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It is common to hear the term "double taxation" used in a general and imprecise way, sometimes referring to it from a legal point of view, defined by the OECD in its Model Convention as the "result of the application of similar taxes in two or more States to the same taxpayer, in respect of the same taxable subject matter and for the same period of time". On other occasions, double taxation is referred to from an economic point of view when referring to situations where the same income or capital is taxed twice, during the same period of time, by different taxpayers. In the international sphere, the purpose of Double Taxation Conventions is to distribute taxation powers among the Contracting States and to establish mechanisms to resolve situations that may generate legal or economic double taxation.

In the case of transactions between related parties, where transfer prices do not correspond to what would have been agreed between independent parties, the Double Taxation Conventions provide, in the first paragraph of Article 9 "Associated Enterprises", for the possibility for a Contracting State to make an adjustment, called a primary adjustment, following the arm's length principle. This primary adjustment can lead to economic double taxation because the same income has already been taxed by the associated enterprise in the other State. 

It is for this reason that the second paragraph of Article 9 of the Conventions provides for the "correlative adjustment", which is nothing more than the adjustment that could be made by the tax authority of the second State to reduce the income in the portion that had been taxed in its jurisdiction but has now been imputed to the first State. In order to decide whether this is appropriate and to calculate the correlative adjustment by mutual agreement, the tax authorities should consult each other, if necessary, using the mutual agreement procedure contained in Art. 25 of the Conventions.


The Double Taxation Avoidance Agreements in force signed by the Republic of Panama provide for the correlative adjustment and the amicable procedure. Thus, it is understood that when there is a transfer pricing adjustment for a transaction covered by a treaty, the taxpayer is entitled to request the opening of an amicable procedure before the Directorate General of Revenue of the Ministry of Economy and Finance. Panama's Amicable Procedure Guidelines should be developed according to the recommendations contained in Action 14 "Making dispute resolution mechanisms more effective" of the OECD's BEPS Project, of which Panama is a member of the inclusive framework.

In the Republic of Panama, the Transfer Pricing Regime started in 2010 as a tax control mechanism for transactions carried out by a taxpayer located in Panama with its related parties abroad, when the country of the related party has an agreement signed with Panama. Subsequently, as of 2012, the scope of application was extended to all cross-border transactions between related parties. 

As of 2019, as a result of the recommendations of the "Report on harmful tax practices on special regimes" published by the OECD in 2017, Article 762-L of the Tax Code came into force, which extends the Transfer Pricing Regime to local transactions between related parties, provided that at least one of the parties is located in the Free Zones, Free Trade Zones, Special Economic Areas and Special Regimes in Panama. It should be noted that the subjection applies to all parties involved in the transaction.

Unlike cross-border transactions, in the case of transactions between two associated companies located in Panama, both parties have obligations and are audited by the Directorate General of Revenue. If the DGI makes a transfer pricing adjustment for one of the related parties involved in a transaction, there is currently no provision in the regulations for a correlative domestic adjustment. This means that we could face a problem of economic double taxation at the domestic level.



Considering that it is the Tax Administration itself that determines the transfer pricing adjustment for one of the parties, it is likely that this economic double taxation will be remedied in the short term through procedures by the Administration or at the request of the taxpayer once the primary adjustment is final. Either way, the transfer pricing documentation of the parties involved in the transaction will be key to the appropriateness of the domestic correlative adjustment and the ease with which it can be applied. 

With the entry into force of Article 762-L, the tax administration will have an overview of the group's activities at the local level, whereby economic substance will be key in the attribution of profits and the determination of transfer prices. In this regard, taxpayers and advisors should bear in mind the importance of assessing the tax risks of domestic intra-group transactions, reviewing consistency and coherence between different types of documentation and symmetry in the documentation of different group entities that carry out transactions between them.


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