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Taxation
in Panama, which is governed by the Fiscal
Code, is on a territorial basis; this
is to say, that taxes apply only to income
or gains derived through business carried
on in Panama itself. The existence of
a sales or administration office in Panama,
or the re-invoicing of external transactions
at a profit, does not of itself give rise
to taxation if the underlying transactions
take place outside Panama. Dividends paid
out of such earnings are free of taxation.
In
February, 2005, Panama’s
unicameral legislature approved a major
fiscal reform package in order to raise
revenues from new business taxes, and
reduce the country’s level of debt. The
legislature voted 46 to 28 in favour of
the measures, which include a new 1.4%
tax on companies’ gross revenues, and
a 1% levy on firms operating in the Colon
Free Trade Zone – the largest free port
in the Americas.
In
July, 2005, all firms which prior to 2005
were exempt from value added tax in Panama
are affected by a new interpretation of
the country's Tax Code by the tax authorities.
In a little publicised move, Panama’s
Revenue Office circulated a series of
opinions which stated that the recent
tax reform has abolished all VAT exemptions
and special treatment given prior to February
2005.
The
new interpretation centered on paragraph
26, article 1057-V of Panama’s Tax Code
which, although the wording is the same
as the original draft passed in 1976,
the Revenue Office has taken to be a new
law after it was reproduced in the major
reform approved in February 2005. Therefore,
according to the Revenue, it is effectively
a new law, which can be interpreted differently
to the 'old' legislation.
Consequently
output VAT could now be charged on clients
previously exempted. Similarly, input
VAT may also affect previously exempted
taxpayers.
In
addition to the taxes described below, employers
pay social security contributions of 10.75%
in respect of employees.
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Panama 
