Transfer Pricing Update in Panama
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.
- Published in 2018, 2019, Adolfo Campos, Publications, Taxation
Morgan & Morgan participated in Seminar on Property Taxes
Panama, November 20, 2018. Adolfo Campos, senior associate and tax specialist, took part as speaker in the Seminar on Property Taxes in Panama-New Law 66 of 2017.
During the event the speakers talked about the most relevant aspects of Law 66 of 2017 which will begin to take effect on January 1st, 2019.
The activity was organized by the National Bar Association of Panama.
About Morgan & Morgan
Morgan & Morgan advises companies and individuals in matters pertaining to the Panamanian taxation system, including special taxes regimes. The firm has an experienced team of attorneys with broad knowledge in tax law addressing all sorts of industries, such as, financial services, technology, shipping, energy, real estate, intellectual property, retail and wholesale business, who can readily identify obstacles and solutions but mostly the opportunities clients can expect to achieve upon making business in Panama.
- Published in 2018, Adolfo Campos, News, Taxation
Deduction of education expenses
Article published in the Tax Column of the newspaper La Prensa (April 15, 2018)
The National Assembly approved a bill that will allow individual guardians and taxpayers to deduct education expenses incurred with respect to their minor dependent or dependents, which includes (but not limited to as we understand) enrollment and school fees, as well as school supplies, school uniforms and school transport, related to the first level of education or general basic education and the second level of education or secondary education in public and private schools.
To read the full article click here
- Published in 2018, Adolfo Campos, Press Room
The tax rule that subsists over time
Article published in the Tax Column of the newspaper La Prensa (April 1, 2018)
Someone once told me: “well-made rules subsist over time.” On the 7th of May, Cabinet Decree 109/1970 and its amendments, which regulate the Directorate General of Revenue (DGI), will celebrate 48 years since its approval.
To read the full article click here here.
- Published in 2018, Adolfo Campos, Press Room
A Predicted Tax Legislation
Article published in the Tax Column of the newspaper La Prensa (March 4, 2018)
Act 51 of 2013 granted the opportunity to regularize the taxes administered by the National Revenue Authority (ANIP, known today as Directorate General of Revenues -DGI-) in favor of taxpayers for the payment of their taxes on undeclared income in the correct manner, regardless of whether there was fault or willful misconduct, and until the 2011 fiscal period.
To read the full article click here.
- Published in 2018, Adolfo Campos, Press Room
Pending tasks with property tax
Article published in the Tax Column of the newspaper La Prensa (February 18, 2018)
The changes introduced by Act 66 of October 17, 2017 (Act 66/2017), brings with it a new concept and alternative to the procedure on the part of the taxpayers, which is the right to adopt or not to the regime of family tax patrimony (PFT) or main dwelling (VP).
To read the full article click here.
- Published in 2018, Adolfo Campos, Press Room
Morgan & Morgan advised a manufacturer of insulated panels and insulation boards with respect to the acquisition of a Spanish conglomerate
Morgan & Morgan acted as local counsel to one of the most important manufacturers of insulated panels and insulation boards in the acquisition of a Spanish conglomerate involved in the polyurethanes business with presence in the Republic of Panama.
This cross-border deal was closed in the last quarter of 2017 and was the biggest transaction realized by the acquirer to date.
Partner Francisco Arias and associates Pablo Epifanio, Adolfo Campos and Milagros Caballero, participated in this transaction.
- Published in 2017, Adolfo Campos, Milagros Caballero, Pablo Epifanio
New challenges in tax matters
Article published in the Tax Column of the newspaper La Prensa (November 26, 2017)
In Panama, of the 12 taxes of a national nature, only 2 of them expressly do not typify the figure of tax fraud, however, they have, like the other 10, pecuniary sanctions constituted by surcharges and interest for late payment of tax obligations.
To read the full article click here.
- Published in 2017, Adolfo Campos, Press Room