Panama’s tax reform:

A step in the right direction to become Latin America’s investments powerhouse in the future

Read our article in the Cayman Financial Review Magazine, eversion 

 

To this aim, the newly elected government of
Panama has, during 2010, enacted a broad tax reform aimed at attracting
investment to the country as well as improving its investment grade rating.

With regards to its tax policy, this reform has included the reduction of
income tax rates, deductions and the number of tax brackets for both
individuals and corporations from 30 per cent to 27.5 per cent in 2010 and to
25 per cent beginning in 2011 with some exceptions such as banks and
telecommunications industries, among others1.

It
has also increased the VAT rate from 5 per cent to 7 per cent and modified some
of it exceptions, reclassified certain foreign source income as Panamanian
source income and eliminated the alternative income tax calculation for
corporations with annual earnings up to US$ 1.5 million. 

The
central government considers that all these measures will increase Panama´s
competitiveness in the region by making it a more attractive and secure place
for foreign investments and by enhancing its place as a regional financial
centre.  

With regards to the
tax reform in the international sphere, Panama has recently negotiated fourteen
Treaties for the Avoidance of Double Taxation2, ten
of which have already been signed with Mexico, Barbados, Singapore, Spain,
Portugal, Luxembourg, Italy, South Korea, Singapore and Qatar.

The treaty with
Mexico is already in force3 and it is expected that the other treaties
will enter into force in January of 2012. All these treaties possess an
exchange of information clause that includes an anti blocking statute provision
intended to ensure that the limitations on the exchange of information are not
used to prevent such exchange in case the information is held by banks, other
financial institutions, nominees, agents, fiduciaries, etc.   

Additionally, Panama
has enacted transfer pricing regulations in its domestic law as well as in the
tax treaties signed to comply with OECD standards and to reaffirm its
commitment to international fiscal transparency.  

It is also worth
mentioning that on 30 November, 2010, the government of Panama signed a Tax
Information Exchange Agreement with the government of the United States4. This agreement allows, among
other things, the exchange of tax information with retroactive effect from 30
November, 2007. 

With all these reforms, Panama
hopes that the OECD removes it from the “grey list” and elevates it to the
“white list”, signalling that Panama is not a tax haven but a solid,
transparent and trustworthy regional financial centre with a lot of potential
for future investment. 

 

EndNotes 

  1. Rates for these types of companies will start to decrease in 2012 from 30% to 27.5% and to 25% in 2014.
  2. Treaties for the Avoidance of Double Taxation have been negotiated with: Mexico, Barbados, the Netherlands, Spain, Qatar, Singapore, Belgium, South Korea, Luxembourg, Portugal, Czech Republic, Ireland, France and Italy.
  3. Published in the Official Gazette of the Republic of Panama No. 26.548 dated June 4th, 2010. The provisions of the Treaty are enforceable from 1 January, 2011.
  4. Published in the Official Gazette of the Republic of Panama No. 26767, dated 18 April, 2011.

 

Panama’s tax reform: A step in the right direction to become Latin America’s investments powerhouse in the future