An adjustment for FY 2013 and 2014 had been issued to a pharmaceutical company in Panama “Pharma Distributor S.A” that resulted in an income adjustment of 19.5 million dollars, which in turn resulted in additional taxes of 2.4 million dollars. The resale price method had been used by Pharma Distributor S.A. to determine the market value of an asset acquired from a related entity that was sold to an independent entity. This method was rejected by the tax authorities based on the fact that the analysis presented by the taxpayer did not meet the requirements for application of the method. The tax authorities instead applied a TNMM. The tax authorities also rejected tax deductions for expenses purportedly paid for administrative services due to the absence of supporting documentation. Provisions of article 762-G “Administrative services received” in the Tax Code in Panama contemplates tax deductibility for such expenses exclusively when services have actually been rendered to the benefit of the recipient. Decision of the Court The Court held in favor of the tax authorities. The Court ratified the position of the tax authorities regarding the non-deductibility of the expense paid for administrative services. In addition, the Court’s resolution indicates inconsistencies and imprecision in the delineation of the transaction within the comparability analysis, selection and application of the Resale Price Method, concluding that the level of comparability presented in the supporting documentation would be inadequate for application of the method. It was also indicated that Pharma S.A assumed operating expenses in excess of those of simple distributors. Hence Pharma Distributor S.A. should be characterized as a fully-fledged distributor and be compensated for the additional functions performed and risks assumed. Due to these methodological inconsistencies, the Court agreed that the TNMM – as suggested by the tax authorities – was the more appropriate method in the case at hand. Click here for English translation Click here for other translation ...

SARL SRN Métal’s business is trading in industrial metal and steel products. Following an audit of the company for FY 2011 to 2012 and assessment was issued related to VAT, Transfer Pricing and Withholding Tax. In regards to transfer pricing, the administration considered that (1) the sales of goods made by SRN Métal to B-Lux Steel, established in Luxembourg, were invoiced at a lower price than that charged to the company’s other customers and (2) that commissions paid to Costa Rica – a privileged tax regime – were not deductible as SRN Metal did not provided proof that the expenses corresponded to real operations and that they are not abnormal or exaggerated. The company requested the administrative court of Strasbourg to discharge the assessments. This request was rejected by the court in a judgement issued 29 October 2019. This decision of the administrative court was appealed by the company to the Supreme Administrative Court Judgement of the Supreme Administrative Court The Appeal of SRN Métal was rejected by the Court. Excerpts related to sales of goods to B-Lux “In order to establish a transfer of profits resulting from a reduction in the selling price of goods sold to B-Lux Steel, the department examined twenty sales transactions carried out by the applicant company with French customers at arm’s length from it. The administration also examined, within the framework of administrative assistance to the Luxembourg authorities, fifteen resale transactions by B-Lux Steel of products acquired from SRN Métal. This examination revealed that the margin charged by SARL SRN Métal for sales to B-Lux Steel was significantly lower than that charged to its other customers, without this difference being explained by the conditions of sale, the nature of the products sold or the situation of the customers. By merely alleging, without further clarification, that the results of the administrative assistance would have shown that it charged a higher margin for transactions carried out in Luxembourg, SRN Métal does not usefully challenge the evidence gathered by the department establishing the existence of a transfer of profits to Luxembourg by reducing the selling price of its goods. “It is true that SRN Métal intends to justify the lower prices charged to B-Lux Steel by its commercial interest in winning market share from Luxembourg customers and by the need to make sales to French customers limited by a credit insurance ceiling, through B-Lux Steel. However, it did not provide any evidence to support these allegations. Consequently, the administration was right to subject the profits thus transferred to Luxembourg to corporation tax. “ Excerpts related to commissions paid to Casa Vi.De.Sa.Ro in Costa Rica “The administration reintegrated into the applicant company’s taxable profits for 2011 and 2012 the sums it paid as commission to a company established in Costa Rica. It is not disputed that the company Casa Vi.De.Sa.Ro was not subject in Costa Rica to taxation on the profits it made abroad on account of the commission in question. Consequently, it is for the applicant company to prove that those commissions corresponded to real transactions and that they are not abnormal or exaggerated.” “In order to justify the reality of the business transactions which Casa Vi.De.Sa.Ro carried out on its behalf, the appellant company reiterates its argument that those commissions were intended to enable it to obtain the clientele of Arcelor Mittal Dunkerque. However, the applicant company, which does not even have a contract signed with the disputed company, does not provide any basis for its allegations. Although the applicant company maintains that it deducted exactly the same commissions in respect of other years and that the department admitted them on the occasion of another audit of the accounts, such a circumstance is not in itself sufficient to establish the reality of the services at issue during the period audited. Consequently, the administration was right to reinstate these commissions in its taxable profits.” Click here for English translation Click here for other translation ...