New modifications to Panama’s Tax Law affects offshore operations between related parties
July 28th, 2010
The major changes which affect the international commerce through corporations or persons residing in Panama established by the recent approved Law 33 of June 30 of 2010, which “adds one chapter to the Tax Code regarding Adequacy Standards to the Treaties or Agreements to avoid the Double taxation and adopts other tax measures” are the following:
- It is established the authority of the Department of Revenue to verify that commercial transactions between related parties have been valued according to the principle of free competition with respect to the same transactions between independent parties, and states that the Department of Revenue may take the necessary fiscal measures where it is found that there was a lower tax rate applied to aforesaid transactions (762-B).
- The approval of deductions of expenses for services received from a person related to the company, including management, legal, accounting, administrative, financial, technical and others services it will be subject to be rendered effectively and produce an utility or benefit to the company (art.762-G).
- It is established the obligation to submit an annual report of transactions with persons or companies related to the administration or ownership of the company, and the possibility that such information is shared with other states who have signed bilateral agreements on double taxation (art.762-I).
- International maritime business becomes taxed with income tax (art.701 lit. N)
- It is established and regulated the power of coercive collection of the Department of Revenue (art. 1247-A).
These reforms are due to the current approach that this government administration is overtaking, following the steps of previous government administrations, to restructure the national taxation system in Panama, taking the necessary measures for Panama to be considered a competitive legal framework not only for its low tax rates, but for the safety granted by a secure and solid collection system with principles of territoriality well marked, and that is willing to be taken into international consideration for its respect and observance of international tax treaties.
The effects these reforms will have in the offshore business will raise direct objection to the legal principles which have always been the basis of this activity in Panama, and even today remain in force and are picked up in other rules of our legislation: the corporate secrecy of the identity of the shareholders of the Panamanian Corporations, and the bank secrecy of the identity of the account holders; then we will have to wait to know how the Authorities will proceed in the application of one norm opposite the other”.
Beyond these reforms and for their immediate effect, we will have to wait for the regulations to be issued by the Department of Revenue, responsible for establishing procedures to implement in practice these adopted laws.
So far, Panama has signed this kind of tax treaties with Mexico only, but is in discussion with other countries in the Caribbean area to subscribe new Agreements to avoid international double taxation.
