Transfer pricing has become an important issue in international taxation as multinational groups expand globally, with related-party transactions often shifting taxable profits across borders. In response to BEPS concerns, tax authorities now closely scrutinise such arrangements. Central to transfer pricing is the arm’s length principle, which requires related parties to price transactions as if they were independent an approach embedded on article 9 of both the OECD and UN Model Tax Conventions.
Background and Legislative Developments
The Finance Act No. 9 of 2015 introduced updated transfer pricing rules under section 98B, referencing to both OECD and UN transfer pricing guidelines.
Formal documentation requirements were later introduced through S.I. 109 of 2019, making contemporaneous transfer pricing documents and the Transfer Pricing Return (ITF 12C2) mandatory, followed by further guidance issued under Public Notice 21 of 2020 which introduced the Transfer Pricing practise notes.
Who Must Prepare Transfer Pricing Documentation.
In terms of Statutory Instrument 109 of 2019 as read with section 98B of the Income Tax Act, the following taxpayers are required to prepare contemporaneous transfer pricing documentation:
- Any Zimbabwean entity transacting with related parties, as defined under section 2A of the Income Tax Act, whether locally or cross-border.
- Any Zimbabwe-resident company transacting with an entity located in a tax haven jurisdiction listed on the Transfer Pricing Return (ITF 12C2).
Documentation must be maintained contemporaneously and when requested by Zimra it is supposed to be submitted within 7 days of request
Consequences of Non-Compliance:
- Transfer Pricing Adjustments: ZIMRA may increase taxable income to align profits with the arm’s length principle, potentially causing double taxation in cross-border transactions.
- Penalties: Late submission of ITF 12C2 attracts a civil penalty of USD 30 per day, up to a maximum of 91 days (section 35(2)(b), Revenue Authority Act).
- Secondary Adjustments: Non-compliance may affect other tax heads, such as VAT.
- Short-Notice Risk: Failure to prepare documentation in advance can create compliance risks due to the seven-day submission requirement.
- Increased Costs: Non-compliance can lead to higher legal and advisory expenses, especially under audit or urgent preparation pressure.
- Reputational Damage: Failure to comply may negatively impact the entity’s public and professional standing
How Baker Tilly Can Assist
Baker Tilly provides the following services
- Preparation of contemporaneous transfer pricing documents.
- Completion of the transfer pricing returns (ITF 12C2).
- Provision of benchmarking services
- Staff and client training on transfer pricing
- Advisory on cross-border and domestic related-party structures
- Transfer Pricing Gap-analysis
- Zimra transfer pricing audit assistance
Partner with Baker Tilly today to secure your tax compliance for the future
References
- Income Tax Act [Chapter 23:06]
- OECD transfer pricing guidelines of 2022
- OECD model tax convention of 2017
Tax Consultant at Baker Tilly
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