TAX NEWS - 2010

Panama Tax: Panama approves transfer pricing legislation

Panama's legislature has approved a proposal to introduce transfer pricing regulations. Under the regulations, transfer pricing rules would be adopted to regulate transactions between related companies. The regulations will follow the arm's length principle, whereby prices for transactions between related parties should be similar to what they would have been had the parties to the transaction been unrelated. The executive branch still needs to sanction the new law.

According to the text of the regulations, transfer pricing rules will apply only when there is a tax treaty in force between the countries of residence of the related parties. Panama has negotiated double taxation agreements with Barbados, Belgium, France, Italy, Mexico, the Netherlands, Qatar, and Spain. However, ratification by both countries is required for the treaties to enter into force, and all of Panama's treaties are pending ratification.

The regulations also provide that to ensure that taxpayers will comply with the proposed transfer pricing rules, detailed documentation and information supporting an arm's length transfer price must be made available to the tax authorities by way of a technical study. The study must provide sufficient analysis to sustain the conclusion that operations between the related parties comply with the arm's length principle and the methods established in the proposed regulations.

The regulations list as acceptable methods the comparative uncontrolled price (CUP) method, the resale price method, the cost plus method, the profit split method, and the transactional net margin method.