Documentary requirements for Transfer Pricing
On May 10, 2019, the Government gazetted the country’s final Transfer Pricing regulations under Statutory Instrument (SI) 109 of 2019. This SI specified the documentary requirements from a transfer pricing perspective.
With the SI, Zimbabwe formally introduced a transfer pricing regulatory regime and documentation requirement into Zimbabwean tax law. This article is intended to lay down the key elements of the new transfer pricing regime in Zimbabwe and our comments on the areas that companies’ management ought to deliberate to adhere in terms of the regulatory transfer pricing compliance.
Attribution of profits to a permanent establishment
Specific provisions have been introduced, which apply to any non-resident who has a permanent establishment (PE) that carries on a trade, profession, or business in Zimbabwe. The guidance on attributing income/loss to a PE is based on the Authorised OECD Approach.
ZIMRA has clarified that its long established source based principle of taxation will continue to apply to determine the chargeability of income or profits to Zimbabwean tax. Therefore, this provision will not limit or alter the conditions for charging profits tax, which means that only those attributable profits that have a Zimbabwean based source will be subject to tax in Zimbabwe.
The definition of PE for tax treaty countries is based on the PE article in Zimbabwean existing tax treaties, whereas for non-tax treaty countries, the definition is based on the OECD’s recommendations under BEPS Action 7.
Particular relevance to financial institutions, banks, and insurance companies that often maintain Zimbabwean branches, since the PE in Zimbabwe, was not specifically compensated in the past.
With the application of source based rules, only the sourced based profits (and not off-shore) related to the operations of the PE in Zimbabwe will be chargeable to tax. In other words, the application of the Authorised OECD Approach (AOA), in conjunction with the source based rules, may result in more profits for the entity that is subject to tax in Zimbabwe.
ZIMRA started implementation of this provision in 2016 when the Transfer Pricing regulations were put in place and reliance on anti-avoidance provisions set aside.
Arm’s Length Principle (ALP)
ZIMRA has been empowered to impose transfer pricing adjustments on either income or expense arising from non-arm’s length transactions between associated persons that lead to a potential Zimbabwean tax advantage. However, Zimbabwean legislation is unique in that it also encompasses the domestic related-party transactions in as far as they lead to tax differences; and are used for tax avoidance. The rules are effective from assessment year starting 1 January 2016.
Importantly, the applicability of the ALP is independent of the applicability of transfer pricing documentation. Therefore, transfer pricing arrangements of all the taxpayers, irrespective of documentation threshold that are inconsistent with the ALP, will have to be corrected.
Additionally, the ALP applies to all types of tax, including income tax, capital gains tax, and payroll tax. Zimbabwe adopted a source based income tax system, which is different from the comprehensive income tax regimes of several overseas’ tax jurisdictions whereby all the sources of income are aggregated for assessment purposes (resident based).
Treatment of intangibles
ZIMRA could impose a tax on the Zimbabwean taxpayers if they have carried out value creation activities, such as development, enhancement, maintenance, protection or exploitation (DEMPE) functions in Zimbabwe that contributed to any intellectual property (IP) held by an overseas related party.
The rule is applicable to assessment year starting January 1, 2016 and the Transfer pricing policy document is required to be in place at the statutory tax return’s next ﬁling date (Annual Income Tax return, 30 April 2020). The taxpayers should ensure compliance with the arm’s length principle and properly document the transfer pricing position of their IP strategy in view of the potential tax uncertainties that arise.
Transfer Pricing Documentation Requirements (SI – 109/2019)
Zimbabwe has not adopted the OECD recommended three-tiered documentation structure, comprising master-file, local-file and country-by-country (CbC) reporting. Zimbabwe has focused on the local-file for reporting purposes only excluding the other two files for now.
Also of note is that the Zimbabwean legislation does not include any exemptions with regards to who is supposed to prepare the Transfer Pricing Policy Document (TPPD) like what other countries have put across.
Considering the costs involved in preparing a TPPD, it would have been prudent for the tax authority to exclude small or insignificant transactions or rather basing their exemption on the turnover of companies.
TPPD -Local File (LF)
The LF is to be prepared in the English language and must be retained for a period of at least three years. Documentation shall be required to be provided to the Commissioner within seven days of written request being duly issued by the Commissioner.
The obligation of the taxpayer to provide this documentation is established without prejudice to the power of the Commissioner to request additional information that in the course of audit procedures the Commissioner deems necessary to carry out his or her functions.
Conditions for exemption from preparing TPPD under the Transfer Pricing regulations:
Advance pricing arrangements
The advanced pricing arrangement (APA) regime, which allows for unilateral, bilateral, and multilateral APA applications, is still to be put in place.
Penalties and non-compliance
If a taxpayer has adopted non-arm’s length pricing for its related-party transactions and is unable to demonstrate that it has exercised reasonable effort to determine the arm’s length price for such transactions, ZIMRA is empowered to impose a penalty by way of additional tax not exceeding 100% of the amount of the tax undercharged. The penalty for transfer pricing matters is less or equal to that imposed for incorrect.
Penalties for contravening transfer pricing documentation requirements
Evidence that the avoidance, reduction or postponement of the tax liability was a result of fraud 100% of shortfall
Lack of TP documentation to support related party transactions giving rise to an amended assessment 30% of the shortfall
Non-compliance with TP guidelines 30% of the shortfall
Taxpayer complied with the above but an assessment has been raised 10% of the shortfall
Dispute resolution mechanism
As jurisdictions, including Zimbabwe, begin to focus on the enforcement of transfer pricing laws and regulations, it could be reasonably anticipated that the result would be more disputes and double tax issues that would need resolution. To ensure effective resolution of these disputes, the regime provides for a statutory dispute resolution mechanism whereby:
• Any taxpayer can present a case to the tax authority and/or arbitration under a relevant tax treaty; and
• ZIMRA must give effect to any agreement reached with the other tax authority concerned in the course of arbitration.
It is, therefore, important for Zimbabwean entities to be well-coordinated with its related counterparts, to monitor the issues and progress of each other’s transfer pricing audits and to ensure that the concerned competent authority is duly notified. This would help in soliciting their involvement at appropriate moments for speedy and amicable resolution of disputes.
The deadline for applying for corresponding adjustments is not stated in legislation. However the Commissioner, shall after a request is made by the person resident in Zimbabwe, examine the consistency of that adjustment with the arm’s length principle provided for under section 98B of the Income Tax Act [Chapter 23.06], consulting as necessary with the competent authority of the other country.
If the adjustment proposed or made by the other country is consistent with the arm’s length principle both in principle and as regards the amount, the Commissioner shall make a corresponding adjustment to the amount of the tax charged in Zimbabwe to that person on those profits, in order to eliminate the economic double taxation that would result from the inclusion of the same profits in the taxable income of both that person and the associated person.
Issues to consider
It is expected that the tax authority will focus on transfer pricing in the coming years and the taxpayers are recommended to consider the following:
• Review the existing related-party transactions that may be subject to the new transfer pricing rules and revisit the existing transfer pricing policies, particularly for services that have not been compensated at arm’s length in the past;
• Maintain contemporaneous and robust transfer pricing documentation within the applicable deadlines.
Given the above, there does exist uncertainties as to the interpretation and practical application of the aforementioned transfer pricing provisions emanating from the regulations. Furthermore, the guidance is expected in the coming months from ZIMRA through a Transfer Pricing manual, which would provide further clarity.
With the introduction of the transfer pricing rules and enforcement of various tools to measure BEPS, the multinational enterprises operating in Zimbabwe we will have to be better equipped in terms of a robust documentation, which is not only accurate but also represents profits being in sync with the value chain.
With tax authorities having access to significant information, the challenges arising due to detailed scrutiny have a far-reaching impact on the multinationals. Companies should involve various stakeholders to revisit transfer pricing policies and tax structure positions with respect to their supply chains and use of IP.
Furthermore, the related-party transactions undertaken need to meet the arm’s length criteria to ensure compliance with local laws and plug any probable issues that may arise in future on account of PE.