The Administrative Contentious Chamber of the Supreme Court of Justice of the Republic of Panama recently issued a ruling of great relevance for the transfer pricing regime in the country. In its Edict No. 1772 of June 11, 2024, the Court declared that Resolution No. 201-6265 of December 28, 2016, issued by the General Directorate of Revenue (DGI) of the Ministry of Economy and Finance (MEF), is not illegal, and denied the rest of the claims of the plaintiff, Puma Energy Bahamas, S.A. Consequently, ruling TAT-RF-062 of the Administrative Tax Court (TAT) of September 10, 2020, on the transfer pricing adjustment to said taxpayer for purchases made with its related parties abroad for $39 million corresponding to the periods 2013 and 2014, is confirmed.
This ruling of the Supreme Court of Justice represents a milestone for the Transfer Pricing Regime in Panama, not only for the amount of $13.5 million of taxes to be paid to the national treasury, to which must be added the default interest provided for in the Tax Code, but also for the criteria and interpretation of the application of the arm's length principle. This principle seeks that related companies agree on the transactions carried out between them as if they were independent companies under comparable market conditions and circumstances.
The tax community is attentive to the publication of the Court's decision in order to appreciate the progress and development achieved in the interpretation of the transfer pricing regulations in force in Panama on fundamental aspects such as the selection of the method and the comparability analysis. The central points of this controversy that were addressed in detail in the TAT ruling were the importance of using the correct accounting information for the calculation of the profitability indicators, the validation of the information extracted from the specialized databases with the original sources and the proper documentation of the adjustments of any kind made by the taxpayers to the financial information used in the analysis of their transactions.
The Court's decision reaffirms the need to conduct a thorough review of the documentation supporting the transfer pricing methodology applied by taxpayers, so as to ensure the reliability of the results in accordance with the Tax Code of the Republic of Panama. This implies the precise delimitation of the transaction in order to compare the conditions and circumstances with economic relevance between independent parties in the adoption of the methods.
With the Court's pronouncement, it is clear that transfer pricing audits have a wider scope in their analysis and can result in millionaire adjustments to the taxable income tax base. Therefore, it is recommended that multinational groups, especially those with a high volume of transactions, review their transfer pricing policy and supporting documentation in order to avoid transfer pricing adjustments and fines for non-compliance.
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