Marvelous Tapera 
THE 2020 tax year will be the second year Zimbabwean enterprises with intercompany transactions will be required to submit a Transfer Pricing (TP) return (ITF12C2).
This follows the introduction of TP legislation by the country in 2014. In terms of the law, intercompany taxpayers should determine their income tax liability using prices on transactions with their affiliates that meet the arm’s length principle.
Unlike other countries which only focus TP rules on international transactions, our legislation covers both the local and cross border transactions between related parties as well as transactions between the taxpayer and entities in tax havens.
The Statutory Instrument 109 of 2019 offers further guidelines on how taxpayers with related party transactions should document their transactions. It further impresses that such taxpayers should maintain contemporaneous documentation that verifies that the conditions in its transactions with their related parties for the relevant tax year, are consistent with the arm’s length principle.
This documentation requires companies to articulate consistent TP positions to enable the revenue authority (ies) to assess TP risks of the enterprises.
Contemporaneous documentation is a requirement of TP laws in many jurisdictions. Documentation is considered to be contemporaneous if it is in place at the statutory tax return’s filing date.
Businesses should endeavor to determine TP for tax purposes in accordance with the arm’s length principle, based upon information reasonably available at the time of the transaction.
It is important to note that the Zimbabwe TP rules reference both the Organisation for Economic Co-operation and Development (OECD) and United Nations (UN) transfer pricing guidelines.
There are however, instances where the Zimbabwe TP legislation or rules may deviate from the OECD and UN TP guidelines.
Of note is that the OECD guidelines recommend for the updating of the TP documentation every three years while in Zimbabwe there is a requirement to update the TP document annually. Businesses are therefore, urged to update their documents in order to comply with the local TP rules.
TP documentation however, is very expensive to produce particularly for small to medium enterprises (SMEs). In terms of the international guidelines, taxpayers are not expected to incur disproportionately high costs and burdens in producing documentation.
Tax administrations are expected to balance requests for documentation against the expected cost and administrative burden on the taxpayer.
Despite the law on TP coming into force in 2014, the TP return was only filed for the first time in Zimbabwe in 2020 in relation to 2019 year of assessment. The return was due on August 31, 2020 together with the Income Tax return and those that are yet to do so face the risk of penalties being imposed on them.
The Zimbabwe Revenue Authority (Zimra) can make an estimate of the tax liability based on its transfer pricing adjustments in the absence of the return.
Meanwhile, the information requested in the return assists revenue authorities to identify and assess potential risks on their tax bases. Businesses are encouraged to file the 2019 return, if they had not already done so, in order to avoid the consequences thereof.
In relation to the tax year ended December 31, 2020, both the income tax and the TP return are due on April 30 this year. Companies with intercompany transactions should therefore, be ready with their tax computations and returns by then. TP update is necessary for completing this exercise and where the conditions of the actual transaction differ from arm’s length conditions, adjustments should made on time.
The TP documentation update is triggered by a number of factors in respect of 2020 year of assessment. Firstly, the economic environment was very volatile owing to inflation and secondly, the impact of the Covid-19 pandemic took a toll on pricing and other economic conditions.
The adjustments can be effected on the taxable income or to the price paid or payable in the controlled transaction.
An adjustment to the price paid or payable can only be made by the taxpayer and not by the tax authority. In the first case, the adjustment is reflected in the calculation of taxable income only.
In the second case, the adjustment is reflected in the financial accounts, and thus, ultimately in the calculation of taxable income.
It is our view that Zimra may not grant an extension for the 2020 tax year, and this means that taxpayers should be ready with all their returns before the due date in order to avoid any penalties from the tax authority.
The TP landscape is developing fast, most developing countries’ revenue authorities are getting training, and consequently, they will be able to handle complex TP audits.
They will be able to effectively collect revenue for their governments, sometimes at the expense ill-prepared taxpayers. We have also seen an increase in the TP audits in recent times, and some jointly undertaken with revenue authorities of other jurisdictions in order to enforce compliance.
In conclusion, the taxpayer’s process of considering the TP documentation appropriate for tax purposes should be determined in accordance with the same prudent business management principles that would govern the process of evaluating a business decision of a similar level of complexity and importance.
● Tapera is the Founder of Tax Matrix (Pvt) Ltd and the chief executive of Matrix Tax School. He writes in his personal capacity. Matrix Tax School (Pvt) Limited hosts a webinar short course in Managing Tax Practice (Basic Theory & Practice) every Wednesday and Saturday.
