ZIMBABWE’S transfer pricing rules are contained in sections 98A and 98B of the Income Tax Act (ITA). The rules came into force retrospectively as of January 1, 2014, because of an amendment to Act promulgated in April 2014.
The Income Tax Act was further amended, effective January 1, 2016, to clarify the transfer pricing legislation and incorporate guidelines in the 35th Schedule. Section 98A provides income-splitting rules for associated entities while section 98B generally applies to transactions between associates, employers, and employees that must be at arm’s length. This affects both cross-border and domestic transactions.
Under Zimbabwe’s transfer pricing rules, the Arm’s-Length Principle generally states that all controlled transactions must be in accordance with that rule. For this purpose, the rules introduce the concept of the arm’s-length range. If the relevant financial indicator for a controlled transaction falls outside the arm’s-length range, the Zimbabwe Revenue Authority (ZIMRA) may adjust it up or down to the range and issue a tax assessment accordingly. For adjustments that may result in double taxation, the rules provide for corresponding adjustments for both domestic and international transactions.
The following methods are accepted for determining an arm’s-length price: Comparable Uncontrolled Price Method, Resale Price Method, Cost-Plus Method, Transactional Net Margin Method, and Transactional Profit-Split Method. When reviewing a controlled transaction, ZIMRA is limited to using the transfer pricing method chosen by the taxpayer, as long as the taxpayer has satisfied the requirements of the transfer pricing laws in Zimbabwe.
For controlled transactions involving intangible assets, the Zimbabwe transfer pricing rules provide that the determination of an arm’s length price must take into account the position of all parties to the transaction, including the value and usefulness of the intangible assets to each party’s business.
In Zimbabwe, an uncontrolled transaction is comparable to a controlled transaction when there are no differences that could materially affect the financial indicator being examined under the appropriate transfer pricing method or, if such differences exist, when a reasonably accurate comparability adjustment is made to the relevant financial indicator of the uncontrolled transaction to eliminate the effects of those differences on the comparison.
To determine whether two or more transactions are comparable, the following factors should be considered if they are economically relevant to the transactions: the characteristics of the property or services transferred; the functions undertaken by each party in the transactions, taking into account assets used and risks assumed; the contractual terms of the transactions; the economic circumstances in which the transactions take place; and the business strategies pursued by each of the associated persons in relation to the transactions.
Through Statutory Instrument 109 of 2019, Zimbabwe adopted the Income Tax (Transfer Pricing Documentation) Regulations, 2019, which requires that every taxpayer involved in related party transactions maintain documentation verifying that all transactions with related parties during the relevant tax year are consistent with the arm’s-length principle. The regulations took effect on May 10, 2019. From January 1, 2019, non-compliance with transfer pricing rules can result in following: A penalty equal to 10 percent of the shortfall in tax liability when the transactions are not at arm’s length but contemporaneous transfer pricing documentation is available; a penalty equal to 30 percent of the shortfall if the taxpayer does not comply with the transfer pricing rules, including when contemporaneous transfer pricing documentation does not exist; and a penalty equal to 100 percent of the shortfall if it is evident that there is tax evasion or a fraudulent scheme was in place.
Companies that are trading with those that are based in any of the following countries must also prepare and submit the transfer pricing documents: Andorra, Anguilla, Antigua & Barbuda, Aruba, Bahamas, Bahrain, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Cook Islands, Cyprus, Dominica, Gibraltar, Grenada, Guernsey/Sark/,Alderney, Isle of man, Jersey, Liberia, Liechtenstein, Luxembourg, Maldives, Malta, Marshall Islands, Mauritius, Monaco, Montserrat, Nauru, Netherlands, Antilles, Niue Panama, Samoa, San Marino, Seychelles, Singapore, St Lucia, St Christopher (St Kitts) & Nevis, St Vincent & the Grenadines, Tonga, Turks & Caicos, US Virgin Islands, Vanuatu and other similar countries.
Zimbabwe transfer pricing rules also require taxpayers who are trading with related parties to submit the transfer pricing return (ITF 12C2), failure to submit the return on time will result in a penalty of US$30 per day.
Zimbabwe’s transfer pricing rules are out of sync with the rest of the world because they focus on domestic transactions in addition to international arrangements. Zimbabwe’s legislation borrows from both the OECD transfer pricing guidelines and the UN Practical Manual on Transfer Pricing for Developing Countries. Therefore, tax administrations must balance requests for documentation against the expected costs and administrative burdens that the taxpayer will incur in creating the files. Also, the OECD transfer pricing guidelines do not cover domestic issues as they focus only on the international aspects of transfer pricing.
Zimbabwe transfer pricing regulations do not establish thresholds in terms of the revenue or value associated with specific transactions or general taxpayer revenue thresholds above which transfer pricing documentation rules apply. This means that all taxpayers who engage in transactions with associated enterprises are obliged to keep contemporaneous transfer pricing documentation.
Ultimately, the transfer pricing rules have brought more certainty to the transfer pricing landscape in Zimbabwe. However, there are a number of practical issues such as transfer pricing benchmarking data that require further dialogue between taxpayers, ZIMRA, and tax professionals. By Simbarashe Hamudi
l Hamudi is a tax partner at Baker Tilly Central Africa, based in Harare, Zimbabwe. He can be contacted at +263 775 399 536 or simbarashe.hamudi@bakertilly.co.zw