The regulation of Transfer Pricing is one of the mechanisms through which the Directorate General of Revenue (DGI) seeks to avoid the erosion of the tax base.
In Panama, it is regulated in the Fiscal Code in its Chapter IX from Article 762-A to 762-Ñ. The obligation on the issue of Transfer Pricing and specifically with the study is generated since the 2011 period. At that time it was applicable only in cases in which Panamanian taxpayers developed transactions with companies that were located in countries with which Panama had signed a treaty to avoid double taxation.
However, in the 2012 period, by means of Law 52-2012 in its Article 7, the scope of the obligation is modified and the scope of application is extended, so, from that period, all Panamanians taxpayers who carry out transactions with related companies located abroad are subject, provided that said transactions result in income, costs or deductions in the determination of the tax base, for purposes of Income Tax, of the fiscal period in which the transaction is declared or carried out.
In 2018 it is included that the entities that hold a Multinational Company Headquarters License (SEM) must report in the Affidavit of Income Tax following the arm's length principle, that is, they must prepare it and present it within the framework of a transfer pricing study resulting from transactions with other companies of the group worldwide.
All of the foregoing means that the taxpayers subject to the Transfer Pricing obligation must inform their transactions with related parties located abroad in the Affidavit of Income Tax, submit the Form 930 of Transfer Pricing and the elaboration of the report.
It is necessary to point out that only the Transfer Pricing Report must be submitted, at the moment that the DGI makes the request, within a period no longer than 45 days from the notification.
Part of the efforts made by the DGI to incorporate BEPS (Base Erosion and Profit Shifting) actions is reflected in Article 11 of Executive Decree 390 effective as of January 1, 2017, which allows the Tax Administration to request Information corresponding to:
- Consolidated financial statements of the economic group, as well as a list of intangibles.
- The organizational, legal and operational structure of the economic group of which the Panamanian taxpayer is a member.
- Description of the functions, assets and risks of the group companies.
- Also, as part of the required information, the group transfer pricing policies,
- A description of the value chain of the most important products and services, among others.
Given this situation, it is necessary for taxpayers to take into consideration the adoption of the local report (local file) and the master report in accordance with the BEPS standard.
On the other hand, we must bear in mind that Executive Decree No. 390 made an update on the Transfer Pricing regulations in force in Panama, where we can highlight the following points:
- It states that: the transactions of income, costs and deductions must be analyzed transaction by transaction, however, it is possible to perform an analysis in a grouped way given the nature of the transactions.
- Regarding the use of information from several periods, it will be possible to use it, provided that it adds value to the analysis.
- The comparability adjustments, which are made in the studies submitted by the taxpayers, may be applicable and accepted by the Tax Administration, provided that they comply with certain parameters.
- The taxpayer must include in the study, detailed information of the analyzed transactions, organization chart, its related companies and type of relationship, competitors' detail, analysis of the sector in which it operates, among others.
- For the selection of comparable transactions, they must be justified by indicating the characteristics of the goods and services; as well as the functions, assets and risks; contractual terms; and economic circumstances, among other factors.
- On behalf of the DGI, emphasis is placed on their preference for internal comparables. Reason for which, the taxpayer must document any transaction potentially comparable to those made with related parties.
Currently, as part of the evolution of the issue of Transfer Pricing in our country, in April 2018, the DGI published Resolution No. 201-1937 which modifies form 930, (which must be presented through the eTax 2.0 system.)
Among the main changes in the declaration, the following points can be highlighted:
- The taxpayer must reveal if it is in a fiscal 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 it belongs is added.
- An annex must be completed for intangible transactions such as: royalties, intellectual property, trademarks, among others.
- For cases in which a method based on profit margins has been used, it is necessary to reveal the name of the companies selected as comparable, the tax periods of the comparable companies used, as well as the country of residence.
Fines and other measures for non-compliance
An element to consider with the modification of the form is that, due to the level of details requested, it is very important to have the Transfer Pricing Report prior to the presentation of the declaration.
For cases in which the filing of Form 930 is not made, taxpayers could be sanctioned with 1% of the total gross amount of the transactions with related parties of the period, up to a maximum of $1,000,000.
On the other hand, if the Tax Administration makes the request for the Transfer Pricing Report and the taxpayer does not provide the documentation, it would result in a fine ranging from $1,000 to $5,000 in the first instance and, from $5,000 to $10,000 in case of being recidivist.
The DGI has the power to close the taxpayer's premises for 2 days in the first instance; and if it is a recidivist it can be up to 10 days and if the breach continues it could reach up to 15 days.
With the described scenario and the actions taken by the DGI, it is vital that taxpayers advise each other correctly in order to comply with the requirements within the established deadlines and thus avoid any type of contingency that may arise in the issue of Transfer Pricing.
Our expert team is at your disposal to jointly achieve the due fulfillment of this obligation.
How can we work together?
Compliance in Transfer Pricing
A transfer pricing study that adequately and concisely complies with the transfer pricing information required by current regulations allows concentrating the management in this matter towards the optimization of resources.
At Morgan & Morgan, together with Grupo Camacho Internacional, we have the knowledge and experience to prepare the documents required by the DGI, validating the prices traded between companies of the same economic group and also serving as compliance support for cases of tax review.
Transfer pricing management
Transfer pricing management consists of the planning, design, implementation and active control of compliance with policies, strategies and actions related to the matter, in order to ensure compliance with current regulations in Panama and internationally.
Our ability to assess and understand the needs of each company allows us to guide your company through a highly personalized service, ensuring compliance and efficient tax management.
Questions from the DGI
When the DGI determines that the transactions carried out and analyzed by your company do not comply with the arm's length principle, it will make an incremental adjustment in the income tax.
Our experience, both in the preparation of the documentation and in their respective defense, enables us to deal with the highest professional level in handling cases and the attention of particular consultations.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.