The Directorate General of Revenue of the Ministry of Economy and Finance of the Republic of Panama (hereinafter DGI) in the execution of the transfer pricing audits, has demonstrated the efficiency of the arm’s length principle as a fiscal control mechanism. Taking into account the positive results of the transfer pricing audits, the DGI has elaborated the conceptual bases to carry out a program of cooperative compliance to taxpayers subjects to the transfer pricing regime, with the purpose of providing a legal alternative to the taxpayers who enter into transactions with related parties abroad.
The DGI has within its objectives to propose the inclusion of the Anticipated Transfer Pricing Agreements (hereinafter the “APAs“) in the Tax Code of the Republic of Panama, the inclusion of APAs should be considered as an alternative methodology of tax control, in which DGI and taxpayers must work together to successfully conclude the APAs agreement.
With the implementation of the APAs, the DGI and the taxpayers will be able to agree the valuation methodology during an agreed upon period of transactions between related parties with prior character. In the APAs, the methods will be selected, the comparable ones, the adjustments to the comparable ones and the future benefit estimates, among other aspects.
The DGI submitted this draft project to the professional associations related to taxation in the Republic of Panama, with the purpose of allowing the interested parties to make their comments and proposals. It is important to note that the DGI held several working groups with the unions to analyze and discuss the draft bill.
It is important to highlight that in the event that the taxpayer requests a unilateral APA from the DGI, this agreement will only have an impact on the Panamanian taxable income, but not in the other tax jurisdictions that have an impact on the transaction. Within the draft submitted by the DGI to the unions there is the possibility of signing agreements with those countries with which the Republic of Panama has signed an agreement to avoid double taxation. It should be noted that the subscription of this type of agreement with another jurisdiction reduces the risk of double taxation.
In the draft of APAs presented by the DGI, a procedure based on negotiation between the taxpayer and the administration is established in the area of mutual cooperation. The purpose of such negotiation is to agree on the methodology of valuation of inter-company transactions, following the arm’s length principle. The implementation of the APAs in the Republic of Panama, without a doubt, would mark a significant progress in the Panamanian Tax Law.
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