In 2019, Zimbabwe implemented significant reforms to its tax regulations by introducing mandatory transfer pricing (TP) documentation requirements through S.I. 109 of 2019. This legislation requires all taxpayers engaged in related party transactions, as well as those transacting with individuals or entities from designated tax haven countries, to prepare and maintain contemporaneous transfer pricing documents. The guidelines set forth by the Zimbabwe Revenue Authority (ZIMRA) are vital for ensuring compliance and enhancing transparency in cross-border transactions. This article will examine the necessary components of a compliant TP document under these regulations;
- An overview of the taxpayer’s business operations (history, recent evolution and general overview of the relevant markets of reference). This is basically so that the Commissioner General can have an understanding of what may drive the terms of trade in related party transactions. For instance, if a Zimbabwean mining firm sells minerals to its South African subsidiary, the Commissioner General may review business overviews to verify roles, risks, and pricing reflecting genuine operations, not profit shifting or tax avoidance schemes.
- A description of the corporate organizational structure of the group that the taxpayer is a member. This requirement seeks to verify and identify all related party entities. This may aid the Commissioner general in the discovery of potentially hidden transactions.
- A description of the controlled transaction(s), including analysis of the comparability factors specified in paragraph three (3) of the 35th schedule to the Income Tax Act. In TP we understand that before we conclude whether a transaction is at arm’s length or not, there are some factors that must be considered, and these factors are called the comparability factors. Therefore, there must be a mention of all considered comparability factors.
- An explanation of the selection of the most appropriate transfer pricing methods, and where relevant the selection of the tested party and the financial indicator. It is important to note that there must not only be a mention of the most appropriate transfer pricing method, however, there must be an explanation of why that particular method was selected. Moreover, financial indicators are also used to compare companies to their peers, therefore, this also assists in determining the arm’s length nature of a transaction.
- A comparability analysis including the process undertaken to identify the uncontrolled transactions. The comparability analysis ultimately determines whether a transaction is at arm’s length or not. Moreover, it must be stated why a certain transaction was deemed to be uncontrolled and why they were used as a basis of comparison in this analysis. This is to ensure that all basis of comparison are legitimate and trust-worthy.
- Industry analysis and economic analysis including budgets and projections relied on must be included in the TP Document. However, this information must only be included if it has any bearing on the determination of the arm’s length nature of a transaction. For example, if the manufacturing industry does not have a bearing on the performance of a mining company (a subsidiary), then information on the mining industry must not be included.
- Details of any advance pricing agreements or similar arrangements in other countries applicable to the controlled transactions. This means that the APAs taking place in other countries may contribute to the determination of the arm’s length nature of a transaction and must be included in the analysis.
- Lastly, a conclusion of whether the transaction is an arm’s length or not must be clearly stated for the TP document to be considered complete and compliant.
- If there is any other information that would need to be disclosed in the TP document that would contribute to the determination of the arm’s length nature of the transaction must be included.
At Baker Tilly, we assist businesses throughout Zimbabwe and the region in developing comprehensive transfer pricing documentation that aligns with all regulatory requirements. Partnering with us ensures your compliance with transfer pricing legislation at competitive rates. With the Commissioner providing only a seven-day window for documentation submission, timely preparation is essential. Avoid penalties and complications by choosing Baker Tilly to help you stay ahead and compliant.
References:
- Statutory Instrument 109 of 2019
- Section 98B arw 35th Schedule of the Income Tax Act.
Tax Consultant at Baker Tilly.
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