Recent amendments to Chapter IX of the Fiscal Code “Standard of Adaptation of Treaties to Avoid the Double International Taxation” will now reach any operation that a taxpayer in Panama has with its foreign related parties. Prior to the introduction of these amendments, transfer pricing documentation requirements in Panama only applied to cases where a tax resident in Panama had operations with a related party located in a country with which Panama has a double tax treaty in place.
The new legislation requests taxpayers to annually complete a transfer pricing tax return, disclosing information on the inter-company transactions engaged by the taxpayer during the fiscal year in question. Such transfer pricing tax return will need to be filed with the Panamanian Tax Authorities in the 6 months following the end of the fiscal year of the taxpayer. Furthermore, of great relevance is the explicit recognition and adoption in the introduced amendment of the OECD Transfer Pricing Guidelines published in July 2010, as well as those that may be published in the future by the OECD. The fines for not documenting an inter-company transaction or disclosing it incorrectly in the transfer pricing tax return are as high as 1% of amount of the inter-company transaction in question.
These amendments have entered into effect since their publication on August 28th, 2012.
What to expect from these amendments?
These recently introduced changes in the area of international taxation and transfer pricing are a remarkable statement for a traditional civil law country. Of significant interest is the position adopted by the Panamenian Tax Authorities for adopting dynamic soft law rules for immediate effect on tax assessments from 2012 onwards.
These amendments are part of a series of changes across the LATAM region in the area of transfer pricing. Like Panama, other countries in the LATAM region are making significant progress in the area of transfer pricing by aligning their transfer pricing regimes to international best practices. By providing more certainty in the area of transfer pricing, we expect to see an increase in the number of transfer pricing queries raised in LATAM as tax authorities strive to increase their taxable revenues.