How Transfer pricing could cost your business
Did you know that transfer of assets, services or goods on an intra-group level can have tax implications? Some businesses are found trapped and face challenges on how to respond to this issue. Henceforth, this article is centred on Transfer Pricing in Zimbabwe which was introduced in 2016 and further updated in 2019.
Transfer Pricing Overview
Transfer pricing refers to the pricing of goods, services, assets, or intangibles transferred between related entities, for example a parent company and its subsidiaries. In Zimbabwe, some companies are still reluctant and unaware of the tax implications of intra-company transactions. Therefore, companies are expected to incorporate the arm’s length principle when participating in intra-company transactions.
Arm’s Length Principle
The principle stipulates that related party transactions must be conducted at the same price and under the same conditions as if they were totally independent parties.
Legislation
The intra-company transactions are governed by Section 98B as read with the 35th Schedule to the Income Tax Act. With transfer pricing documentation requirements governed through S.I 109 of 2019 as read with OECD Transfer Pricing Guidelines. S.I. 109 of 2019 require taxpayers to maintain contemporaneous (updated annually) documentation of Transfer Pricing.
Tax Implications of Transfer Pricing
The enforcement of transfer pricing laws in Zimbabwe has several implications for businesses and these include the following.
- Penalties and Transfer Pricing Adjustments: Non-compliance may lead to transfer pricing adjustments, interest, and penalties. These include:
- 100% penalty of shortfall amount for a transfer pricing adjustment due to fraud or tax evasion.
- 30% penalty of shortfall amount for a transfer pricing adjustment where a contemporaneous transfer pricing document does not exist.
- 10% penalty of shortfall amount for a transfer pricing adjustment if transfer pricing document which compiles with TP regulations exists.
- Risk of Double Taxation: Improper pricing can result in profit adjustments in multiple jurisdictions without corresponding relief. If one jurisdiction adjusts profits upward while the other does not provide a corresponding downward adjustment, the same income can be taxed twice.
- Impact on Tax Planning: Transfer pricing directly influences how profits are allocated within a multinational group. Tax-efficient structuring must balance business operations with compliance to avoid aggressive tax planning which may trigger ZIMRA disputes or audits.
To mitigate risks and maintain compliance, businesses should:
- Maintain detailed transfer pricing reports substantiating management fees with cost-benefit analyses and benchmarking studies.
- Regularly review intra-group transactions to ensure prices align with independent market conditions.
- Seek expert guidance to interpret both Zimbabwean and OECD requirements.
- Stay informed on updates to OECD guidelines and local transfer pricing legislation.
How Baker Tilly Can Assist:
Baker Tilly provides comprehensive transfer pricing advisory and compliance services. Our team assists clients in:
- Preparing compliant transfer pricing documents.
- Conducting transfer pricing benchmarking studies.
- Training on Transfer Pricing Regulations
Through proactive planning and expert support, Baker Tilly helps businesses reduce exposure to transfer pricing risks while enhancing tax efficiency and transparency.
References:
- Income Tax Act (Chapter 23:06)
- S.I 109 of 2019 – Income Tax (Transfer Pricing Documentation) Regulations, 2019
- OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022
Tax Consultant at Baker Tilly
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