This case concerns a transfer pricing adjustment made to a Panamanian air freight logistics company that is part of a global aviation network. For the 2015 tax year the company provided air freight services and related logistics to its foreign related parties under group agreements, and applied the Transactional Net Margin Method (TNMM) with return on total costs as the profit level indicator. The transfer pricing study treated the Panamanian entity as the tested party and concluded that a 2 percent net margin on total costs was consistent with the arm’s length range derived from nine foreign comparable companies.
The intercompany transactions analysed included the provision of air freight services to group companies, reimbursements within the network, commission payments to the group parent for account management, and intra group loans and deposits. For the air freight services the taxpayer applied TNMM on total costs, while for some other transactions, such as commissions, it used the CUP method based on publicly available Deutsche Post tariffs.
The tax authorities accepted TNMM in principle but rejected eight of the nine comparables used in the taxpayer’s study. It constructed its own arm’s length range based effectively on a single remaining comparable and recalculated the taxpayer’s return on total costs, concluding that the actual operating result was a loss of B/.6,523, equivalent to a negative margin of about 0.01 percent, rather than the approximately 2 percent profit reported in the study. On that basis the DGI adjusted the taxpayer’s margin to 5.27 percent, within the interquartile range it derived, and issued an additional assessment of B/.475,402.16 in income tax and B/.62,817.78 in complementary tax, plus surcharges for 2015.
The taxpayer appealed, arguing that its original set of nine comparables satisfied the functional and risk profile of an air freight logistics provider and that the DGI had improperly narrowed the sample. It maintained that the group transfer pricing policy of targeting a 2 percent net margin on total costs for the Panamanian entity was consistent with the range obtained in the study. It also contended that reimbursements, commissions and intercompany loans were priced at arm’s length, pointing to the use of CUP for commissions and to a proper search for comparable loan transactions.
During the proceedings the Tax Administrative Court ordered expert accounting evidence. The experts confirmed that TNMM with return on total costs was an appropriate method for the air freight services and, using the taxpayer’s broader set of comparables, determined an arm’s length interquartile range with a median of about 3.17 percent. They concluded that any transfer pricing adjustment should be made to that median rather than to the 5.27 percent margin proposed by the DGI, and that the reimbursements under analysis were consistent with the arm’s length principle.
Judgment
The Court ruled in favor of “Logistics SA” and cancled the assessment of additional taxable income.
On method selection the Court confirmed that TNMM is expressly recognised in Article 762 F as an authorised transfer pricing method and that using net margin on costs as the profit level indicator is consistent with Panamanian legislation and OECD guidance. Since the tax authorities had accepted TNMM, the dispute centred on the comparability analysis rather than on the method itself.
The Court held that a comparability analysis under TNMM cannot treat the choice and rejection of comparables as a purely discretionary exercise of the administration. It accepted that finding independent companies that closely match a specialised aviation logistics operator is difficult in practice and that comparability is not an exact science. However, it stressed that the tax authorities could not simply discard most of the taxpayer’s comparables without a robust functional and economic justification and then construct an arm’s length range effectively from one remaining company.
In the Court’s view both the taxpayer and the administration share the burden of establishing the arm’s length nature of the transactions. While taxpayers must provide a coherent transfer pricing study and supporting documentation, the tax authorities must also support any adjustments with sufficiently reasoned selection and rejection of comparables. In this case the Court found that the administration had not met that burden, because it did not adequately demonstrate that the eight rejected comparables were functionally non comparable or economically unreliable, and yet used the outcome from the narrowed sample to justify a margin significantly above both the taxpayer’s target and the expert median.
The Court accepted the expert analysis that supported a median margin of around 3.17 percent as better grounded in a realistic set of comparables and consistent with TNMM as defined in Article 762 F. It also noted that the tax authorities itself had acknowledged the difficulty of obtaining perfect comparables for this type of business and that, in such circumstances, a larger sample that is reasonably similar is preferable to a very narrow set.
As regards the other controlled transactions, the Court took into account that for certain items such as commissions and loans the taxpayer had used methods and criteria that the tax authorities broadly accepted, including CUP based on published tariffs and accepted qualitative criteria for financial transactions. The central economic impact of the assessment was therefore the adjustment to the air freight margin, which rested on the contested comparables.
In its operative part the Tax Administrative Court decided not to declare the tax authorities resolutions null for procedural reasons but to revoke them on the merits. It held that the additional assessments for income tax and complementary tax for 2015 based on the 5.27 percent margin could not stand because the administration had not carried out a sufficiently robust comparability analysis in line with the arm’s length principle and the requirements of Article 762 F.
The court
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