Marvelous Tapera 
Zimbabwe introduced transfer pricing legislation on January 1, 2014 that is meant to forestall transfer pricing in transactions involving associates.
These complement the “old rules”, i.e. section 23 and 24 of the Act.
Unlike the old rules, which are meant to address transfer pricing issues in transactions involving non-residents, the new rules are both domestically and externally focused. The new rules however, still have their roots in anti-tax avoidance.
Meanwhile, transfer pricing methods were introduced through Finance Act no 2 of 2015. The transfer pricing methods were adopted from the OECD Transfer Pricing Guidelines for Multinational Enterprises.
The guidelines provide a set of criteria to be employed to assess comparability between controlled and uncontrolled transactions (characteristics of products/services, functions performed by each party taking into account the assets used and risks assumed, contractual terms, economic circumstances and business strategies).
The transfer pricing legislation imposes an administrative burden on taxpayers, especially those engaged in associate transactions, to maintain transfer pricing policy documentation to support their transfer prices.
Transfer pricing is complex and involves multiple international and domestic transactions, methodologies and comparisons. It is therefore, never that easy to comply with transfer pricing rules, because there is an onerous requirement to maintain documents to support judgments regarding chosen transfer pricing rule.
While is it accepted that it is difficult to comply with transfer pricing rules, the legislature has introduced transfer pricing regulations that are meant to simplify the transfer pricing laws.
The laws included therein comprise among other issues, the nine steps in drafting contemporaneous transfer pricing documentation. The effect of these regulations is that if a transfer pricing document is not consistent with the regulations it will not be considered as a transfer pricing document by the Zimra. These steps are modelled on the OECD Transfer Pricing guidelines and the UN Transfer Pricing manual.
In addition to the transfer pricing regulations, it is also proposed to make transfer pricing guidelines on the application of the provisions in Zimbabwe. Zimra has come up with transfer pricing notes that came early 2019.
The transfer pricing document must contain the following information: “an overview of the taxpayer’s business operations (history, recent evolution and general overview of the relevant markets of reference) and organisational chart (details of business units/departments and organisational structure); a description of the corporate organisational structure of the group that the taxpayer is a member (including details of all group members, their legal form, and their shareholding percentages) and the group’s operational structure (including a general description of the role that each of the group members carries out with respect to the group’s activities, as relevant to the controlled transaction(s)); description of the controlled transaction(s), including analysis of the comparability factors; explanation of the selection of most appropriate transfer pricing method(s), and, where relevant, the selection of the tested party and the financial indicator; comparability analysis, including; description of the process undertaken to identify comparable uncontrolled transactions; explanation of the basis for the rejection of any potential internal comparable uncontrolled transactions (where applicable); description of the comparable uncontrolled transactions; analysis of comparability of the controlled transaction(s) and the comparable uncontrolled transactions and, details and explanation of any comparability adjustments made; detail of any industry analysis, economic analysis, budgets or projections relied on; details of any advance pricing agreements or similar arrangements in other countries that are applicable to the controlled transactions; a conclusion as to consistency of the conditions of the controlled transactions with the arm’s length principle, including details of any adjustment made to ensure compliance; and any other information that may have a material impact on the determination of the taxpayer’s compliance with the arm’s length principle with respect to the controlled transactions.”
In terms of the OECD Transfer Pricing Guidelines for Multinational Enterprise, the critical documentation for arriving at arms’ length is contemporaneous documents. These are documents that show how the parties arrived at arm’s length price e.g. minutes, correspondences, bargaining agreements emails etc.
In other words, it is critical for taxpayers to prepare documents at the time of transacting with their associates, for instance, a contract prepared and signed before a deal is executed is likely to be given more value by the Commissioner than any other documentation arising after the transaction.
Lack of or poor documentation could result in taxpayer’s price being replaced by one that the Commissioner feels is more “suitable” in the circumstances. The taxpayer will be in an unfavourable position to rebut the Commissioner’s decision based on the fact that inadequate documentation was prepared.
An analysis under arm’s length principle generally requires information about associated enterprises involved in the controlled transactions, the transaction at issue, the functions performed, information derived from independent parties engaged in similar transactions or businesses. It is always important and critical to keep record of documents involved in negotiations. These would support the basis or rationale behind a particular transfer price.
In conclusion, taxpayers should understand that regardless of the lack or otherwise of documentation supporting a transfer price, Zimra would still need to make a determination on transfer pricing even if the information is incomplete. To this end, adequate record-keeping practices and the voluntary production of documents can improve the persuasiveness of its approach to transfer pricing.
Meanwhile, Matrix Tax School invites you to take part in the upcoming course Payroll Tax and Administration. The course will commences on January 13 to February 8, 2022 online through the Zoom Portal.
Tapera is the founder of Tax Matrix (Pvt) Ltd and chief executive of Matrix Tax School. He writes in his personal capacity.
