Zimbabwe first introduced transfer pricing provisions into law in 2016 by amending the Income Tax Act [Chapter 23:06] (“Income Tax Act”). Subsequently, in 2019 additional transfer pricing provisions were included in the Income Tax Act through the Finance Act, 2019. There was, however, a lacuna in the law regarding transfer pricing documentation. This fact notwithstanding, the Zimbabwe Revenue Authority (“ZIMRA”) was entitled to utilise existing sections of the Income Tax Act to request certain documentation in relation to transfer pricing- such as section 37 which states that the Commissioner of ZIMRA (the “Commissioner”) may request any fuller and further returns, and section 44 which empowers the Commissioner to request evidence under oath. The full documentary requirements vis-à-vis transfer pricing were, however, yet to be published by means of formally gazetted transfer pricing regulations.
On the 10th of May 2019 the much-anticipated Income Tax (Transfer Pricing Documentation) Regulations, 2019 [Statutory Instrument 109 of 2019] (the “Regulations”) were gazetted. The Regulations set out, inter alia, the documentation which a taxpayer is required to have in place, the language requirements, and the time limit for submission of documentation.
In terms of when the documentation must be in place, the Regulations require the taxpayer to have documentation in place at the time the statutory return is filed, which return must be filed annually. At a minimum, the documentation must contain information about the transaction, however, taxpayers are also required to:
- have in place an overview of their business operations;
- provide a full description of any group of companies that the taxpayer is a member of; and
- if the taxpayer is a member of a group of companies, details of shareholding and the role that each member of the group plays in the operations of the group.
The role that each member of the group plays is important because considerations such as how much value addition a member of a group contributed to a product/ service is a factor in transfer pricing, so the documentation must reflect this.
Taxpayers are further required to explain the transfer method utilised and why it was the most appropriate for the transaction. There are 5 (five) methods in the Income Tax Act (a full list may be found here), and each method is generally considered appropriate for certain types of transactions. The one that is generally considered to be the simplest is the Comparable Uncontrolled Price (“CUP”) method, however, this method may be inappropriate for more complex transactions. Taxpayers would, therefore, benefit from having their documentation prepared by someone who understands the nuances of the different methods and the circumstances in which each is appropriate.
The Regulations further require a comparability analysis of the transfer price on the one hand, and prices in transactions conducted at arm’s length, on the other, as is expected. This, however, is not as simple as it appears. A comparability analysis may be done internally, against what has been paid to unrelated entities for similar supplies, in which case the data is readily available. Where there is no internal comparable, however, an external analysis is required of similar transactions between unrelated entities. This will require the taxpayer to have access to a database of information on external comparable transactions. Databases such as Amadeus and Bureau van Dijk are utilised to compare financial information. The databases contain information regarding industries and transactions and allow for a comparability analysis. However, and this is particularly so viewed in the context of Zimbabwe’s foreign currency challenges, subscription to such databases may prove costly to a taxpayer who may wish to prepare their own documentation.
The Regulations also require details of adjustments made to ensure compliance. Adjustments are made for jurisdiction-specific factors which may justify a higher or lower price being charged. An example of a possible adjustment to take into consideration is a location saving made due to location-specific advantages from which the taxpayer has benefitted; or political or economic risk which may affect price. These factors may be taken into account for adjustments to the price charged.
Advance Pricing Agreements
The Regulations recognise the role played by Advance Pricing Agreements (“APAs”). To avoid transfer pricing pitfalls taxpayers may enter into APAs, which are agreements between a taxpayer and a tax authority or a number of tax authorities on an appropriate transfer pricing methodology for a set of transactions. The agreements are usually between 3 (three) to 5 (five) years in duration, and if a taxpayer adheres to the terms of the agreement, barring significant changes in the economic and legal landscape, then they will avoid transfer pricing adjustments and penalties. Taxpayers may wish to canvass the possibility of entering into APAs with relevant tax authorities for the purposes of certainty.
Ultimately, the Regulations have brought more certainty to the transfer pricing landscape in Zimbabwe. However, there are a number of practical implications for both taxpayers and ZIMRA which require interrogation and further dialogue between taxpayers, ZIMRA and tax professionals. Taxpayers may benefit from seminars and training in the area of transfer pricing in order to appreciate what is required by the Regulations and how they may fully comply. Should you believe that you may be at risk of non- compliance, or simply require more information about how to comply, kindly contact us for a transfer pricing questionnaire.
Author: Zinzile Mlambo