A transfer pricing framework introduced into Zimbabwe’s tax laws as from 1 January 2016 broadly follows the OECD transfer pricing guidelines (although the UN practical manual on transfer pricing for developing countries also is mentioned in the legislation). The main features of the new rules are as follows:
- Where a person engages in a controlled transaction (i.e. a transaction with a related party), the amount of taxable income derived must be consistent with the arm’s length principle, i.e. the conditions that would have applied between independent parties under comparable circumstances.
- Comparability will be determined by taking into account the characteristics of the property/services, functions performed, assets owned and risks borne, contractual terms, economic circumstances and business strategies of each of the associated parties.
- Documentation supporting the arm’s length nature of intercompany transactions must be prepared and maintained, to enable the Zimbabwe tax authorities to ascertain whether a transaction was conducted in accordance with the arm’s length principle.
- In accordance with OECD principles, the supporting documentation must contain a detailed “functional analysis” and an “economic analysis,” including information on how the most appropriate transfer pricing method was selected and the application of the method, to demonstrate the arm’s length nature of the transaction and price.
- Traditional transaction methods (comparable uncontrolled price, resale price and cost plus methods) and profit-based methods (transactional net margin method and profit split method) may be used.
- Although the transfer pricing rules typically apply only with respect to foreign related parties, the legislation indicates that, in line with Zimbabwe’s anti-avoidance legislation, domestic transactions also may be subject to the rules.
- The transfer pricing principles also will apply where a Zimbabwe-resident person engages in a transaction with a person (whether or not related) resident outside Zimbabwe in a jurisdiction considered by the Commissioner General to provide a tax benefit in relation to the transaction. It appears that the aim of this section is to “red-flag” cross-border transactions between Zimbabwe and a low-tax jurisdiction (tax haven), particularly if the overseas entity lacks substance and significant “people functions.”