Due to globalization, many developing countries have increased the opening of borders for business with international companies. Such cross-border business has helped significantly in economic development, whilst also growing immensely in intra-group business transactions due to large amounts of foreign direct investment. Meanwhile there has been an exponential growth in tax issues that have been arising from profit shifting by multinational enterprises (MNEs) from high tax jurisdictions to tax havens in order to avoid or minimize tax payment. This is presenting a significant risk on tax revenues for a number of developing countries as they are restricted from collecting tax on profits earned in their countries. Gaps and mismatches in international tax rules can allow the shifting of profits to no or low-tax locations where the business has little or no economic activity. These activities are referred to as base erosion and profit shifting (BEPS). Because of poor technology and weak systems among other reasons, African governments have not been prepared enough to repel the BEPS activities of multinational enterprises, more evidently these governments continue to lose a great deal of their revenues through transfer pricing mismatching. The Illicit Financial Flows report by Global Financial Integrity estimated that Africa lost an estimated US$1.8trillion between 1980 and 2008 while an estimated US$50billion to US$80billion is lost annually through illicit financial flows. The illicit financial flows include amongst other things abusive transfer pricing by MNEs.

What is transfer pricing?

Transfer pricing is a field of taxation that refers to the rules and methods for pricing transactions within and between enterprises under common ownership or control. It involves a set of substantive and administrative regulatory requirements imposed by governments on certain taxpayers. Due to the potential for cross-border controlled transactions to distort taxable income, tax authorities in many countries can adjust intra-group transfer prices that differ from what would have been charged by unrelated enterprises dealing at arm’s length. According to the Organisation for Economic Co-operation and Development (OECD), the arm´s length principle provides that “where conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly”. Over the past years, some companies including large digital economy companies have exploited the complexities of transfer pricing in order to lessen their tax burdens by shifting profits. These practices result in revenue losses for tax authorities. This has of late triggered comprehensive overhauls in transfer pricing legislations amongst developing countries, Zimbabwe included.

OECD Transfer Pricing Guidelines

Intra-group mispricing is one of the issues identified when the OECD released its base erosion and profit shifting (BEPS) action plan in 2013 to ensure that profits are taxed where economic activities are carried out and value is created. Compliance is an area of magnitude and importance in transfer pricing, which obliges the taxpayer to keep documented evidence on related-party transactions and to submit such documentation upon request. Appropriately documenting intercompany transactions to comply with rules and legislation is imperative in managing tax risk. Most African countries have no official guidance regarding the frequency and process of preparing transfer pricing documentation. The statistics of the OECD on the implementation of the three-tier documentation approach stipulated in BEPS Action 13 (Local file, Master file and Country by Country Reporting) illustrates that Africa has the least number of countries, which have adopted this approach so far.

Although a large number of developing countries have adopted and enforced transfer pricing rules, there are consistency challenges. For example rules regarding: transfer pricing methods to be used, legal requirement to prepare documentation as well as documentation submission deadlines all differ by country. Such variations make transfer pricing prone to disputes and audits. The establishment of global transfer pricing standards and methods could be one way of minimizing the mismatches that develop across different jurisdictions. Additionally, adherence to the OECD Guidelines would enable international consistency thereby creating a worldwide structure and promoting international trade. The majority of African countries have developed TP regulations that are in line with the OECD.

The OECD developed its OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations in 2010 in order to harmonize international transfer pricing policies and practices. Moreover, the OECD created the OECD Development Centre and OECD´s Task Force on Tax and Development with the main aim to support developing countries on transfer pricing matters. In addition, the UN complemented the OECD guidelines by issuing their UN Transfer Pricing Manual in 2011, which provides transfer pricing guidance to developing countries. The African Tax Administration Forum (ATAF) is also among the predominant organizations working towards addressing the practical challenges hindering the process of transfer pricing development in Africa.

Although several other international organizations have taken action to address the issues of BEPS, many developing countries lack the administrative and technical resources needed to enforce proposed recommendations. Additionally, there are several other issues hindering the process of transfer pricing development for a number of countries in Africa. Some of the issues include but are not limited to:

  • Differences in TP policies and knowledge of tax authorities.
  • Lack of extensive regulations regarding transfer pricing e.g. Zimbabwe added a 35th Schedule as a guidance for transfer pricing in the Income Tax Act in 2016.
  • Insufficient funds for investment into technology and personnel.
  • Tax policies that are specific to particular industries e.g. mining.
  • Difficulties in accessing information required for comparability.

The incapacity by African countries to deal with transfer pricing issues has left them at the mercy of MNCs who manipulate and rip them through their sophisticated ownership and operating schemes.


Despite the transfer pricing challenges faced by developing countries, it should be noted that, there is remarkable progress in the implementation of transfer pricing rules and regulations in Zimbabwe. However, the Zimbabwean scenario is even more complicated and deterrent to foreign direct investment due to potential double dipping transfer pricing legislation because of the existence of the original anti-tax avoidance rules which have not been repealed.