General

VAT/GST registration

VAT/GST compliance

International Supplies of Goods and Services

VAT/GST recovery

Tax points

Invoices

Record-Keeping Requirements

Audits

Special Indirect tax rules

Rulings

Types of indirect taxes (VAT/GST and other indirect taxes).

In Panama VAT is called ITBMS (impuesto a las transferencias de bienes corporales muebles y la prestacion de servicios). This tax applies to imported goods, products sold or services rendered in Panama.

Are there other indirect taxes?

A stamp tax is levied on the issuance of certain documents.

Selective consumption tax, impuesto selectivo al consumo (ISC), is an excise tax on imports of specific goods such as luxury vehicles, jewelry, firearms, alcoholic beverages and tobacco products.

Insurance tax is levied on insurance premiums.

What supplies are subject to VAT?

In Panama VAT is called ITBMS. In general, all transactions involving the supply or transmission of tangible personal property (commodities and products) and the provision of services within the Republic of Panama are subject to this tax.

The following supplies are subject to VAT.

Transactions 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 supplied physically
• supplies of goods to owners, partners or shareholders as a result of the definitive closure of an enterprise.

Provision 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
• 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 are the standard or other rates (i.e. reduced rate) for VAT/GST and other indirect taxes?

Standard rate: 7 percent.

Higher rates: 10 percent (alcoholic beverages and hotel services) and 15 percent (tobacco products).

There are no zero-rated rules for supplies. However, exporters of goods (i.e. services not included) may recover a tax credit certificate related to the input VAT incurred. The same regime applies to local sales of food products and medical/pharmaceutical products. There are several partial exemptions (i.e. without the right to deduct input VAT) including services related to healthcare, education, electricity, insurance and financial services.

Some transfers of goods are also VAT exempt. These include:

• agricultural products in their natural condition (goods already altered by chemical processes or by any treatments 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 
• newspapers, magazines, educative magnetic media, notebooks, pencils and other items for school purposes (e.g. books and general publications) 
• fuel and similar products, except oil and lubricants
• cement, additives and sub-products used by subcontractors in connection with the construction of the third set of locks for the Panama Canal expansion 
• medicines and pharmaceutical products
• VAT paid in connection with both exempt supplies and supplies not subject to the tax cannot be recovered. In any event, transactions that cannot be deducted from input VAT may be entitled to be deducted from income tax 
• selective consumption tax: various tax rates 
• insurance tax: 5 percent of the premium 
• stamp tax: rate varies depending on the value and type of document.

Who is required to register for VAT/GST and other indirect taxes?

For VAT purposes, 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 monthly gross income exceeds 36,000 US dollars (USD) per year.

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 taxpayer registry (Registro Único de Contribuyentes). Registration involves 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).

In the case of foreign companies importing goods in to Panama, the import must be made by another company located in Panama and with a taxpayer identification number. The local company has to settle the import VAT and recover it in the sale afterwards.

Services performed by a non-resident within the Panamanian territory are subject to VAT withholding, which is considered as included in the amount invoiced to the client in Panama. The VAT withholding is determined by multiplying the total amount of the invoice by the coefficient of 0.065421 in order to obtain the VAT included.
The withholding agent (usually a Panamanian entity or a non-resident entity registered as a taxpayer in Panama) must file and pay the withheld VAT to the tax authority within 15 days of the transaction.

Services performed by a non-resident supplier for a customer based in Panama that are rendered outside of Panama are not subject to VAT.

For excise taxes on consumption, the taxpayer is the individual or legal entity who acts as a provider of taxable services or as a manufacturer, importer or provider of taxable goods.

Excise taxes on consumption refers to the selective consumption tax but a distinction is made between selective tax and petroleum tax (both of which are excise taxes on consumption).

Is voluntary registration for VAT/GST and other indirect taxes possible for an overseas company (e.g. if the annual turnover is below the relevant VAT/GST and other indirect taxes registration threshold)? 

A foreign company may register with Panama’s taxpayers’ registry. However, registration will only serve the purpose 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.

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 invoiced the coefficient 0.065421 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.

Which forms and supporting documentation does an overseas company need to submit for VAT/GST and other indirect tax registrations? 

Not applicable.

Is grouping* for VAT/GST and other indirect taxes possible? 

VAT grouping is not allowed except in the case of joint ventures that are 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 marketplace.

How frequently are VAT/GST and other indirect tax 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.

Selective consumption tax can be paid in the customs clearance at the final product placement (in the case of imported products) or on a monthly basis.

What are the exchange rate rules in your country?

If a business receives a purchase invoice in foreign currency, it should use the exchange rate of the invoicing date. However, there is no obligation to use a central bank’s exchange rate.

Exports – Goods

How are exports of goods 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.

Exports – Services

How are exports of services treated for VAT/GST purposes?

Certain export-related services are considered VAT exempt. These services include those listed in the relevant provisions as necessary and accessory to the exportation of goods and merchandise such as:

• international freight
• 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
• services rendered by travel agencies.

Imports – Goods

How are goods dealt with on importation?

There is no rule in place requiring overseas companies selling goods into consumers/non-VAT registered consumers in the Republic of Panama.

Generally, import duties and customs clearance and procedures are the responsibility of the importer of goods. The following general criteria apply:

• 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.

Imports – Services

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

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

Can an overseas company recover VAT/GST and other indirect taxes if not registered for VAT/GST locally?

No, individuals and legal entities registered as taxpayers (or taxable persons for VAT purposes) operating domestically within Panama are granted the right to carry forward the VAT.

Are there any exemptions with the right to recover or deduct input VAT?

Yes, exclusively the exportation of goods and the importation and local supplies of food products and medical/pharmaceutical products.

Are there any restrictions to the deduction of input VAT?

As a general rule, exemptions do not grant the right to recover VAT.

When is VAT/GST due on a supply of goods or services?

There are different tax points depending on the type of supply involved: supply of goods or provision of services.

In the case of the supply of goods, VAT is due either at the moment of: delivery of the goods or the issuance of the respective invoice, whichever occurs first.

For provision of services, VAT is due at either the moment of: issuance of the respective invoice; completion of the services rendered; or receiving either a partial or full payment for services, whichever occurs first.

Is a business required to issue tax invoices?

Yes.

Is it possible/mandatory to issue invoices electronically?

Yes, although authorization from the tax authorities is required.

Currently a group of taxpayers are participating in a pilot plan led by the Directorate General of Revenues that is intended to implement this year electronic invoicing for all taxpayers.

Is it possible for the vendor to issue an invoice, (i.e. self-billing)?

No.

How long must records and invoices be retained?

For VAT purposes, taxable persons shall keep records and invoices covering at least the period for reassessments by the tax administration. The statute of limitation period for VAT purposes is 5 years. Such a period initiates as of the first day of the month following the month during which the VAT tax should have been paid.

However, certain taxable persons may also carry out other types of transactions subject to different taxes (stamp taxes or excise taxes). Under these circumstances, the records and invoices of the relevant business shall be kept at least for the period during which the tax administration is allowed to issue reassessments against the taxpayers.

Can the invoices be stored abroad?

Records and invoices (hard copies) related to supplies provided within Panamanian territory cannot be stored outside the country. However, there are special provisions allowing taxpayers to store documentation using technological archives. Under these circumstances, remote access to this data is feasible, allowing users to produce any evidence required by the tax administration in Panama while, at the same time, being able to store such technological archives in different locations.

Do tax audits take place on a regular basis?

No, audits are carried out on a discretionary basis by the tax authority.

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

No.

What penalties can arise from non-compliance?

Penalties, as well as interest, are assessed for late payments:

• late filing: 10 percent of the VAT amount due 
• interest: 12 percent annual rate 
• USD500 charge for filing amendment return three months after the original form was filed 
• late return (over 60 days) with no liability: USD10 fine.

If an entity fails to register as a taxpayer with the Directorate of General of Revenue (obtaining a Tax ID number) while using invoices as well as irregular documentation or non-fulfillment of formal obligations, such misdemeanors face a fine of USD100 to USD500 for first offense and USD500 to USD5,000 for more than one offense.

In cases of fiscal fraud, imprisonment from 2-5 years or a fine of five to ten 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 the return or tax payment within 2 months of the date due.

Are there any special rules for the sale of a company by one taxpayer to another where VAT is not due on the sale?

No.

Are there unique specific indirect tax rules that you would not expect to find in ‘standard’ VAT jurisdictions?

• No refunds can be requested for ITBMS paid in excess. 
• No ITBMS can be charged on services provided to the Panamanian state. 
• There is a special ITBMS regime applicable to concessions granted by the government related to infrastructure projects. The concessionaire is also granted an exemption for VAT. 
• On a general basis, contracts with the 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 contractors.

Since 1 January 2016 there are new ITBMS procedures in relation to ITBMS, with withholding agents duly designated by the Directorate General of Revenue (Dirección General de Ingresos).

A brief summary of the new procedures is as follows:

• the state and other entities of the government sector: withholding on the purchase of goods and services over 50 percent and 100 percent of total tax invoiced by vendors or providers, respectively 
• services provided by parent companies abroad: withholding over the total amount of the tax determined on the services provided 
• joint ventures, consortiums, other similar associations: withholding on the purchase of goods and services over 50 percent of the total tax invoiced by vendors or providers 
• withholding agents duly designated by the authority (on an annual purchase threshold basis): withholding over 50 percent of the ITBMS 
• credit or debit card issuers or management entities: withholding over 50 percent of the ITBMS included in the invoices.

Does a reverse-charge mechanism apply for goods or services?

No.

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

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

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

No, rulings and decisions are not publicly available. Tax opinions issued by the Dirección General de Ingresos are available at www.dgi.mef.gob.pa.

Luis Laguerre
Partner
KPMG in Panama
T: +507 208 0704
E: llaguerre@kpmg.com