The case concerns a Panamanian insurance company that ceded excess loss reinsurance premiums to a related party abroad in 2018.
Following a transfer pricing audit the tax authorities rejected the profit level indicator (PLI) and external comparable used in the Insurance SA’s study, replaced it with operating margin as the PLI, recalculated the arm’s length margin excluding other operating income, and issued an additional assessment of B/.30,626.06 in income tax and B/.3,675.13 in supplementary tax, plus surcharges.
Insurance SA argued in reconsideration and appeal that it had followed domestic rules and the OECD Guidelines, that its chosen PLI was appropriate for an insurance business with significant marketing and sales expenses, and that the tax authorities’ rejection of its key comparable based on alleged branch opening costs in 2016 was speculative and unsupported by the financial statements. It also claimed that its segmented analysis of premiums and ceded reinsurance costs showed a margin within the interquartile range of independent insurers.
The tax authorities upheld its own position, pointed to inconsistencies in the Insurance SA’s financial statements and segmentation, insisted that operating margin was the correct indicator, and maintained the 2018 income tax and supplementary tax adjustments.
Judgment
The Administrative Court did not decide the transfer pricing issues. Instead it found serious procedural defects in the audit process that violated due process. It noted that in the initial audit notice the taxpayer was not informed of the identity of the officials in charge or their superiors, contrary to Article 155(5) of Law 8 of 2010. The audit closing report was undated, referred only vaguely to alleged deficiencies, and did not clearly link findings to specific tax effects. Most importantly, the closing report stated that the audit ended on 16 August 2021, while the tax authorities’ additional assessment resolution was dated 12 August 2021, meaning the assessment was issued before the audit was formally closed. The Court also found that the tax authorities never issued the mandatory regularisation proposal after the closing report as required by Article 208 of the Tax Procedure Code, thereby denying the taxpayer an opportunity to comment on adjustments at that stage. Taken together, these omissions were held to breach constitutional due process and to trigger absolute nullity under Article 298 of the Tax Procedure Code.
The Court therefore declared the additional assessment resolution of 12 August 2021 and its confirmatory resolution of 27 December 2023 absolutely null and void, cancelled the 2018 income tax and supplementary tax assessed, and ordered closure and archiving of the file, noting that the taxpayer cannot be audited again for the same tax and period.
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