The purpose of this short post is to summarise the bookkeeping requirements for your business in Panama, particularly as it relates to ITBMS – sales tax on goods and services.
Six things you should know about sales tax withholding in Panama
#1 – Bookkeeping for your business in Panama
While your business may be small, and you can run your accounting through QuickBooks, PeachTree or Sage, it is vital that you also have someone handling your bookkeeping that knows Panama’s rules and regulations. This applies to aspects of accounting records requirements, online reporting, monthly reporting requirements, and even payroll (where you have employees in Panama).
In a very small business, you may only need this person to come in once a month for reporting the transfer of goods and services (before the 15th of each month). In larger businesses, make sure you have hired adequate accounting staff to take care of all reporting requirements.
#2 – Online reporting & online payments
With eTax 2.0, your business can report online to the tax department. This includes the monthly withholding of the goods and services tax (ITBMS), which is currently set at 7% of your sales.
You can even pay this online by credit card through eTax 2.0. There is no reason to incur penalties and interest.
#3 – Effect on business cashflow
Recognise that ITBMS management is one of the primary mistakes that small businesses make when it comes to managing their cash flow. You can mistakenly think you have more funds than you actually have.
This tax may be paid monthly or quarterly – so be aware of the limits: when are you obligated to pay this monthly, rather than quarterly.
#4 – Updating the Panama tax department records
If you move or change phone numbers, you should remember to update these details in eTax 2.0, as simply part of your regular monthly reporting. It is possible to incur penalties or fines for failing to keep these minor details up to date.
#5 – Whose responsibility is it to pay sales tax?
Sales tax is charged to the customer for goods or services which they purchase from a Panamanian business. Originally, this tax only applied to buyers present in Panama. So, for service providers who were providing a service to clients overseas, ITBMS did not apply.
Nonetheless, more than ten years ago, this changed. Now, ITBMS applies to services provided to clients who are overseas, provided that the work is completed in Panama. So, for example, law firms in Panama with clients internationally are required to include ITBMS in their invoices.
It is the responsibility of the Panamanian business to add the goods and services tax to the bill and charge this to the client. The business acts as a withholding agent. These funds, collected from the buyer, are then to be paid to the Panama tax department by the business owner.
Nonetheless, if you receive your payment by credit card, your bank is also required to withhold from your total payments received through their processing, a percentage. This will offset your withholdings at the end of each month. You should make sure each month that you are reconciling what was withheld by the bank as a withholding agent and then make up the remainder of that amount in your payments.
Your bookkeeper or accountant should be reconciling these figures regularly.
#6 – Income limits to be liable as a small business in Panama for sales tax
In order to be liable for sales tax in Panama, your business needs to have a monthly income of at least $3,000.00 or exceed an annual income of $36,000.00. Once over the limit of $36,000.00 in annual income, you are required to become a withholding agent. This includes having the technology in place in your business to report monthly/quarterly and make the respective payments to the tax department.
Your registration at the tax department in Panama is your responsibility, and most likely will not have been undertaken by your lawyer/accountant unless you specifically requested this.
Registration for ITBMS will not be done until you reach the limit, so you need to be very clear on the income that your business has received in the first months of operation.
For more information regarding doing business in Panama, please do not hesitate to contact our office.
