Panama vs “Elec Distributor SA”, January 2025, Administrative Court, Exp. 026-2024

Category: Legality - Legitimacy - Constitutional, Limited Risk Distributor, Losses, Transfer Pricing Methods | Tag: , , , , ,
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Elec Distributor SA is a distributor of electronics that in 2014 bought all goods from related parties abroad and sold almost entirely to foreign customers, so only a small part of its income was subject to Panamanian income tax. It prepared a transfer pricing study using the Resale Price Method for goods and CUP for intercompany financing and concluded that its results were arm’s length.

The tax authorities audited the 2014 related party purchases, rejected the Resale Price Method as inadequately supported on comparability, applied the transactional net margin method with an operating margin benchmark, and increased Elec Distributor SA’s margin from –1.86 percent to 2.30 percent, issuing a supplementary tax assessment of about B/.546,700 plus surcharges.

Elec Distributor SA argued that its foreign operations were exempt from income tax and that Article 762-D limited transfer pricing to related party transactions that affect the corporate income tax base.

Judgment

The Administrative Court agreed with Elec Distributor SA that for 2014 the transfer pricing regime could not apply to exempt foreign income or be grounded solely on supplementary tax. It revoked the tax authorities’ assessment in full and cancelled the supplementary tax and surcharges, without ruling on the issue of the most appropriate method RPM or TNMM.

 
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Related Guidelines

  1. TPG2022 Chapter VI paragraph 6.198In a transfer pricing analysis where the most appropriate transfer pricing method is the resale price method, the cost-plus method, or the transactional net margin method, the less complex of the parties to the controlled transaction is often selected as the tested party....
  2. OECD COVID-19 TPG paragraph 38When performing transfer pricing analyses, the activities performed by an entity may lead it to be characterised as “limited-risk” where it has a relatively lower level of functions and risks. 20 Though the term “limited-risk” is commonly used, since the term is not...
  3. OECD COVID-19 TPG paragraph 39In all circumstances it will be necessary to consider the specific facts and circumstances when determining whether a so-called “limited-risk” entity could incur losses at arm’s length. This is reflected in the OECD TPG which states that “simple or low risk functions in...
  4. OECD COVID-19 TPG paragraph 40In determining whether or not a “limited-risk” entity may incur losses, the risks assumed by an entity will be particularly important. This reflects the fact that at arm’s length, the allocation of risks between the parties to an arrangement affects how profits or...
  5. OECD COVID-19 TPG paragraph 41When considering the risks assumed by a party to a controlled transaction, tax administrations should carefully consider the commercial rationale for any purported change in the risks assumed by a party before and after the outbreak of COVID-19 (and taking into consideration the...
  6. TPG2022 Chapter II paragraph 2.62This Part provides a discussion of transactional profit methods that may be used to approximate arm’s length conditions where such methods are the most appropriate to the circumstances of the case, see paragraphs 2.1 – 2.12. Transactional profit methods examine the profits that...


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