The Panama Administration accepted its mistake in trying to impose worldwide taxation instead of the local-source taxation system in place under Article 694 of the Tax Code of 1957.
The President Ricardo Martinelli blamed current Revenue Authority (ANIP) administrator Luis Cucalon for the passage of Law 120 of 2013, while Vice-Minister Luis E. Camacho assumed responsibility and current Minister of Economy Frank De Lima (author of restrictions to bearer shares on behalf of the OECD) said more consultations were necessary. The fact remains that several dozen legislators of the government Cambio Democratico party approved the law in its 3rd reading and failed to predict the onslaught of public opinion opposing this change to the Tax Code.
Article 694 of the Tax Code states that the obligation to pay the income tax will be for the "taxpayers" and defines it as:
"Taxpayer, as the term is used in this Title, is the individual or legal entity, national or foreign, who receives taxable income subject to the tax."
However, Law 120 replaced Paragraph 2 which stated since 1964 that "The income arising from the following activities are not deemed as earned within the territory of the Republic of Panama:
(a) To invoice, from an office established in Panama, the sale of merchandises or products for an amount higher than that for which such merchandises or products have been invoiced against the office established in Panama, provided such merchandises or products only move outside of Panamanian territory.
(b) To manage, from an office established in Panama, transactions that are performed, executed or have effects abroad.
(c) To distribute dividends or participation quotas of entities which do not require an Operations Notice or which do not generate taxable income in Panama, when such dividends or participations are earned from revenues not produced within the territory of the Republic of Panama, including those revenues earned from the activities mentioned in literals a and b of this paragraph."
Even if Law 120 still would have allowed banks and free zone companies not to pay income tax on foreign-source income, thousands of foreign individuals who had relocated as expatriates to Panama would have to pay Panama incme tax on foreign income or pensions. Double taxation treaties would have provided some tax relief for citizens of a few countries.
The Panama Presidency issued a press release over the holidays.
Law 120 of 2013 http://competenciafiscal.blogspot.com/2013/12/ley-120-de-2013-es-bomba-atomica-para.html
Articles 2 and 3 of Law 120 will be revoked
Tuesday, December 31, 2013
The Director of the National Authority of Income (Autoridad Nacional de Ingresos, in Spanish), Luis Cucalón accepted mistakenly including articles 2 and 3 of Law 120 from 2013 to Congress, which deals with territoriality of the incomes received outside Panama by national and legal Panamanians. “Even though wrong things have been said about the scope of the law, I recognize that I made a mistake thinking Panama was ready to take that step”, he said.
Cucalón requested the President of the Republic to revoke article 2 and 3 of the aforementioned Law. The request was accepted.
“I have asked the Director of the National Authority of Income to be more careful in the future. I have accepted his recommendation to present a law that revokes articles 2 and 3 of Law 120 and reestablishes the ones revoked or modified by them, just like I accepted his request to sanction the Law with the incorporation of the articles proposed by him. I did it because I trust completely in Cucalón´s professionalism, hence the position. The State´s unprecedented revenue are his best job reference”, said the President.