcoholic beverages and tobacco products and the provision of selected services such as cable and satellite TV and mobile phone services (other than services under pre-paid phone cards).


Insurance tax is levied on insurance premiums.

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Registration

Who is required to register for Panamanian VAT?


All individuals or legal entities that provide professional services, and sell and/or import goods, including state-owned industrial and commercial enterprises, are required to register when their annual gross income exceeds USD 36,000 per year and/or USD 3,000 per month.


However, only individuals and legal entities registered as taxpayers (or taxable persons for VAT purposes) operating domestically within Panamanian boundaries may be registered in the Panamanian’s Taxpayers Registry (Registro Único de Contribuyentes). Such a registration involves the identification of the relevant taxable person with an identification number valid for all tax purposes (including invoicing, filing of tax returns, and other reports to the tax administration).


The aforementioned registry includes not only VAT taxable persons, but all other types of taxpayers and/or taxable persons subject to Panamanian tax laws (including income tax, excise taxes, VAT, and others).


Are there penalties for not registering or late registration?


Yes. Not registering is considered a misdemeanor subject to a fine between USD 100 and USD 500 for the first offense and between USD 500 and USD 5,000 applicable to recurrent violations of the relevant provision. In extreme situations, the tax administration could close the business of the taxable person for violating such obligations.


Is voluntary VAT registration possible for an overseas company?


It would be possible for a foreign company to register with the Panamanian’s Taxpayers Registry (Registro Único de Contribuyentes). As mentioned above, such a registration involves the identification of the relevant taxable person with an identification number valid for all tax purposes (including invoicing, filing of tax returns, and other reports to the tax administration).


However, such a registration will only serve the purposes of allowing the foreign entity to file VAT returns before the tax administration. The company may then deduct any input VAT paid in the acquisition of goods and services required to provide taxable supplies within Panamanian territory. Domestic VAT law does not provide for the recovery of any excess input VAT in cash. These amounts could only be carried forward to the following tax periods.


However, the exporters of goods in excess VAT credit positions are entitled to obtain specific fiscal certificates issued by the tax administration which may then be used to pay VAT due upon importations of goods or may be transferred to third parties.


Are there any simplifications that could avoid the need for an overseas company to register for VAT?


Foreign entities operating overseas are not allowed to register. VAT on services performed by a foreign entity in Panama is to be paid by the Panamanian contractor based on a withholding mechanism, applying to the total amount of the services invoiced, the coefficient 0.0652421, to determine the total tax embedded.


Does an overseas company need to appoint a fiscal representative?


Under Panamanian VAT law there are no provisions governing the appointment of a fiscal representative.

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VAT grouping

Is VAT grouping possible?


In Panama, VAT grouping is not allowed except in the case of joint ventures that is an association of two or more individuals or companies engaged in a solitary business for profit without actual partnership or incorporation in order to share strengths, minimize risks, and increase competitive advantages in the market place.


Can an overseas company be included in a VAT group?


No. This is not possible. Overseas companies may not even be registered as taxable persons for VAT purposes, if not registered as taxpayers domiciled in Panama for all tax purposes and carrying out activities or transactions within Panamanian territory.

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Returns

How frequently are VAT returns submitted?


The VAT return must be submitted within 15 days after the month or quarter period.


  • independent professionals are required to file on a quarterly basis.
  • Subject to tax authorities’ agreement, the VAT returns could be submitted on an agreed basis other than monthly or quarterly.

However, producers, retailers and services providers will not be considered taxpayers if their gross annual income is under USD 36,000 annually.


Amended VAT returns can only be filed before the tax authorities once per fiscal period, within 12 months, accounted from the date in which the company must file the income tax return.


The amended VAT returns filed involves a cost of USD 100 for individuals and USD 500 for corporations, when such returns are filed after 3 months of the legal date of the original return filed.


Are there any other returns that need to be submitted?


Services provided by foreign service providers within Panamanian territory are also subject to VAT taxation under a withholding mechanism. Local clients of these foreign service providers shall file the corresponding VAT withholding tax forms.


If a business receives a purchase invoice in foreign currency, which exchange rate should be used for VAT/GST reporting purposes? (e.g. central bank’s exchange rate applicable on the date of the invoice)


The exchange rate should be that of the invoicing date. However, there is no obligation to use a central bank´s exchange rate.

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VAT recovery

Can businesses recover VAT if they are not registered


No. Only individuals and legal entities registered as taxpayers (or taxable persons for VAT purposes) operating domestically within Panamanian boundaries are granted the right to recover Panamanian VAT. It should be noted that VAT law does not establish a special or specific registry for VAT taxable persons.


Nevertheless, all individuals or legal entities regarded as taxable persons for VAT purposes are obliged to enroll in the Panamanian’s Taxpayers Registry (Registro Único de Contribuyentes). Such a registration involves the identification of the relevant taxable person with an identification number valid for all tax purposes (including invoicing, filing of tax returns, and other reports to the tax administration).


The aforementioned registry includes not only VAT taxable persons, but all other types of taxpayers and/or taxable persons subject to Panamanian tax laws (including income tax, excise taxes, VAT, and others).


Does your country apply reciprocity rules for reclaims submitted by non-established businesses?


N/A.


Are there any items that businesses cannot recover VAT on?


The VAT paid in connection with both exempt supplies and supplies not subject to the tax cannot be recovered. In any event, sums that are not recovered as deductible input VAT may be considered as deductible expenses for income tax purposes.

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International Supplies of Goods and Services

How are exports of goods and services treated?


Exports of goods are VAT exempt but exporters are granted the right to recover any input VAT charged on goods and services supplied and destined to produce exported goods. There are two different categories of services labeled as export services: export-related services and professional exportation services. None of these supplies are subject to VAT but under different rules. None of these supplies grant the right to recover input VAT.


Export-related services include those listed in the relevant provisions as necessary and accessory to the exportation of goods and merchandise such as:


  • international freight
  • the loading, unloading and transport of merchandise in or within ports
  • logistic services (including transport, distribution, storage, handling, manipulation and repackage) in tax free zones and special economic regimes
  • reparation of ships and aircraft engaged in international transportation of goods and/or passengers
  • maintenance and cleaning services for such ships and aircraft
  • movement of containers and freight rendered within customs bonded areas and
  • services provided to and within port areas engaged in international trade and services required for use on the Panama Canal.

How are goods dealt with on importation?


  • imported goods are taxed unless expressly exempt
  • import goods are taxed on cost, insurance, and freight (CIF), plus duty taxes amount
  • if CIF value is unknown, freight on board (FOB) value applies adding 15 percent.

How are services which are brought in from abroad treated for VAT purposes?


Services are taxed when rendered in Panama (unless specifically exempt) regardless of the place where the contract or agreement is executed or concluded or the domicile, residence, or nationality of parties.


The recipient of such services is obliged to withhold VAT on the total amount paid to the service provider domiciled abroad. Subsequently, if the acquirer of such services is a taxable person operating within Panamanian territory, it will be entitled to claim the amount withheld as input VAT in the relevant periodical return.

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Invoices

Is a business required to issue tax invoices?


Yes.


What do businesses have to show on a tax invoice?


The invoice must contain the following data:


  • type of document (such as invoice, receipt)
  • sequential numbering and unique
  • name and last name or name of the corporation, address, and tax ID number of the issuer of the document
  • control Digit
  • flowchart of originals and copies
  • identification number of the fiscal equipment
  • name of the buyer, date, address, description, time period, and amount of the transaction,
  • price, excluding VAT of the good to be transferred or the amount due for the service performed
  • VAT amount
  • payment conditions agreed
  • records, special numbering and/or colors for the use of branches, affiliates and POS.

Can businesses issue invoices electronically?


Yes. Authorization from tax authorities is required.


Is it possible to operate self-billing?


No.


Can a business issue VAT invoices denominated in a foreign currency?


Yes. A business can issue VAT/GST invoices denominated in foreign currency. However, it is suggested to include in the invoice the appropriate conversion to local currency.

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Transfers of Business

Is there a relief from VAT for the sale of a business as a going concern?


No. In such a case, there is no relief from VAT as a general rule. Nevertheless a tax regularity certification avoids the severance liability of the buyer. Allocation of the purchase price among taxable and non-taxable items may be considered.

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Options to Tax

Are there any options to tax transactions?


There are not any options to tax transactions.

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Head Office and Branch transactions

How are transactions between head office and branch treated?


Goods and services deemed to be taxable in Panama will be subject to VAT (such as locally provided services, and sales and imports of goods).


Transactions between a head office and a branch are recognized for VAT purposes. Accordingly, any supplies of goods or services affected within Panamanian territory shall be considered as taxable events. Specific VAT provisions establishes that if a head office provides services to its branch or agency located within Panamanian territory, such branch or agency shall withhold VAT when remitting payments made abroad. In these situations, it is considered that the relevant invoice includes the VAT by applying a factor 0.065421 to the total amount invoiced.

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Bad Debt

Are businesses able to claim relief for bad debts?


Yes. The relief is granted through the mechanism of reducing the VAT due in the VAT return corresponding to the period during which the account receivable is qualified as bad debt.

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Anti-Avoidance

Is there a general anti-avoidance provision under VAT law?


No. There is no general anti-avoidance provision under Panamanian VAT law. However, the provisions governing VAT tax fraud specifically refers to the following situations:


  • Simulation of acts or transactions that can be used to omit totally or partially the payment of tax.
  • To omit the documentation of taxable transfers contrary to the law. Accordingly, applying VAT tax deductions without being legally documented is also considered tax fraud.
  • To omit registering transaction records or to register false VAT accounting operations as a strategy to avoid the payment of tax.
  • To avoid the delivery of the records of VAT amounts (and underlying transactions) to the tax authorities in the period of time according to law.

Tax fraud is punished by law with a fine not less than 5 times and not above 10 times the amount involved, or prison sentence from 2 to 5 years.

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Penalty Regime

What is the penalty and interest regime like?


Penalties, as well as interest, are assessed for late payments apart from commercial sanctions:


  • late filing is charged with 10 percent upon the VAT amount due
  • interest is fixed to approximately 12 percent annual rate
  • also, there is a USD 500 charge for filing amendment return 3 months after the original form was filed
  • when there is a late return for more that 60 days, and there is no tax to pay because of credit, there is a USD 10 fine.

Not registering, although using invoices as well as irregular documentation or non-fulfillment of formal obligations, are considered misdemeanors sanctioned by a fine between USD 100 and USD 500 for first offence and between USD 500 and USD 5,000 more than one offence.


In case of fiscal fraud, imprisonment from 2 to 5 years or fine from 5 to 10 times the amount applies. Such cases are selected for partial or total omission of tax payment, for not documenting either taxable transactions or deductions of the tax, for failure to register accounting operations, or for not submitting return or tax payment within two months of date due.

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Tax authorities

Tax audits


How often do tax audits take place?


Audits are carried out on a discretionary basis by the tax authorities.


Are there audits done electronically in your country (e-audit)? If so, what system is in use?


No.


Advance rulings and decisions from the tax authority


Is it possible to apply for formal or informal advance rulings from the (indirect) tax authority?


The Tax Authority does not issue binding advance rulings concerning indirect (or direct) taxes. Formal opinions may be obtained on certain positions adopted or to be adopted by taxable persons. These formal opinions are not binding and the criteria may be subsequently reviewed and/or amended by the Tax Authority.


Are rulings and decisions issued by the tax authorities publicly available in your country?


Tax opinions issued by the Autoridad Nacional de los Ingresos Públicos (ANIP), formerly denominated Dirección General de Ingresos (DGI) are available at www.dgi.gob.pa.

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Miscellaneous

In your country, are there unique specific indirect tax rules (regimes) that differ from standard indirect tax rules in other jurisdictions?


As a general rule, no refunds can be requested for VAT (ITBMS) paid in excess. However, companies engaged in the manufacturing of food and medical/pharmaceutical products for human consumption, as well as those involved in the agriculture or agro industrial sectors –all of them VAT (ITBMS) exempt activities- can credit the VAT paid on the acquisition of packing materials, services and raw materials used in their production or manufacturing processes to their estimated or advance corporate income tax liability.


No VAT can be charged on services provided to certain Institutions of the State benefiting from specific exemption regimes (i.e. the Panama Canal Authority (PCA), the Social Security Authority (CSS) and the Institute of Water Supply (IDAAN)).


There is a special ITBMS regime applicable to concessions granted by the government related to infrastructure projects, the concessionaire is also granted an exemption.


On a general basis, contracts entered into with the Central Government will be subject to VAT. The Government will withhold 50 percent of the VAT charged by the contractor upon payment. This regime may generate excess credit positions to contractor


Are there indirect tax incentives available in your country (e.g. reduced rates, tax holidays)?


Yes, there are special regimes that grant companies ITBMS exemptions.

 

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