Panama – International Tax Developments 2015
As summer is heating the northern hemisphere, we will quickly review what have been the tax legislation developments in Panama that affects international operations during the first half of 2015.
With the enactment of Law 27 of May 4, 2015, there is a change in withholding rules related to payments of services and others such as copyright revenues, royalties, and any income considered as local sourced, to persons domiciled outside Panama (Outbound payments).
Under the new rules, not only the payments considered as deductible by the tax payer in Panama are subject to withholding. Also, government entities, private companies in which the State owns 51% or more of its stake, tax payers operating with losses, and non-profit entities will also have to withhold such payments to persons located outside Panama.
The withholding remains as 50% of the total tax rate applicable to entites or individuals as the case may be.
CHANGE IN DIVIDEND TAX TREAMENT FOR LOANS AND CREDIT FACILITIES TO SHAREHOLDERS
Every loan or credit given to a shareholder or partner of commercial companies, is subject to a 10% dividend tax. The new law provides that in such cases, the 10% rate applies even when the applicable dividend tax rate is 5%. Corporations with bearer shares reamins at a tax rate of 20%.
NEW RULES FOR ENTITIES EXEMPTED TO WITHOLD INCOME TAX TO PAYMENTS ABROAD.
The tax reform introduced a new feature for dividend, interest, royalties and professional fee payments when those payments are income tax exempted by a special law.
In those cases the income tax exemption will not apply if the beneficiary of the payments would have been able to obtain a tax credit for the income tax that otherwise would had to pay in Panama. To obtain the tax exemption in Panama, the taxpayer will need to show evidence from an expert of the relevant jurisdiction that the taxpayer is not able to apply the tax paid in Panama as tax credit in his own jurisdiction.
NEW REQUIREMENTS FOR APPLYING DTT BENEFITS.
By the end of July, the General Revenue Directorate (Dirección General de Ingresos) enacted new requirements for applying to Double Taxation Treaty benefits.
The main features of the new regulations are (some of them were in force before):
- It introduces the concept of interested party or tax responsible party which is the taxpayer resident in Panama that pays the tax on behalf of the non-resident tax payer from the DTT jurisdiction.
- The application will have to clearly identify the article of the treaty serving as legal grounds for the application and provide full evidence of the applicability of said benefit.
- Each payment and each type of income will need a separate application.
- Tax resident certificates are valid for 12 months unless the certificate contains a lesser period.
- The application must be submitted 30 days before the transaction or operation subject to the benefit is made.
- Evidence presented for recurrent transactions are valid for the next 1 months, but separate applications accompanying photocopies of said evidence are still needed.
- If the authority request further evidence, there is a 2 month period to provide it.
Finally, the illegal or abusive use of benefits by acts such as simulation and other illegal conducts will be sanctioned and punished as tax evasion.
TRANSFER PRICING AUDITS WILL CONTINUE
The General Director of Revenue has publicly announced that transactions between Panamanian tax payers and international related parties will continue to be under scrutiny. Transfer Pricing Audits will continue and there is still much to see on how will the tax authorities will contest methods and comparables used by tax payers.