Prospects of post-BEPS transfer pricing in Panama

The analysis and compliance with transfer pricing in Panama is in a process of transformation, as tax rules and tax practices in the country are adjusted to the standards proposed by the BEPS project of OECD. The cooperation and communication between different actors and the knowledge of the implications of the changes will be essential for a proper evolution.

Transfer pricing and international taxation have gained importance in recent years in the area of taxation because of the major changes and developments that have arisen from the BEPS [1] project of the Organization for Economic Co-operation and Development (OECD). These changes have also affected Latin American countries and other developing countries that have the task of adjusting to them and participate in discussions on the subject as a necessity to protect their tax base.

Although the BEPS project focuses on various aspects of international taxation, discussions and development on transfer pricing have received special attention because of the complexity of the issues addressed and the impact of the proposed changes on the tax administrations, multinational companies and tax advisors.

Implementing the actions 8-10 that address new methodologies and guidelines to ensure that the results of transfer prices are in line with value creation, and Action 13, which standardizes the transfer pricing documentation and introduce the “country-by-country” (CBC) report, have led multinational groups to rethink how to pay taxes in different tax jurisdictions. They have reviewed their transfer pricing policies in order to avoid adjustments to their tax bases if they fail to adjust their tax planning schemes to BEPS standards.

With regard to Action 13, multinational groups with consolidated revenues exceeding 750 million euros have been presenting the “country-by-country” report since 2017 in different jurisdictions. Subsequently, this report is automatically exchanged between the competent authorities through mechanisms of automatic exchange of information for tax purposes. This progressive implementation of Action 13 has provided information to tax authorities, to identify risks associated with intra-group transactions and enabled them to get an “overview” of the global value chain of the multinational groups.

It is also important to mention the impact of Action 5, which seeks to combat harmful tax practices, and recommendations of the report on harmful tax practices on special regimes, published by OECD in October 2017. These have resulted in changes several special regimes in different jurisdictions. These changes seek a better consistency between taxation of profit and the factor “economic substance”. This ensure that profits cannot be artificially transferred to offshore jurisdictions /regimes that do not create value.

However, the adoption of the BEPS standards in the Republic of Panama has also resulted indirectly in the modification of the scope of transfer pricing from the 2019 fiscal period. Taxpayers who have transactions with parties related in the Colon Free Zone, in the Oil Free Zone, in the Panama Pacific Special Economic Area, Multinational Corporations central offices, City of Knowledge or any other free zones, or in a special economic area established or to be created in the future, must comply with formal and material transfer pricing obligations.

Taxpayers who fall within the new scope must meet the test of substantial activities for each regime and the obligations of transfer pricing in accordance with the respective legal provisions to avoid penalties that could reach a sanction of up to one million dollars in case of omitting to submit the transfer pricing report.

In this regard, amid so many changes in the legal, methodological framework and practical aspects, it is essential to stay updated and improve communication and cooperation between the various actors in the field of taxation in Panama. This way, the evolutionary process of transfer pricing will generate positive results.

[1]The BEPS Project (OECD, Paris, 2013) to combat erosion of the tax base and the transfer of benefits. In English, “Base Erosion and Profit Shifting”.

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