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Ruling adjusted transfer prices in technology company

Galíndez, Medrano & Asociados - Fallo ajustó precios de transferencia en Panamá

The Administrative Tax Court (TAT) of the Republic of Panama, through Resolution TAT-RF-006 of 19 January 2023, ratified the transfer pricing adjustment in the amount of USD 1.4 million applied by the Directorate General of Revenue (DGI) to the value of the distribution operations of technology products, carried out by a taxpayer with related parties abroad during the 2013 tax year for not being in accordance with the arm's length principle, i.e., with the market price or value.

The transfer pricing adjustment applied by the DGI and ratified by the TAH was based on the following considerations:

The finding of inconsistencies existing between the amounts of the transactions declared in the Transfer Pricing Report and the sworn income tax return corresponding to the 2013 tax year.

Objection to the inclusion of the "Other Income" line by the taxpayer in the calculation of the operating margin as a profit indicator for the purposes of the application of the Transactional Net Margin Method (TNMM).

Rejection of companies selected by the taxpayer as comparables for use in the application of the TNMM. Based on the business description and financial information of the selected companies, the DGI argued that there are companies that are not comparable because they have substantial functional differences or are in exceptional circumstances that affect comparability (holding companies, restructuring processes, recurring losses, unavailable financial information, etc.).

Objection to the adjustments made by the taxpayer to the financial information of the companies selected as comparable. This was on the grounds that such adjustments were justified with insufficient information and without an analysis of the comparability between the accounts payable, accounts receivable and inventories of the taxpayer and the companies selected as comparables.

Subsequently, the taxpayer requested the reversal of the adjustment made by filing an Appeal for Reconsideration. Among the arguments expressed by the taxpayer in this new phase were the controversial aspects mentioned above, in addition to new elements presented extemporaneously, such as its financial statements segmented under US GAAP and, subsequently, under International Financial Reporting Standards (IFRS). In addition, the taxpayer argued that its operating result was higher than the consolidated operating result of the corporate group to which it belongs.

The administrative contentious phase ended with a Confirmatory Resolution, which was subsequently ratified by a decision of the TAH, where the court established new jurisprudence on transfer pricing by stating the following considerations:

It is important to differentiate between the income obtained from the taxpayer's own business operations and the operations that generate the income reported under the "Other Income" line. In this sense, the TAH reiterated that the "Other Income" line should not be taken into account for the calculation of the operating margin. Likewise, the TAH reiterated the DGI's objection regarding the inconsistencies in the segmentation criteria that were applied by the taxpayer, rejecting their use because they distorted the quantitative analysis.

The consolidated financial statements of the group record the results of operations carried out by each member of the group. Therefore, there could be differences generated in terms of markets, economic conditions, functions, etc. Therefore, the TAH reiterated that the consolidated profitability cannot be claimed to be an indication that the taxpayer's transactions have been agreed at arm's length.

Regarding the rejection of 2 companies selected as comparables, the TAH reiterated the DGI's position not to consider them for such purpose for different reasons, among them, their results reflected significant recurrent losses, they were in the process of restructuring and they did not have financial information available for the year under review.

Finally, with respect to the application of comparability adjustments made by the taxpayer, the TAH reiterated the need for the taxpayer not to make adjustments automatically, but to demonstrate how such adjustments improve comparability.


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