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Learn about Panama's precedent-setting transfer pricing ruling

Updated: Mar 15, 2023

Court ratifies tax adjustment for 39 million dollars in transfer pricing to a branch of a multinational oil company. How does this impact? Find out the scope in this analysis.

Among the tax controversies with the greatest economic impact at present are the problems surrounding the valuation of transactions that occur between members of a multinational group, when such transactions do not comply with the arm's length principle, which requires that for tax purposes, associated companies (better known as related parties) must agree their transactions as if they were independent parties operating under comparable conditions and/or circumstances.

The arm's length principle is based on the fact that when independent undertakings negotiate with each other, market forces normally determine the terms of their commercial and financial relationships. Therefore, the price and terms agreed, as well as the circumstances under which transactions between related entities are negotiated, should be consistent with those that would be agreed by independent enterprises in similar transactions in comparable circumstances.

The Panamanian tax system, through its Tax Code, adopted the arm's length principle in order to prevent the erosion of the tax base and the shifting of profits from Panamanian source income. In order to achieve this objective, the Panamanian Tax Code has undergone several reforms in recent years to achieve the efficient application of the arm's length principle and thus improve tax control in the area of transfer pricing.


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