In 2013, “Panamá Fertilizer S.A.” purchased fertilisers and agrochemicals from affiliated companies and resold them in Panama. The total value of these purchases was approximately B/.22.1 million. In its transfer pricing study, the company treated its Costa Rican subsidiary as the tested party, applying the transactional net margin method. It argued that there were no suitable Panamanian comparables and that Costa Rica had similar functions and risks.
However, the tax authority rejected this, stating that the tested party had to be the Panamanian distributor. They considered Panamá Fertiliser S.A. to be a simple reseller, whereas they considered Costa Rica to be a more complex manufacturer and distributor. The tax authority applied the resale price method, using one Panamanian comparable based on a segmented division of a company listed on the Panama Stock Exchange. Based on this, it issued an additional tax assessment.
Panamá Fertiliser S.A. argued that the local comparable was not truly comparable, as it was much larger and had many more branches, employees, assets, and marketing functions, as well as selling many more products than just fertilisers. The company also defended its use of Costa Rica as the tested party under the OECD Guidelines, stating that its results were within the interquartile range of the Costa Rican comparables.
Judgment
The Administrative Court agreed with the tax authority that the tested party had to be Panamá Fertiliser S.A., and that the resale price method was, in principle, the correct method for a distributor. However, it annulled the assessment because the tax authority failed to respect due process. The tax authority had not properly informed Panamá Fertiliser S.A. that it was rejecting its comparables and replacing them with its own. Furthermore, it relied on a single comparable without sufficient transparency.