Marvelous Tapera 
TRANSFER pricing is increasingly becoming a focal point for tax authorities worldwide and Zimbabwe is no exception. The Zimbabwe Revenue Authority (ZIMRA) is actively working to prevent Base Erosion and Profit Shifting (BEPS).
With the region’s transfer pricing laws still developing, enforcement and compliance have become increasingly stringent. Zimbabwe serves as a key example of these evolving trends, especially in how it handles related parties cross-border transactions. The transfer pricing rules apply to local businesses engaged in cross border transactions with associated enterprises, engaged with parties in tax haven countries, as well as those conducting domestic intercompany transactions.
Zimbabwe introduced its transfer pricing regulations in 2019 through Statutory Instrument 109, aligning with the OECD’s BEPS initiatives. These regulations aim to ensure that profits are taxed where value is created, closing loopholes that facilitate profit shifting. However, unlike some other jurisdictions, Zimbabwe does not offer safe harbour rules, which provide protection or exemptions for smaller transactions. All intercompany transactions, regardless of value, must be thoroughly tested and justified for compliance. There are no agreed-upon fixed profit margins, making it essential for businesses to provide evidence of the arm’s length nature of their transactions.
In terms of reporting obligations, Zimbabwean businesses must document their intercompany transactions in a Local File but are not obligated to submit a Master File or Country-by-Country Report (CbCR) as seen in other countries. Taxpayers are to maintain contemporaneous documentation that substantiates their controlled transactions, ensuring compliance with the arm’s length principle. Transfer pricing documentation must be reported in English and is filed only upon request, within seven days of ZIMRA’s notification. Failure to provide adequate documentation can lead to significant penalties during audits. The Transfer Pricing Return must be filed with the ZIMRA alongside the annual Income Tax Return, requiring companies to disclose related-party transactions in a timely manner.
The country remains deeply rooted in anti-tax avoidance measures, particularly in relation to interest and management fees between related parties. These measures focus on deduction of expenditure that is incurred, supported by evidence of services, application of deduction limits and the general anti-tax avoidance rules. For instance, deduction of interest paid to a related party or non-resident person is limited to that incurred on a debt-to-equity ratio of 3:1. Interest on debt from local financial institutions and from a Government Credit Facility by a public entity is exempt from this rule, provided there is no collusion for tax avoidance.
Deductions on management fees paid to related parties are capped at 1% of the total deductible expenses of the paying entity and must be substantiated by services rendered. Excess interest expenses and disallowed management fees are further subject to a 15 percent Shareholders’ Tax, treated as a deemed dividend which overrides any Double Tax Agreement rates. The general deduction and limitation of deduction rules reinforce the commitment to minimising profit shifting and tax avoidance. The general tax anti-tax avoidance rule (GAAR) empowers ZIMRA to disallow any transaction which has no economic substance but mainly designed for securing a tax benefit. These anti-tax avoidance measures are not supplement but operate in parallel with transfer pricing rules, creating an opportunity for double taxation.
ZIMRA has ramped up its audits on intercompany transactions, particularly those involving management services, royalties and financing arrangements. The recent Nestlé case serves as a prime example of ZIMRA’s aggressive stance on transfer pricing enforcement. It highlighted ZIMRA’s emphasis on scrutinising deductions related to royalties, management fees and other related transactions paid to foreign affiliates, requiring companies to provide sufficient documentation to substantiate the arm’s length nature of these transactions. This case illustrates the complexities of ZIMRA’s audits and the necessity for businesses to maintain comprehensive documentation for their intercompany transactions. Failure to meet these standards can result in disallowed deductions and broader tax implications, including impacts on VAT and Customs Duty.
In a move to further streamline transfer pricing compliance, ZIMRA will transition to electronic Transfer Pricing returns through the TaRMS platform starting 1 October 2024. This digitalisation effort aims to reduce delays, minimise errors and enhance efficiency in the submission, review and audit of transfer pricing documentation.
As ZIMRA intensifies its scrutiny of transfer pricing practices, businesses must adopt a proactive approach to compliance. The heightened focus on documentation and the implementation of stringent penalties for non-compliance emphasise the need for companies to not only adhere to established regulations but also to stay ahead of potential regulatory changes. Maintaining comprehensive and contemporaneous documentation is essential for justifying intercompany transactions and avoiding complications during audits. With ZIMRA transitioning to electronic filing and committing to align with international standards, companies are entering a more rigorous compliance environment. By preparing effectively and understanding the complexities of transfer pricing in Zimbabwe, businesses can better manage this evolving landscape and mitigate risks associated with non-compliance.
l WTS Tax Matrix Academy will be hosting its inaugural Executive Tax Summit Africa, a premier gathering of business leaders, owners, and executives, from September 26 to 29, 2024 at Sun City Resort, South Africa. Tapera, founder of WTS Tax Matrix (Pvt) Ltd and CEO of WTS Tax Matrix Academy, writes in his personal capacity.
