The Panamanian transfer pricing (TP) laws are aligned with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (the OECD Guidelines). TP rules are governed by the Fiscal Code of the Republic of Panama.
Arm’s Length Principle
In Panama, transactions with related parties must follow the arm’s length principle, meaning they must be valued as if they were made with independent parties under the same circumstances. These values will be reflected in the taxpayer’s income tax return using one of the methods allowed by law.
Related Party Definition
Related parties are defined as individuals or businesses where either directly, or indirectly, there is management, control, or ownership by a related party of another person or business. Permanent establishments (PE) are considered related parties to their home offices, other permanent establishments with the same home office, and any other relationship to the home office.
Transfer Pricing Methods
The methods that can be used to determine the arm’s length price in Panama are:
- Comparable Uncontrolled Price Method (CUP)
- Resale Price Method (RPM)
- Cost Plus Method (CPM)
- Transactional Net Margin Method (TNMM)
- Profit Split Method (PSM)
The selection of the methods is based on a hierarchy, with CUP, Resale Price, and Cost Plus being the preferential ones. If none of these can be applied to the complexity of operations or unavailable information, then TNMM or the Profit Split method will be applied.
Comparability Analysis
An important part of the transfer pricing compliance is the comparability analysis. Below is a summary of the main points regarding comparability analysis in Panama:
In practice, Panama follows the OECD Guidelines and applies the comparability analysis outlined in Chapter III, as regulated in the Ministerial Order, articles 5 and 7. This means that comparability adjustments can only be made when the application of that adjustment improves the comparability and reliability of the results and the legal framework also describes the considerations that a taxpayer considers in making the adjustments, including that the taxpayer must document all of their adjustments.
Panama’s legislator does not allow for the usage of secret comparables, but it states a preference for internal comparables over externals. When doing a comparability analysis, the Panamanian Tax Administration recommends using the inter-quartile range to determine if a transaction falls within the arm’s length range.
Documentation Requirements
Documentation requirements for transfer prices in Panama are based on the three-layer method of OECD. That means multinationals have to report the following to the French tax authorities:
- Master file;
- Local file; and
- Country-by-Country (CbC) report.
Master and Local Files
In Panama, all taxpayers subject to transfer pricing rules must prepare documentation in Spanish and file a disclosure report detailing their related-party transactions. This report must be submitted within six months after the end of the fiscal year and must include information on the nature, amount, and pricing of the transactions. Additionally, multinational enterprise groups may be required to provide more information about their transfer pricing policies, such as details on value chains, intangibles, intragroup services and financing, profit generators, business restructures, and risk allocation.
Country-by-Country Reporting
The CbC reporting in Panama is required for resident parent entities of multinational groups that have an annual consolidated revenue of over EUR 750 million. The CbC report must include key financial and tax data for each jurisdiction where the group operates. For instance, such information would include data on revenue, profit before tax, income tax paid and accrued, capital, employees, and tangible assets—along with a list of group entities and their business activities and tax jurisdictions. The report has to be filed electronically within 12 months following the end of the relevant fiscal year.
Advance Pricing Agreements (APA) and Mutual Agreement Program (MAP)
In Panama, advance rulings or pricing agreements are not available. Instead, the tax authority can proceed with the issuance of a guidance, which is not binding for the parties. However, since 2024, the law has introduced a new tax ruling procedure that allows any legal/natural subject to consult with the Tax Authority regarding questions related to the application of law in given circumstances.
Approach to Transfer Pricing Audits
In Panama, the tax authorities are actively auditing the compliance with transfer pricing policy and routinely enforce penalties. Taxpayers must submit transfer pricing documentation within 45 days of a request from the tax authority. Taxpayers have a variety of dispute resolution instruments available if the tax authority issues a proposed adjustment. For example, taxpayers may dispute the adjustment first by administratively reviewing the proposed adjustment before the General Directorate of Revenue and then subsequent appeals to the Tax Court, and finally, judicial review before the Supreme Court’s Third Chamber. If the adjustment is upheld, the taxpayer must pay the additional tax amount and a 10% surcharge for the additional tax plus interest, which is around 1% per month.
Penalties
There is an explicit penalty for not delivering the transfer pricing report on time. That penalty is 1% of the amount of aggregated transactions (and up to USD 1,000,000) between the taxpayer and its related parties covered by the period.
Taxation at a Glance
Panama operates under a territorial tax system, meaning it only taxes income that is earned within its borders or connected to domestic business activities. Income generated from foreign sources, along with the expenses related to that income, is completely excluded from taxation. Consequently, a person’s or corporation’s residency status does not significantly influence their tax liability in Panama. Instead, residency primarily affects the way taxes are collected.
Its official currency is US dollars (USD), and the official name of the tax authority is called General Directorate of Revenue.
The table below provides a summary of the main taxation rates related to businesses:
Tax Type | Tax Rate |
Corporate Tax | 25% |
VAT | 7% |
Withholding tax on dividends to non-residents | 5%/10%/20% |
Withholding tax on interest to non-residents | 12.5% |
Withholding tax on royalties to non-residents | 12.15% |
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