This week I’d like to draw your attention to a Resolution of the Administrative Tax Court of Panama of 9 July 2021, which set a precedent for transfer pricing in Panama.
Many thanks to Miguel Medeiros at Sol Petroleum for highlighting the case and for sharing his thoughts on it. As always, we’re extremely grateful for the feedback we receive from friends and fellow members of the international corporate structuring community.
The case concerned Pfizer and confirmed a TP adjustment of 19.5 million for the years 2013 and 2014, relating to transactions between associated entities in Panama and Costa Rica. The decision of the Tax Court resulted in income tax to be paid of 2.4 million. (All figures in USD.)
One of the central aspects was the Court’s rejection of the resale price method for transactions involving the sale of inventory for distribution. The decision of the Tax Court observed that the analysis presented by the taxpayer did not meet the assumptions required for this method.
Another important aspect of the decision was the rejection of costs for administrative services in accordance with the provisions of article 762-G "Administrative services received" of the Tax Code. This contemplates the deductibility of such expenses only when the services are actually rendered and produce an economic value for the recipient.
I’ll leave it to Miguel and others to comment on the detailed TP analysis of the case, but clearly one of the key factors was that the taxpayer’s intercompany agreements and other TP documentation did not adequately delineate and evidence the relevant transactions.
The following extract from the Tax Court’s decision was translated from the original Spanish using Google Translate, and then lightly edited for clarity.
“The following findings were identified:
Difference between the amount declared in the transfer pricing report (7%) as remuneration for services rendered, with respect to the information contained in the contract and addendum provided (5%);
Lack of response when additional documentation was required to justify the payments of corporate services received by the taxpayer.”
If you’ve been following LCN for a while you’ll know that these are two themes that we return to again and again. Intercompany agreements are often one of the first pieces of evidence that tax administrations request when carrying out a TP audit. If those agreements don’t match the TP policies, it can become significantly more difficult for taxpayers to justify their positions.
Implementing appropriate intercompany agreements is therefore not just a one-off exercise: it’s an ongoing requirement to maintain up-to-date agreements which match TP policies, operational reality, and ownership of IP. We talk about this on our website and in our free guides, and they’re also important elements of our ICA health check service and many of our training seminars.
If the Coca-Cola case didn’t convince you that discrepancies between ICAs and transfer pricing policies can cause serious problems, this one surely will. Dare we suggest that Pfizer would have benefited from a health check?