Transfer Pricing News Issue 37 - December 2021

Supreme Court upholds transfer pricing penalty on a taxpayer in a special tax-exempt area

Panama’s Supreme Court of Justice issued a decision on 27 August 2021 in one of the first tax disputes involving a multinational operating within a special tax-exempt area in Panama (under the common denomination “Oil Free Zones”).

In 2014, the Panama tax administration imposed a USD 1 million penalty on the taxpayer, Chevron Panama Fuels Limited (formerly called Chevron Products Antilles Limited). The taxpayer was a Panamanian-based branch of a foreign subsidiary of the Chevron group operating within an Oil Free Zone in Panama. 

The penalty was imposed for failure to comply with transfer pricing obligations for fiscal year 2012. Specifically, the failure related to the obligation to file Tax Form No. 930, including a summary of all the taxpayer’s transactions with related parties during the fiscal year, and the obligation to provide Panama’s tax administration a full transfer pricing study, including both the functional and economic analysis of the taxpayer’s operations in Panama.  

The taxpayer challenged the penalty at the administrative level, including a reconsideration before the tax administration and a subsequent appeal before the administrative tax court. Both motions were denied because the penalty was determined to be issued in accordance with the applicable statutory provisions and regulations. Subsequently, the taxpayer filed a lawsuit before the Supreme Court of Justice seeking to annul and reverse the penalty imposed by the tax administration.

Supreme Court analysis

The supreme court’s discussion of the case centered on the tax benefits and exemptions granted to taxpayers operating in the special tax-exempt area in Panama known as Oil Free Zones (regulated under section 701-D of the Fiscal Code). The regime provides taxpayers a corporate income tax exemption on profits arising from reexporting operations and other transactions that benefit from the regime (such as sales to vessels crossing the Panama Canal and aircraft in international traffic, among others).

However, there is an additional layer of taxation assessed on those profits. The supplementary tax takes the form of an advance tax on undistributed profits equivalent to 2% of the net profits derived by companies operating within these special areas from taxable operations (considered local operations) and exempt operations (those considered export or other special operations). This supplementary tax is assessed and determined in the income tax return filed by companies (including those established in the special areas).

According to the Supreme Court, Section 762-C of the Fiscal Code defines “related parties” for transfer pricing purposes, Section 762-D requires that related parties conduct their transactions under the same terms and conditions that would be agreed between independent parties and Section 762-I requires the filing of Tax Form 930, including a summary of all related party transactions for the preceding fiscal period, which must be filed within six months after the close of the fiscal year. A 1% penalty assessed on the total amount of undisclosed transactions is imposed on taxpayers that fail to comply.

According to the Supreme Court, the taxpayer reported in its income tax return related party transactions generating revenue equal to approximately USD 595 million. However, the taxpayer did not file the required Form 930, arguing that its operations were treated as exempt operations and, therefore, were not subject to corporate income tax in Panama.

However, the Court sided with the tax administration, the decision of the administrative tax court and the opinion of the attorney general for public administration. In so doing, it concluded that the income tax exemption applicable to export operations will not be automatically construed as an authorisation for noncompliance with the transfer pricing requirements on related party transactions, which evidently have a direct impact on the taxpayer’s revenue, costs and profits, and consequently on the tax base of the supplementary tax. The Supreme Court thus dismissed the taxpayer’s lawsuit.


For taxpayers operating under any special tax-exempt area in Panama, it is important to note that a new version of Section 762-L of the Fiscal Code was enacted as part of the approval of Law No. 69 of 2019. The new text clearly establishes that, as from fiscal year 2019, all taxpayers operating within the Colon Free Zone, Oil Free Zones, Panama Pacific Special Economic Area, Multinationals Headquarters Regime, City of Knowledge or any other special area established in Panama or to be established in the future, will be required to comply with the transfer pricing statutory provisions and regulations.

Rafael Rivera