The government introduced transfer pricing legislation with effect from 1 January 2016. The transfer pricing legislation made a number of provisions regarding transactions between associates. The key requirement of transfer pricing laws and rules is that transactions between associates or related parties should be at arm’s length. The arm’s length principle entails that the amount charged by one related party to another for a given product should be the same as if the parties were not related. What had remained a grey area, not clarified by the legislation is the documentation requirements to be maintained by associated persons. The government has through SI 109 of 2019 gazetted the Income Tax (Transfer Pricing Documentation) Regulations, 2019 which require every taxpayer to maintain documentation that verifies that the conditions in its transactions with related parties for the relevant tax year are consistent with the arm’s length principle. The regulations took effect from May 10, 2019, the date of their publication and are the focus of this article.
Law and Interpretation
Contemporaneous documentation is a requirement of transfer pricing laws in many jurisdictions. Documentation is considered to be contemporaneous if it is in place at the statutory tax return’s filing date. Each taxpayer should endeavour to determine transfer prices for tax purposes in accordance with the arm’s length principle, based upon information reasonably available at the time of the transaction. Thus, a taxpayer ordinarily should give consideration to whether its transfer pricing is appropriate for tax purposes before the pricing is established and should confirm the arm’s length nature of its financial results at the time of filing its tax return. However since this law was introduced in year 2016, there had not been any documentation prescriptions provided. The new regulations make detailed documentation requirements as will be discussed in this article. Documentation must include an overview of the taxpayer’s business operations (history, recent evolution and general overview of the relevant markets of reference) and organisational chart (details of business units or departments and organisational structure) together with a description of the corporate organisational structure of the group that the taxpayer is a member (including details of all group members, their legal form, and their shareholding percentages) and the group’s operational structure (including a general description of the role that each of the group members carries out with respect to the group’s activities, as relevant to the controlled transactions). Furthermore, the regulations require a description of the controlled transaction(s), including analysis of the comparability factors as well as an explanation of the selection of most appropriate transfer pricing methods, and, where relevant, the selection of the tested party and the financial indicator. Additionally, the documentation must provide detail of any industry analysis, economic analysis, budgets or projections relied on; details of any advance pricing agreements or similar arrangements in other countries that are applicable to the controlled transactions; as well as a conclusion as to consistency of the conditions of the controlled transactions with the arm’s length principle, including details of any adjustment made to ensure compliance.
Transfer Pricing for Domestic Transactions?
Meanwhile our TP rules are out of sync with the rest of the world because it also focusses on domestic transactions. The imposition of transfer pricing legislation on domestic transactions is administrate expense and presents complications. Firstly, there is anti-tax avoidance legislation that already existed prior to transfer pricing legislation and this legislation provides sweeping powers to the Commissioner General to adjust prices or income where the transactions, arrangements or operations between the parties are found not to be compliant with the arm’s length principle or not reflective of market prices. The second issue is that domestic transactions are being conducted in a jurisdiction with the same tax rate and conditions such that issues of profit or income shifting will not give rise to a permanent tax advantage to taxpayers. Rather, it will simply be a zero-sum game. Thirdly, transfer pricing documentation is very expensive to produce particularly for small to medium enterprises (SMEs) who form the bulk of taxpayers in Zimbabwe. In terms of the OECD Transfer Pricing Guidelines as well as the United Nations (UN) Practical Manual on Transfer Pricingfor Developing Countries (from which the Zimbabwean legislation largely borrow), taxpayers are not expected to incur disproportionately high costs and burdens in producing documentation and therefore require tax administrations to balance requests for documentation against the expected cost and administrative burden to the taxpayer of creating it. In addition, the OECD transfer pricing guidelines do not cover domestic issues as they focus on the international aspects of transfer pricing only. Where a taxpayer reasonably demonstrates, having regard to the principles of the OECD Guidelines, that either no comparable data exists or that the cost of locating the comparable data would be disproportionately high relative to the amounts at issue, the taxpayer should not be required to incur costs in searching for such data. That expensive documentation will be required of SMEs who may not afford it will rock at the core of the principles of taxation, chiefly the principle of Economy which requires costs of compliance to be at the lowest minimum and reasonable level. This problem is compounded by the fact that the new transfer pricing regulations did not specify thresholds in terms of revenue or values of transactions or taxpayers revenues above which transfer pricing documentation would be required. It therefore means that all taxpayers who engage in transactions with associates are obliged to keep contemporaneous transfer pricing documentation.
The documentation can at any time be requested by the Commissioner and if so requested, it must be submitted within seven (7) days from the date the request is issued in the English Language. Taxpayers with related transactions should therefore prepare and submit transfer pricing documentation in order to avoid penalties. However, the authorities may need to re-examine the need for transfer pricing documentation in respect of domestic transactions as it may be too expensive to have transfer pricing documentation by SMEs. Meanwhile if the authorities maintain transfer pricing regulations on domestic transactions then thresholds for maintenance of documentation should be set.