Transfer Pricing Regime in Panama

The regulation of Transfer Pricing is one of the mechanisms through which the DGI tries to avoid tax base erosion.

The scope of application of transfer pricing, which has been in force in Panama since 2011, extends to any operation that a taxpayer performs with related parties that are tax residents of other jurisdictions, provided that such operations have effects as income, costs or deductions in the determination of the taxable base, for income tax purposes, of the tax period in which the operation is declared or carried out.

According to Panamanian law, two or more persons shall be considered related parties when one of them participates directly or indirectly in the management, control or capital of the other, or when a person or group of persons participates directly or indirectly in the management, control or capital of such persons.

Transactions carried out by taxpayers with related parties shall be valued in accordance with the principle of free competition. That is to say, the ordinary and extraordinary income, costs and deductions necessary to carry out these operations must be determined considering the price or amount that would have been agreed upon by independent parties, under similar circumstances, under conditions of free competition.

Previously some of the special zones were exempt from the application of the transfer pricing regime, however, as of fiscal year 2019 its scope of application was extended to the following zones:

• Colon Free Zone;
• Panama-Pacific Special Economic Area;
• Oil Free Zones;
• Headquarters of Multinational Companies;
• City of Knowledge;
• Any other free zone.

Those who are subject to the Transfer Pricing obligation must inform their operations with related parties located abroad at the time of the presentation of the annualy Declaration of Incomes; additionally they must submit the Transfer Pricing Form 930, make a Transfer Pricing Report and prepare a Transfer Pricing Study, which shall only be provided at the request of the DGI, within a term not greater than 45 days counted from the notification.

In case of non-compliance in the delivery of any additional information requested by the DGI in the course of the audit proceedings, the fines established in Article 756 of the Fiscal Code shall be applied, which may be from one thousand balboas (B/.1,000) to fifty thousand balboas (B/.50,000).

Recently changes have been introduced in the legislation where the field of action has been increased, including:

• Changes in declaration F-930 with greater requirements of form and substance.
• Compliance with Masterfile documentation and CbC (Country by country reporting).
• Newly obliged to comply with transfer pricing regulations, especially Multinational Company Headquarters (SEM) companies.
• Penalties in case of non-compliance with supporting documentation.

As part of the evolution of the issue of Transfer Pricing in Panamanian territory, in April 2018, Resolution No. 201-1937 was published, which modifies Form 930. (same that must be submitted through the eTax 2.0 system.)

Among the main changes in the declaration, the following points can be highlighted:

• The taxpayer must disclose if he is in a tax regime or special economic zone.
• Provide information about comparable transactions selected by the taxpayer.
• A section of questions related to the taxpayer and the economic group to which he or she belongs is added.
• An annex must be completed for intangible transactions such as royalties, intellectual property, trademarks, among others.
• In cases where a method based on profit margins has been used, it is necessary to reveal the name of the companies selected as comparable, the fiscal periods of the comparable companies used, as well as the country of residence.

An element to consider with the modification of the form is that, due to the level of detail requested, it is extremely important to have the Transfer Pricing report prior to filing the return.

Finally, taxpayers should consider the possible fines and sanctions they face in the event of non-compliance with any of the obligations mentioned above.

A good transfer pricing strategy or planning makes it possible to be in compliance with the rules determined by the tax administration, as well as to protect oneself in the event of having to face an audit in this area.

With the scenario described and the actions taken by the DGI, it is vital that taxpayers are properly advised in order to comply with the requirements within the established deadlines, and that they have strategies that can also contribute to fostering a better organization of the relationship between companies belonging to an economic group, whether it has multinational operations or in a single jurisdiction.

Taking into consideration the special significance of this issue since the publication and entry into force of the amendment to the SEM Law in Panama, Keridine & Requena entered into a Commercial Alliance with the Camacho International Group, an international consulting firm expert in tax issues and business management, in order to offer added value to our clients, providing personalized and comprehensive advice on Transfer Pricing.