Transfer pricing tweaks

Article

In 2010, the Republic of Panama added to its Tax Code a new chapter regarding the adequacy of double tax conventions for the avoidance of double Taxation. The arm’s length principle was defined, as well as the term related parties, and the scope of application of transfer pricing in the Republic of Panama.

Operations realized by Panamanian tax-payers with related parties will be valued according to the arm’s length principle. In other words, ordinary as well as extraordinary income, cost and necessary deductions to realise operations should be determined based on the price and amount agreed by independent parties under similar circumstances.

In the Republic of Panama, two or more parties are considered related whenever one of them participates directly or indirectly in the administration, control or capital of the other party, or even when a person or group of persons participates directly or indirectly in the control, administration or capital of these related parties.

At first, the scope of transfer pricing in the Republic of Panama only included operations realized between related parties, consireded as fiscal residents of countries with which the Republic of Panama had celebrated a Double Tax Convention for the avoidance of double taxation. Subsequently, in 2012, the scope was modified, and so it included every Panamanian tax-payer that realized an operation with a related party, which was a fiscal resident of another jurisdiction.

Related parties, as defined under Panamanian legislation, must file a transfer pricing form within the next six months after the closing of the tax-payer’s fiscal period. In the event a tax-payer fails to provide this study, a penalty of up to $1 million will be automatically charged to the taxpayer. Further, operations with related parties will be included in the taxpayer’s tax return, with all of the related data.

Transfer pricing is certainly an ongoing subject in the Republic of Panama, as well as in the international taxation area. We believe that the Panamanian tax authorities will soon have sufficient means to achieve the specific control and supervision transfer pricing demands.