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The pillars of new international taxation

Galíndez, Medrano y Asociados. Precios de Transferencia en Panamá. Imagen

For a little over a decade, the Republic of Panama has been incorporating rules in the field of international taxation to align itself with the global standards governing the matter.

In this regard, Panama has been part of the Inclusive Framework of the Base Erosion and Profit Shifting Project (BEPS) of the Organisation for Economic Co-operation and Development (OECD) since 2016.

To meet the objectives of this project, Panama reviewed and amended the regulations of certain special regimes, expanded the transfer pricing documentation to be submitted by taxpayers, and reviewed and amended its tax treaties.

However, due to the increasing digitisation of business models, driven particularly by the health crisis and its post-pandemic effects, the priority of the OECD and the G20 is to address the challenges of the Digital Economy, which constitute Action 1 of the BEPS Project, through two pillars.

The theoretical work and fundamental ideas behind the two pillars were particularly developed during 2019, 2020 and 2021.

Subsequently, in October 2021, the declaration of the Inclusive Framework containing the action plan, commitments and dates for the implementation of the two pillars is published. To date, 138 countries, including Panama, have adhered to this declaration.

The first pillar focuses on allocating a multinational group's share of total income to each jurisdiction in which it operates using a three-factor model, in order to address the increasing difficulties in applying current transfer pricing methods to novel, profitable business models for which there are no comparable market prices. In its implementation phase, the companies that would be subject to the first pillar are multinationals with global revenues above 20 billion euros and profitability above 10%, excluding extractive industries and regulated financial services.

The first factor in the model, called Amount A, is a portion of the residual profit and may be allocated to an end-market jurisdiction when the multinational group earns at least €1 million in that jurisdiction, or at least €250,000 for countries with a GDP of less than €40 billion. This is especially important for developing countries, as it will allow them to be compensated with a portion of the excess profits that were previously transferred to other jurisdictions in overcompensated activities.

The second factor in the model, or B Amount, is the portion of group profits that is allocated to routine marketing and distribution functions performed in each country.

The third key factor for the functioning of the model is the streamlining of the dispute resolution mechanisms set out in Action 14 of the BEPS Project. In the event of a dispute in relation to Amount A, this should be resolved in a mandatory and binding manner.


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