The new Panama transfer pricing documentation rules are intended to comply with Organisation for Economic Co-operation and Development (OECD) guidelines.
Decreto Ejecutivo No. 958 was published in the official gazette No. 27,347 (7 August 2013), and contains the new guidelines to be applied in preparing transfer pricing studies and the supporting documentation as well as other transfer pricing rules.
Examine each transaction
The new decree reiterates that determinations of the arm’s length price are to be conducted for each type of transaction separately. However, if the transactions are too inter-connected or related, or if it is not possible to conduct a separate evaluation for each transaction, the arm’s length analysis can be made for groups of transactions or joint ventures.
Use of comparables
The new transfer pricing rules explicitly recognize the use of data from comparable transactions (i.e., information from independent parties) for two or more tax periods (either prior to or after the tax period under analysis).
Also, the rules allow evaluations of transactions with related parties using information from the tax period under analysis and from prior periods, and permit taxpayers to use averaging with respect to data from various tax periods in order to increase the reliability of the interval or range of values.
Comparability adjustments analysis
The new transfer pricing documentation rules authorize adjustments with respect to the taxpayer’s comparability analysis in order to increase the reliability and the degree of comparability of the results. Adjustments can be made, for example:
- To address inconsistencies in accounting practices between related parties
- To allow for results from segmented financial information
- To adjust for differences in functions, assets, and risks
- To consider differences in capital accounts (i.e., accounts receivable, inventory, accounts payable)
Thus, taxpayers need to allow for such documentation in their transfer pricing studies.
Internal vs. external comparables
The new decree provides standards for internal and external comparables.
Internal comparables concern all transactions conducted by the taxpayer with an independent third party (or by a taxpayer’s related party with independent third parties).
External comparables concern transactions of an independent third party, in a same or similar manner to the transaction between the taxpayer and a related party.
The new rules state a preference for the use of internal comparables over external comparables. When taxpayers are not able to use internal comparables, they need to document the reasons why this was not possible.
The transfer pricing decree expressly states that in searching for external comparables, taxpayers can use reliable commercial databases created by public information companies. If these commercial databases contain no information on Panamanian companies or with respect to comparable transactions within Panama, taxpayers can use information available to companies (or comparable transactions) in other countries.
Thus, the use of “secret comparables” is no longer allowed in preparing transfer pricing studies.
Transfer pricing methods
With respect to methods for assessing related-party transactions, the decree provisions refer to two transfer pricing methods—método de partición de utilidades and residual de participación de utilidades (e.g., the profit-split method and residual profit-split method).
Information, documentation as part of transfer pricing study
The decree provisions provide a list of items that must be included in the transfer pricing study, thereby standardizing the contents so that, for example, all transfer pricing studies must include:
- Documentation showing the direct and indirect relationship between related parties and the taxpayer
- Reasons for the choice of method(s) and the procedures for the method’s application
- Identification of companies selected (or not selected) as comparable transactions and if not selected, the reasons for rejection
- Identification of sources of information for comparable companies or transactions
- Details of the elements, quantification and methodology to make the necessary adjustments
The transfer pricing study and any additional information requested by the tax authorities must be provided in the Spanish language.
Read an August 2013 report (Spanish) [PDF 254 KB] prepared by the KPMG member firm in Panama: Se Reglamentan Disposiciones Sobre Precios de Transferencia
Contact a tax professional with KPMG's Global Transfer Pricing Services.