Transfer Pricing in Panama
Transfer Pricing obligations in Panama have been established since 2011, when it was required to have a study on this matter whenever transactions were carried out with related parties domiciled in countries with which Panama had signed a Double Taxation Avoidance Agreement.
However, as of the enactment of Law No. 52 of 2012, the scope of application was extended to taxpayers who carry out transactions with related parties abroad, even if they are not domiciled in a country with which Panama has signed the aforementioned Agreement.
Therefore, the Panamanian transfer pricing regime has as its regulatory framework Chapter IX of the Panamanian Tax Code, which was amended by the above-mentioned law and Executive Decree No. 390 of 2016, as well as No. 43 of 2019.
The latter is of great importance since it establishes the regulatory framework of the Country by Country Report, with which Panama continues to be aligned with that indicated by the Organization for Economic Cooperation and Development (OECD) in its actions of the BEPS Plan (Base and Erosion and Profit Shifting).
What are transfer prices?
Transfer prices are those prices or values agreed for operations carried out between related parties, which are usually also known as intercompany operations.
Principle of free competition
Also known as the “arm’s length” principle, the principle of full competition is a fundamental pillar of transfer pricing.It is based on the fact that the prices or considerations agreed between related parties are in accordance with the market value, as if they had been made by independent parties.
This principle is also regulated in Panama’s transfer pricing legislation, in article 762-A of the Tax Code, which states that transactions between related parties must be valued according to the principle of free competition.
This is understood as the amount that would have been agreed upon by independent parties in similar circumstances.
Scope of application of transfer pricing in Panama
According to Article 762-D, of the Tax Code, the operations subject to the transfer pricing regime will be those that the taxpayer performs with its related parties located in another jurisdiction.
This is provided that such transactions are considered as income, cost or deduction for income tax purposes.
Related party in Panama: Definition
According to article 762-C, of the Panamanian Fiscal Code, it is understood that two or more persons are considered related parties when:
- One of them participates, either directly or indirectly, in the administration, control or capital of the other.
- A person or group of persons participates, in accordance with the previous paragraph, in such persons.
Likewise, it shall also be considered a party related to a permanent establishment, the main office or other permanent establishments thereof, as well as the persons indicated above and their permanent establishments.
Transfer pricing methods in Panama
There are 5 methods in the legislation of transfer pricing in Panama, in order to be able to analyze the value agreed in operations carried out between related parties.
According to Article 762-F of the Tax Code, these are the following:
- Comparable price method not controlled.
- Added cost method.
- Resale price method.
- Profit split method.
- Net margin method of the transaction.
It should be considered that the aforementioned standard indicates that the last two methods should be used to the extent that there is greater complexity in the transactions or lack of information, such that the first three methods indicated could not be applied first.
Transfer pricing declaration and documentation in Panama
Panamanian legislation on transfer pricing provides for those taxpayers obliged to file a transfer pricing return or report and a technical study with information on the taxpayer and, if applicable, on the business group to which the taxpayer belongs.
Likewise, as from 2019 the presentation of the Country by Country Report or CbC Report has been regulated.
Transfer pricing affidavit
According to Article 762-I of the Tax Code, taxpayers who carry out transactions with related parties must file a transfer pricing report annually.
This must be submitted within six months following the closing date of the tax period, on Form N°930.
Transfer pricing study
According to Article 762-J of the Tax Code, as well as Article 11 of Executive Decree N°390 of 2016, the persons who are obliged to present the above mentioned declaration or report must have a transfer pricing study, in order to verify the valuation analysis of the transactions between related parties.
This report, which could be called “Local Report”, since it is focused on specific taxpayer documentation and follows the guidelines set forth in Action 13 of the BEPS, must only be submitted upon request of the Dirección General de Impuesto (DGI).
The term for this will be 45 days, counted from the notification of the requirement.
Likewise, in the case of those taxpayers that are part of a business group and carry out economic activity among themselves, information must be submitted with respect to the group, such as a general description of the organizational, legal and operational structure of the group, among others.
This is also in accordance with the guidelines of the above mentioned action regarding the “Master Report”.
Country by country report
Executive Decree No. 43 of 2019 establishes the regulatory framework for country-by-country reporting. According to Article 2 of the Decree mentioned above, they will be obliged to submit this report:
The Ultimate Head Office of a multinational group whose consolidated income in a fiscal period is greater than 750,000,000 euros or its equivalent in balboas, provided that it resides for tax purposes in Panama.
The information to be reported includes income, profit or loss before taxes, income tax paid and accrued, declared capital, intangible assets, identification of each member entity, among others; with respect to the jurisdictions in which the multinational group operates.
The referred report must be submitted within 12 months following the closing date of the corresponding tax period and will be delivered in “XML Schema” format, according to DGI regulations.
Sanctions related to transfer pricing in Panama
According to Article 762-I, of the Tax Code, the failure to file the transfer pricing statement referred to in said article entails a penalty amounting to 1% over the total gross amount of the transactions with related parties, with a maximum limit of B/. 1,000,000.
With respect to the lack of transfer pricing studies, the law does not establish a specific fine or penalty for this infraction; however, a penalty may be imposed in accordance with the provisions of Article 756 of the aforementioned Code, with respect to the failure to submit documentation related to the application of the tax or to do so after the deadline.
This is sanctioned with a fine ranging from B/.1,000.00 to B/.5,000.00, the first time, and with fines of B/.5,000.00 to B/.10,000.00 in case of recidivism.
According to the third paragraph of Article 762-D, of the Tax Code, the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations approved by the OECD Council are considered as an interpretative criterion.
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