EY
Building 3855, 2nd Floor, Office #210 Panama Pacifico Boulevard
International Business Park, Panama Pacifico Panama
Indirect tax contacts
Luis Ocando +507 208-0100 (resident in Panama) luis.ocando@pa.ey.com
Rafael Sayagués +506 2208-9880 (resident in San José, Costa Rica) +1 (212) 773-4761 rafael.sayagues@cr.ey.com
Guillermo Leandro +506 2208 9887 (resident in San José, Costa Rica) guillermo.leandro@cr.ey.com
A. At a glance
Name of the tax
Local name
Value-added tax (VAT)
Impuesto a la transferencia de bienes corporales muebles y la prestación de servicios (ITBMS)
Date introduced 22 December 1976
Trading bloc membership Association Agreement between Central America and the European Union
Administered by General Directorate of Revenues (Dirección General de In gresos) ( DGI) (https://dgi.mef.gob.pa/)
VAT rates
Standard 7%
Other 10%, 15%, exempt
VAT number format
National Tax Registry Number (RUC) and check digit (DV)
VAT return period Monthly, quarterly Thresholds
Registration
Gross annual income of USD36,000 or monthly average above USD3,000
Recovery of VAT by non-established businesses No
B. Scope of the tax
VAT applies to the following transactions:
• The supply of goods made in Panama by a taxable person
• The leasing of movable goods located in Panama
• Supplies of services
• The importation of goods from outside Panama, regardless of the status of the importer
C. Who is liable
A taxable person for VAT purposes is an entity or individual that performs commercial, indus trial or financial activities or supplies services, provided its income is greater than USD36,000 per year or has a monthly average greater than USD3,000; non-domiciled persons and importers are liable regardless of their income. Taxable persons that are designated as withholding agents for VAT must appoint a legal representative. All individuals or entities must register as taxable persons, and there is no separate and exclusive registry for VAT taxable persons.
Exemption from registration. All entities and individuals carrying out taxable operations in Panama must be registered as taxable persons before the General Directorate of Revenue and there is no separate VAT registration. Filing of VAT returns will depend not on registration but on whether they meet the minimum threshold or if the operations carried out by the company are within the exemptions established by law.
Voluntary registration and small businesses. The Panamanian Fiscal Code and its relevant regula tions do not contain any provision for voluntary VAT registration.
Group registration. Group VAT registration is not allowed in Panama.
Non-established businesses. A “non-established business” is a business that has no fixed estab lishment in Panama. A non-established business must register for VAT if it supplies goods in Panama. To register, a non-established business must file a registration form. A foreign corporation must also submit a copy of its articles of incorporation, legalized by the Panamanian Consul, together with an official translation in Spanish. It is important to highlight that to carry out the sale of goods within Panama, the tax authorities may require an operation notice, for which the company must register before Panamanian Public Registry. Non-established businesses render ing services in Panama are subject to withholding of VAT. The Panamanian recipient would deem that the VAT is included in the invoice and make the withholding. The amount withheld may be offset as an input tax. The non-established business would not receive a refund.
Tax representatives. Tax representatives are not required in Panama.
Withholding agents. Entities with annual purchases of goods and services in an amount equal to or greater than USD3 million will be considered VAT withholding agents. A VAT withholding agent is required to withhold 50% of the VAT included in the invoice or equivalent document submitted by the supplier.
The Panamanian tax authorities issue an annual publication that contains a list of VAT withhold ing agents identified according to the new criterion set out in the Decree. The list contains 552 companies, including construction companies and banks, among other businesses.
The withholding agents identified in the list are subject to the withholding obligation.
Reverse charge. VAT on services performed within Panama by a foreign individual or foreign entity to a Panamanian entity or individual must be collected and paid by the Panamanian recipient entity or individual based on a reverse-charge mechanism. Panamanian recipients must deem that VAT is included in the invoices from their non-established counterparty and make a VAT withholding to be paid within 10 days to the tax authorities. The amounts withheld may be considered input tax and used to offset output tax of the Panamanian party. The amount that the Panamanian party is required to withhold is calculated according to the following formula: the amount included in the invoice multiplied by 0.065421.
Domestic reverse charge. There are no domestic reverse charges in Panama.
Digital economy. There are no special rules or regulations regarding VAT for the digital economy. The ordinary VAT rules should be applicable based on the characterization of the transactions being carried out digitally.
It is important to consider that Panamanian tax legislation is governed by the principle of terri toriality; therefore, transfers of movable property and services are subject to the payment of VAT, provided they are made within Panamanian territory regardless of where the money is received.
In this sense, if nonresidents are providing electronically supplied services for business-to-con sumer (B2C) supplies by means located within national territory (Panama), then the provision of such services would be subject to VAT, which would trigger the obligation of VAT withholding for the local taxable person receiving the service. This withholding is made through the reversecharge mechanism (see the Reverse-charge subsection below). Where the local consumer is not able to perform the withholding, then the nonresident would be required to register in Panama to comply with the applicable tax obligation.
Nonresident providers of electronically supplied services for business-to-business (B2B) sup plies are not required to register and account for VAT on their supplies in Panama. Instead, the customer is required to self-account for the VAT due by way of the reverse charge (see the Reverse-charge subsection above).
There are no other specific e-commerce rules for imported goods in Panama.
Online marketplaces and platforms. No special rules exist for online marketplaces and platforms in Panama.
Registration procedures. The Panamanian tax authorities issue an RUC, which is the taxable person ID number (it applies to VAT and income tax, among other taxes). The RUC can be registered in person with the Panamanian tax authorities or online (https://dgi.mef.gob.pa/ and via the computer tax system e-Tax 2.0). To register as taxable persons in Panama, a company or individual must complete and present the following documentation:
• For professional and independent individuals:
Copy of ID
Copy of last paid utility bill of a public service to prove the domicile of the taxable person
• Legal entities:
Certificate of registration issued by the public registry
Copy of legal representative’s ID
Copy of last paid utility bill of a public service to prove the domicile of the taxable person
If the taxable person’s information changes, the Panamanian tax authorities should be notified.
Once registered, a national tax registry number (RUC) and check digit (DV) are issued to the tax able person. The RUC (Registro Único de Contribuyentes) is the unique taxable person registry, and DV (Digito Verificador) are both applicable to all corporations, including those that do not generate taxable income in Panama due to their activities.
Deregistration. Entities that are no longer taxable persons for VAT purposes (because of the income threshold) need to fill out and file a form stating that they will no longer be considered as taxable persons for VAT purposes.
Changes to VAT registration details. Any changes to a taxable person’s VAT registration details must be updated online on the Panamanian tax authority website. Additional information will have to be submitted to justify the change, e.g., articles of incorporation (to update the name of the company) or receipt of any invoice (to update the address). There is no specific time period for such notifications.
D. Rates
The term “taxable supplies” refers to all supplies of goods and services that are liable to a rate of VAT.
The VAT rates are:
• Standard rate: 7%
• Special rates: 10%, 15%
The standard rate of VAT applies to all supplies of goods and services, unless a specific measure provides for a special rate or an exemption.
Examples of goods and services taxable at 10%
• Alcoholic beverages, such as liquors and beers
• Hotels and other lodging services
Examples of goods and services taxable at 15%
• Cigarettes, cigars and other tobacco products
The term “exempt supplies” refers to supplies of goods that are not liable to VAT and that do not qualify for input tax deduction.
Examples of exempt supplies of goods
• Supplies made by agricultural producers
• Unprocessed fish, meat and game supplied by nonindustrial fishermen and hunters
• Exported goods
• Medical and pharmaceutical products
• School materials
• Supplies of goods made in a free zone in Panama
• Supplies of movable goods within an authorized customs warehouse
• Oil and related products (motor oil is subject to VAT)
• Groceries
• Hand tools, fertilizers, insecticides, fungicides and similar products used in agriculture
Option to tax for exempt supplies. The option to tax exempt supplies is not available in Panama.
E. Time of supply
The time when VAT becomes due is called the “time of supply” or “tax point.”
For the sale of goods, the tax point is when the invoice is issued or the goods are supplied, whichever is earlier.
For services, the tax point is the date on which the invoice is issued, the date on which the ser vices are rendered or the date on which total or partial payment is made, whichever is earlier.
For recurring annual services, the tax point is when total or partial payment is made. For a lease of movable property, the tax point is when the parties to the lease enter into the contract.
For supplies of goods made by a company to a manager or legal representative of the company for its personal consumption, the tax point is when the goods are delivered or when the goods are posted, whichever happens first.
Deposits and prepayments. There are no special time of supply rules in Panama for deposits and prepayments. As such, the general time of supply rules apply (as outlined above).
Continuous supplies of services. There are no special time of supply rules in Panama for supplies of continuous supplies of services. As such, the general time of supply rules apply (as outlined above).
Goods sent on approval for sale or return. There are no special time of supply rules in Panama for supplies of goods sent on approval for sale or return. As such, the general time of supply rules apply (as outlined above).
Reverse-charge services. There are no special time of supply rules in Panama for supplies of reverse-charge services. As such, the general time of supply rules apply (as outlined above).
Leased assets. There are no special time of supply rules in Panama for supplies of leased assets. As such, the general time of supply rules apply (as outlined above).
Imported goods. The time of supply for imported goods is when the customs return is filed.
F. Recovery of VAT by taxable persons
A taxable person may recover input tax, which is VAT charged on goods supplied for business purposes. A taxable person generally recovers input tax by offsetting it against any output tax due. Output tax is VAT charged on services and supplies made. Input tax includes VAT charged on goods and services supplied in Panama and VAT paid on imports. A valid tax invoice or cus toms document must generally accompany a claim for input tax credit.
The time limit for a taxable person to reclaim input tax in Panama is in the following month where the transaction generating VAT was executed, which is the moment when the VAT month ly return should have been filed.
Nondeductible input tax. If a taxable person provides services or goods to a VAT exempt cus tomer (for example, certain government institutions), the VAT paid on the purchases or imports of goods and services related to sales to such tax-exempt customer may not be recognized as input tax, thus, the VAT would become a cost for the seller. Similarly, the VAT paid on supplies to produce VAT exempted sales should be considered a cost.
Examples of items for which input tax is nondeductible
• VAT paid on supplies required by public energy generating companies
Examples of items for which input tax is deductible (if related to a taxable business use)
• VAT paid on import of inventory
• VAT paid for services received
Partial exemption. The VAT paid by a taxable person relating to exempt supplies cannot be con sidered as an input tax (as it cannot be offset against an output tax), but a cost that should be borne by the taxable person and it will be deductible for income tax purposes.
When taxed and exempt transactions are jointly carried out, the deduction of the input tax must be made in the proportion in which the income corresponds to taxable transactions in relation to the total income, excluding the tax itself.
Approval from the tax authorities is not required to use the partial exemption standard method in Panama. Special methods are not allowed in Panama.
Capital goods. There are no special input tax recovery rules for capital goods. If a capital good is used for both taxable and exempt supplies, the business must apportion the input tax by using partial exemption (see above). The business should carry out a proportion calculation and apply the percentage of the taxable and exempt revenues over the total revenues for the declared period, excluding the tax itself.
Refunds. If the amount of input tax recoverable in a period exceeds the amount of output tax payable, the taxable person receives an input tax credit. The credit may be carried forward to offset output tax in the subsequent VAT period. If it is not possible to offset the input tax credit
in the following period, the taxable person may use the excess as a credit in the following fiscal year. VAT credits are not refunded.
A frequent exporter that regularly has VAT credits may request a document called a “cancellation certificate” from the VAT authorities to help ease cash flow. The exporter may sell the cancella tion certificate to other taxable persons that can offset it against their own VAT liabilities.
Law 52 of 2012 grants certain taxable persons’ privileges for input tax deduction. This provision applies to manufacturers of foods or medicines and to businesses involved in the agriculture sec tor whose revenues exceed USD300,000. These taxable persons do not charge VAT, but they may not offset input tax against other tax liabilities.
Pre-registration costs. Input tax incurred on pre-registration costs in Panama is not recoverable.
Bad debts. The output tax can only be deducted for bad debts if the following requirements are met:
• The values are properly recorded for and have been declared as taxable transactions
• The insolvency of the debtor or the prescription of the debt is verified to prove the insolvabil ity of the debtor (e.g., cessation of payment or bankruptcy)
Noneconomic activities. Input tax incurred on purchases that are used for noneconomic activities is not recoverable in Panama.
G. Recovery of VAT by non-established businesses
Input tax incurred by non-established businesses in Panama is not recoverable.
H. Invoicing
VAT invoices. A taxable person must provide a VAT invoice for all taxable services and supplies made, including exports. An invoice is necessary to support a claim for input tax credit. Special fiscal equipment authorized by the tax authorities must be used. There are taxable persons who, according to their regime, may be exempt from issuing invoices through fiscal equipment. However, they must issue equivalent documents with the minimum documentation requirements according to local legislation.
Credit notes. A VAT credit note may be used to reduce VAT charged (within 180 days) and reclaimed on a supply if the value is reduced for any reason (for example, the price changes or goods are returned as a result of a discount or bonus). A credit note must generally contain the same information as a tax invoice.
Electronic invoicing. Electronic invoicing is mandatory in Panama. On 29 December 2020, Executive Decree 766 (hereinafter, “the Decree”) was published to sets forth the requirements regarding the implementation of electronic invoices. The Decree established that individuals and companies, (i) are authorized by the tax authority upon request, for the implementation of elec tronic invoices; or (ii) are under the obligation to implement the use of electronic invoices when they are exempted by the tax authority (due to its volume or nature of operations) from the use of fiscal equipment.
The electronic invoices will be issued under the following principles:
• The electronic invoices, as invoices issued by fiscal equipment, will be admissible in courts.
• The electronic invoices will have to be signed electronically by the issuer and supported by an electronic certificate issued by an authorized service provider.
• The technical specifications established by the Decree will have to be followed, i.e., following the process to issue the electronic invoice, as well as the format. For example, electronic invoic es will carry a unique identification number, i.e., the Unique Electronic Invoice Code (Código Único de Factura Electrónica).
• To issue the electronic invoice, the issuer will have to obtain an authorization for its use by a qualified authorized provider (responsibilities and obligations). The tax authority will have to approve the authorization of the qualified authorized provider. Only electronic documents gen erated in the Free Invoice of the Electronic Invoice System of Panama (Facturador Gratuito del Sistema de Factura Electrónica de Panamá) will be exempted to follow this rule.
The Executive Decree 766 came into force on 30 December 2020. However, Section IV of the Decree, related to the duties and obligations of the users of electronic invoices, entered into force on 1 June 2021. However, it wasn’t until 13 October that the Panamanian tax administration published on its website the list of providers authorized by the authority to assists taxable persons with the implementation of electronic invoices.
Simplified VAT invoices. Simplified VAT invoicing is not allowed in Panama. Full VAT invoices are required.
Self-billing. Self-billing is not authorized in Panama.
Proof of exports. VAT is not chargeable on qualified supplies of exported goods. To qualify, exports must be supported by documents that confirm that the goods have left Panama, such as customs documents, export invoices and copies of bills of lading.
Foreign currency invoices. If a VAT invoice is issued in a foreign currency, the amounts must be converted into the domestic currency, which is the Panamanian balboa (PAB) or US dollars (USD).
Supplies to nontaxable persons. There are no special invoicing rules for supplies to nontaxable persons in Panama. As such, full VAT invoices are required.
Records. Records that must be held for VAT purposes in Panama include tax returns, invoices, accounts and financial statements. In Panama, VAT books and records must be held within the country.
Record retention period. The general statute of limitation for VAT records in Panama is five years.
Electronic archiving. Electronic archiving may be done electronically if the archive is compliant with the electronic document law.
I. Returns and payment
Periodic returns. Monthly returns must be submitted on or before the 15th day of the month fol lowing the end of the return period. Additionally, sole traders (i.e., independent professionals) must submit VAT returns quarterly, i.e., four times per year.
Periodic payments. Payment of VAT due must be made in full on or before the same date as the VAT return submission deadline (i.e., by the 15th day of the month following the end of the return period). Return liabilities must be paid in PAB or USD.
The VAT can be paid online (if the taxable person has a local bank account), by check in an authorized bank (Banco Nacional and Caja de Ahorros) or by debit or credit card on the Panamanian tax authority online platform.
Electronic filing. Electronic filing is mandatory in Panama for all taxable persons. To file VAT returns electronically, the taxable person will need to request an NIT (número de identificación tributaria), a tax ID number from the tax authorities. This special number is required for all online tax processes on the website of the Panamanian tax authorities (e.g., tax declarations, statements), enabling corporations to be managed remotely.
Payments on account. Payments on account are not required in Panama.
Special schemes. No special schemes are available in Panama.
Annual returns. Annual returns are not required in Panama.
Supplementary filings. No supplementary filings are required in Panama.
Correcting errors in previous returns. Any corrections to a previous VAT return, should be filed on an amended VAT tax return within the last 12 periods/per return.
Digital tax administration. There are no transactional reporting requirements in Panama.
J. Penalties
Penalties for late registration. There are no specific penalties for late registration for VAT.
Penalties for late payment and filings. If a taxable person does not pay VAT on time, a fine of USD10 may be applicable.
Penalties for errors. A fine of USD10 may be imposed for late filing if no VAT is due as a result of credits in favor of the taxable person. Fines of USD100 to USD500 may be imposed for filing inaccurate VAT tax returns that do not result in a reduction in the tax payment, issuing invoices without being registered with the tax authorities and failure to comply with regulations regarding the carryforward of tax credits. Recidivism is penalized with fines ranging from USD500 up to USD5,000 and temporary closure of the business.
VAT returns may be amended only once per period and within a maximum period of 12 months following the date on which the original VAT return was due. The filing of the amended return costs USD100 for individuals and USD500 for legal entities if the amended return is filed more than three months after the due date for the original VAT return. Tax fraud is punished with pen alties varying from 5 to 10 times the amount of undeclared VAT or by imprisonment for a period of two to four years.
No penalty applies for failure to notify or late notification to the tax authorities, for changes to a taxable person’s VAT registration details. For further details, see the subsection above Changes to VAT registration details.
Penalties for fraud. A new Code of Tax Procedures for the Republic of Panama (hereinafter, TPC) will predominately enter into force from 1 January 2022. With these changes, tax evasion is now considered as a crime (said disposition has been added to the Penal Code and the Tax Code has been modified). Tax evasion will be considered as a crime, whenever someone intentionally avoids taxes (by omitting, hiding, falsifying or deceiving the tax office), for themselves or for a third party, for USD300,000 or above in a calendar year.
Tax evasion will be punished with a penalty of two to four years for anyone who, personally or by an interposed person, receives, possesses, deposits, negotiates, transfers or converts money, securities, real estate and other financial resources, knowing that they come from crimes against the National Treasury to hide, cover up or hide their illicit origin, or help evade the consequenc es legal of such punishable act.
Additionally, it is established that, if the crime has been committed through one or more legal persons, the penalty will be imposed on the legal entity in question and will be a fine of one to three times the amount of the tax defrauded.
On the other hand, crimes against the National Treasury are as follows:
• It will be punished with imprisonment of two to four years for anyone who on their own or third party benefits and intentionally incurs tax fraud against the National Treasury and affect the correct determination of a tax obligation to stop paying, totally or partially, the corresponding taxes.
• It will be punished with imprisonment of two to four years and with a fine of one to three times the amount of the tax defrauded, anyone who gets fraudulently an exemption, return, enjoyment or use of improper tax benefits.
Personal liability for company officers. Company directors cannot be held personally liable for errors and omissions in VAT declarations and reporting in Panama.
Statute of limitations. The statute of limitations in Panama is five years. Currently, the Panamanian tax authorities have the right to collect VAT in Panama after five years, counted from the first day of the following month in which the tax should have been paid. The statute of limitations is interrupted by any written action by the competent official aimed to collect the tax.
However, on 1 January 2022, new provisions included in the Code of Tax Procedures for Panama will enter into force. For this purpose, the statute of limitations for direct and indirect taxes (including VAT) will be five years, so in this sense, the statute of limitations for VAT will not be modified.