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Court upholds transfer pricing adjustment to multinational pharmaceutical company

Updated: Mar 15, 2023

In recent years, the Directorate General of Revenue (DGI) has carried out audits in the area of international taxation, especially with regard to transfer pricing by resident multinational groups and/or those operating through a permanent establishment in the country, with the aim of protecting tax revenue and combating aggressive tax planning strategies in which intra-group transactions are the main protagonists.


With the application of the transfer pricing regime in the Republic of Panama, important controversial discussions have arisen regarding the methodology to be considered for the application of the arm's length principle, due to the fact that, as we have pointed out in previous publications, when transactions are carried out between related entities, these must be consistent with the commercial and financial conditions that independent entities would agree in comparable circumstances, as established by the arm's length principle.


In this opportunity, we will comment on the Background Resolution of the Administrative Tax Court of Panama (TAT) No. TAT-RF-066 of 9 July 2021, which also sets precedent on transfer pricing in Panama, which confirmed a transfer pricing adjustment corresponding to the periods 2013 and 2014 to a company in the pharmaceutical sector that resulted in an adjustment of 19.5 million dollars resulting in an Income Tax payable of 2.4 million dollars and 982 thousand dollars for Complementary Tax.

One of the central aspects of this controversy concerns the rejection of the resale price method (RPM) for the transaction of sale of inventory for distribution, which is used to determine the market value of an asset acquired from a related entity that is sold to an independent entity. This ruling notes that the analysis presented by the taxpayer does not meet the assumptions for the application of the method, because the taxpayer also sold to related parties abroad. It is important to note that if the taxpayer performs sales transactions to related parties, the MPR should not be used.


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