Panama, Tax Reform, Act 8 of 2010, Part II - Income Tax - Natural Persons New Rates
The rates for natural person shall be as follows:
If their net taxable income is: The applicable tax is:
Up to B/. 11,000.00 0%
More than B/. 11,000.00 up to B/. 50,000.00 15% for the amount in excess of B/. 11,000.00 and up to B/. 50,000.00
More than B/. 50,000.00 They shall pay B/.5,850.00 for the first B/ 50,000.00 and a 25% rate on the amount in excess of B/. 50,000.00
Previously, foreign natural personas were liable to pay income taxes according to the parameters and criteria established in the Fiscal Code when they remained at least 180 consecutive or alternate days within the Panamanian territory. Now this period has been extended to 183 days.
With the new law, layered or graduate d rates have been established for expenditure related to Representation activities, which was previously subject to the payment of a flat income tax rate of 10%. From now on, income tax will be paid according to the following table:
Up to B/. 25,000.00 10%
More than B/. 25,000.00 B/. 2,500.00 for the first B/. 25,000.00 and a 15% rate for any amount in excess.
Those who receive representation expenses as part of their remuneration, are not subject to filing an income tax return as formerly made obligatory under previous laws. Today, the option has been made available for the taxpayer to file a tax return if the taxpayer wishes to present high medical expenses, mortgage interest or contributions to the pension plans and schemes established by Act 10 of 1993.
Paragraph 1 of Article 694 stipulating the basic deductions, the deductions for dependents and the educational insurance deductions has been eliminated. From fiscal year 2010, only the following deductions shall apply:
- Deduction for joint return or statement in the amount of B /. 800.00.
- Mortgage Interest
- Medical expenses
- Interest on educational loans
- Pension and retirement funds
Natural persons or juridical persons engaged in agricultural activities that have an annual gross income of less than B /.250,000.00 shall not be obliged to file a tax return.
Taxes on dividends and complementary taxes: All companies having a Notice of Operations, an Operations Keyword or Password to operate in the Colon Free Zone (FTZ) or operating in an Oil-free area or any other free zone or special area, or those generating taxable income within the Republic of Panama, shall be subject to payment of these taxes, according to the following rules:
1. Persons having a Notice of Operations or generating taxable income within the Republic of Panama:
- 10% - Income from Panamanian sources. In this case, a 4% additional tax is payable.
- 5% Income arising from a foreign source or from exports and the income exempt as stated in subsections f and l of Article 708 of the Fiscal Code. In this case, a 2% additional tax is payable.
2. People with Operations Passwords to operate within the FTZ or any other free zone or special area, as well as companies based in the Panama Pacifico Special Economic Area, except for those engaged in the activities set forth in articles 60 and the final paragraph of Article 117 of Act 41 of 2004.
- 5% on Panamanian source or local income or domestic transactions, foreign source income or external or export operations, and exempt income as set forth in subsections f, l and n of Article 708 of the Fiscal Code.
- In these cases, a 2% additional tax will be payable.
Where a juridical person distributes dividends or interests, it will first need to completely issue all of the Panamanian source income or the income from local or domestic transactions, before distributing dividends or interests resulting from foreign or export operations and those related to local revenues exempt from payment of the Income tax that are indicated in the Fiscal case, as appropriate.
For the purposes of distributing dividends or interests, the tax regime prevails in treaties or agreements to avoid double taxation between Panama and the country concerned.
Deductibility of costs and expenses: Formula for calculating the maximum amount.
The proportionality of deductible costs and expenses is modified as follows: deductible costs and expenses cannot exceed the ratio obtained from dividing the taxable income and the total revenues, including those that are exempted and those arising from foreign sources. The formula is as follows:
MCGD = (IG / IT) X CGT
MCGD: Maximum deductible costs and expenses.
IG: taxable income.
IT: Total Income (taxable and exempt foreign source).
CGT: Costs and expenses incurred by the taxpayer.
Except for uncollectible accounts, donations to the state, local educational or charitable institutions and non-profit organizations, taxes related to Notices of Operations, technical operating costs directly related to the risk assumed by insurance companies and other charges established by the Executive Body, which may be deducted directly according to the income or earnings to which they relate.
Estimated Income Tax Return
Natural persons will continue to estimate the income they obtain for the next fiscal period. However, juridical persons will estimate the tax they obtain in the 2010 fiscal period and same will be paid in the June, September and December 2010 quarters.
Monthly Advance Income Tax
From 2011, only juridical persons must pay the estimated income tax equal to one percent (1%) of the total taxable income of each month, which must be filed within the first 15 calendar days following the previous month.
Juridical persons who within their income-generating operations include the fuel and petroleum tax, may deduct such tax from their total taxable income. Natural and juridical persons engaged in agricultural or agro-industrial activities, with revenues exceeding B /. 250,000.00 per year will pay a monthly advance equivalent to point five percent (0.5%) on the taxable income of each month.
The adjustment between the affidavit/tax return and the sums paid in advance monthly will be made on the date on which the affidavit is filed.
Corrective/Clarification Tax Returns:
Any corrections or corrective statements that were previously presented without restrictions may be submitted only once and within a period not exceeding 36 months. Based on the previous legislation, corrective statements paid a penalty where presented after 12 months of filing the original tax return. With the tax reform, at the time of its filing, it will immediately entail a fee of one hundred dollars (B /. 100.00) for natural persons and five hundred dollars (B /. 500.00) for juridical persons.
Corrective or clarification tax returns or statements shall be filed with the DGI, through an application describing the events that led to the correction.
Taxpayers who file such amending or corrective statements to increase the tax or reduce the credit as determined in the original affidavit of income, will not be required to submit this application and same may be submitted through the website of the DGI.
Taxpayers who are being audited by the Income Directorate General may not present such corrective statements.
ABOUT THE AUTHOR: Rodrigo Julio Molina Ortega
The law firm MOLINA & Co., offers services relating to civil, administrative, maritime, commercial, banking, general and corporation matters within and outside of Panama, serving customers with honesty and top efficiency and professionalism.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.