With effect from January 1, 2016, the government adopted transfer pricing legislation. A variety of provisions addressing transactions between associates were included in the transfer pricing legislation. The main stipulation of transfer pricing laws and regulations is that between associates or related parties must be fair and represent the same conditions as would if transactions were done by unrelated parties. According to the arm’s length concept, parties should charge each other the same price for a given commodity whether they are linked or not. The legal requirements for the documentation that associated individuals must maintain has remained a murky area that has not been made clear by the legislation. The Income Tax (Transfer Pricing Documentation) Regulations, 2019, which have been gazetted by the government through SI 109 of 2019 require every taxpayer to keep documentation confirming that the terms of their transactions with related parties for the applicable tax year are consistent with the arm’s length principle. The regulations, which are the subject of this article, went into effect on May 10, 2019.
Transfer pricing is the price charged for the transfer of property, goods, or services between associated entities. The OECD TP Guidelines define “TP” as “the prices at which an enterprise transfers physical goods and intangibles or provides services to associated enterprises”.
Many jurisdictions require contemporaneous documentation as part of their transfer pricing laws. Documentation is considered contemporaneous if it is in place on the filing date of the statutory tax return. Each taxpayer should try to calculate transfer prices for tax purposes in line with the arm’s length principle, using information that is reasonably accessible at the time of the transaction. Thus, a taxpayer should normally assess whether its transfer pricing is suitable for tax reasons before establishing the pricing and should validate the arm’s length character of its financial performance when completing its tax return. The use of OECD Transfer Pricing Guidelines, OECD Model Tax Convention, UN Transfer Pricing Guidelines, the Income Tax Act, SI 109 of 2019 and the Finance Act Number 2 of 2015 inclusively has been seen handy in providing all the necessary information on TP. The new legislation, SI 109 of 2019 gives detailed documentation requirements as follows:
Documentation must include an overview of the taxpayer’s business operations (history, recent evolution and general overview of the relevant markets of reference) and organizational chart (details of business units or departments and organizational structure). A description of the corporate organizational 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 transactions);description of the controlled transaction(s), including analysis of the comparability factors specified in the Income Tax Act on the selection of most appropriate transfer pricing methods, and, where relevant, the selection of the tested party and the financial indicator. Selection of the transfer pricing method is confined to Comparable Uncontrolled Price, Resale Price Method, Cost Plus Method, Transactional Profit Split Method and Transactional Net Margin Method.
Comparability analysis follows and it includes; a description of the process undertaken to identify comparable uncontrolled transactions; an explanation of the basis for the rejection of any potential internal comparable uncontrolled transactions (where applicable); a description of the comparable uncontrolled transactions; analysis of comparability of the controlled transactions and the comparable uncontrolled transactions and, details and explanation of any comparability adjustments made; details 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 the 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.
Meanwhile, because it focuses on domestic transactions, our TP rules are out of step with the rest of the globe. Imposing transfer pricing legislation on domestic transactions incurs administrative costs and creates problems. To begin with, there is anti-tax avoidance legislation that existed prior to transfer pricing legislation, and this legislation grants the Commissioner broad powers to adjust prices or income where the parties’ transactions, arrangements, or operations are found to be inconsistent with the arm’s length principle or not reflective of market prices. The second concern is that domestic transactions are taking place in a country that has the same tax rate which in turn does not give a permanent tax advantage to taxpayers. Thirdly, transfer pricing documentation is prohibitively expensive to generate, particularly for small and medium-sized firms, who account for the vast majority of taxpayers in Zimbabwe.
Further, the new transfer pricing laws did not identify revenue or transaction value or taxpayer revenue criteria above which transfer pricing paperwork would be required. As a result, all taxpayers who conduct transactions with associates are required to retain contemporaneous transfer price evidence.
The Commissioner may seek documentation at any time, and if so, it must be submitted within seven (7) days after the day the request is issued in English. Taxpayers involved in connected transactions should consequently create and submit transfer pricing documents to avoid fines. However, the authorities may need to reconsider the necessity for transfer pricing evidence in domestic transactions, as it may be prohibitively expensive for SMEs to obtain transfer pricing documentation. Meanwhile, if the authorities maintain transfer pricing laws on domestic transactions, thresholds for documentation retention should be established.
In conclusion, transfer pricing documentation is an important part of doing business in Zimbabwe. It helps to ensure that multinational companies are paying the correct amount of taxes and it also allows for better compliance with international accounting standards. Transfer pricing documentations plays an essential role in helping businesses meet both national and international regulatory obligations while also providing them assurance against potential penalties arising from incorrect filing procedures resulting inn inaccurate computation off taxable incomes.