Publication of Law 1 of 2014 reestablishes local-source taxation

The territorial taxation system whereby only local-source income is subject to taxation was reinstated under Law 1 of 1984 upon publication of Official Gazette of Friday, January 10, 2014.   Approval Law 1 came after vocal opposition to previous Law 120 of 2013 from the Panama Bar Association, the Panama Association of Enterpreneurs (APEDE), and other groups of logistics and financial employers - including the pro-bearer share immobilization Panama Banking Association.

Law 1 abrogated Law 120 of 2013 which had been valid for 12 days and reinstated the validity of Article 694 of the Tax Code.  Under Article 694, income from the several activities abroad is considered foreign‑source and, therefore, is not taxable, such as:
•Invoicing from an office in Panama for sale of merchandise that does not enter Panama;
•Managing from Panama transactions that are executed abroad;
•Distributing dividends from non‑taxable income or income from activities conducted abroad;
•Passive income from loans or other financial transactions with foreign borrowers, even if the reimbursement is conducted in Panama;
•Settling of foreign assets under a Panamanian trust;
•Bank deposits of foreigners in Panama; and
•Securities of any kind issued by Panamanian corporations of fully foreign‑source income.

Taxable income is the difference resulting from subtracting deductible expenses from gross income. Deductible expenses are those incurred for the maintenance and production of the income (eg, office expenses and promotion), as well as others authorised by law. The taxpayer must allocate expenses to exempt, taxable, or foreign source income, maintaining separate accounting for each type of income to ensure approval in case of an audit. Taxpayers with both Panama  and foreign source income must prove to taxation authorities that expenses were indeed used for Panama source income in order to allow their deductibility. Under the "rule of proportionality", expenses made for both types of income may be deducted only in the proportion that they maintain to total income.

As in previous years, individuals and entities which have commercial activities in Panama with other Panama taxpayers or applied for Aviso de Operacion business licenses have to file their income tax returns before each March 31.

See also:
Law 1 of 2014 http://www.gacetaoficial.gob.pa/pdfTemp/27450_A/45163.pdf
Panama Administration will continue local-source taxation http://mypanamalawyer.blogspot.com/2014/01/panama-administration-will-continue.html
Panama Cabinet votes to revoke Law 120 of 1973 and reaffirm territorial taxation http://mypanamalawyer.blogspot.com/2014/01/panama-cabinet-votes-to-revoke-law-120.html
Panama Chapter of International Taxation of Low-Tax Transactions amazon_com
Panama taxation news http://mypanamalawyer.blogspot.com/search/label/taxation
Renta 2013 tax return filing freeware https://www.anip.gob.pa/descarga_renta.html

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MEF REQUESTS FOR THE REPEAL OF SECTIONS 2 AND 3 OF THE ACT NO. 120 OF 2013 

“It is subject to tax, the taxable income that occurs, from any source, within the territory of the Republic of Panama, whatever the place where it is perceptible.” 

   

"We are a country that has historically substantiated its criterion of income tax by applying the principle of territoriality," said the Minister in Charge of the Ministry of Economy and Finance (MEF), Gladys Cedeño Urrutia, after submitting to the National Assembly of Deputies, the abrogation of articles No. 2 and No. 3 of Act No. 120 of 2013. 

The income will be territorial, as set forth in article No. 694 of the Tax Code. "It is subject to tax, the taxable income that occurs, from any source, within the territory of the Republic of Panama, whatever the place where it is perceptible," reiterated the Minister in Charge, Cedeño. 

This action corrects any errors logged at the time of writing the articles 2 and 3 of the Act 120, and comes to restore the validity of article 694 of the Tax Code. This Law has retroactive effect from December 30th, 2013. 

www.mef.gob.pa