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Zimbabwe has closed loopholes in its transfer pricing legislation, in a development that will curb illegal foreign currency outflows amid reports US$1,1 billion could have been siphoned out through such practices. Through previous transfer pricing laws, Zimbabwe could have lost tens of millions in foreign currency as multinational corporations and exporters exploited loopholes in the legislation.
Transfer pricing refers to the rules and methods for pricing transactions within and between enterprises under common ownership or control. But for such transactions to be considered fair, they should be in line with the “arm’s length price for a transaction”, that is, the price of that transaction if it was on the open market.
And although the Zimbabwe Revenue Authority (Zimra) has not been able to quantify the extent of the forex losses, estimates have been put around US$1,1 billion.
In respect of the critical upgrade, Zimbabwe’s transfer pricing legislation now requires that every person who engages or will engage in a related party transaction, must submit a return to Zimra disclosing the details of the transaction or contemplated transaction. These transactions could be cross border or domestic in nature.
This compliance requirement was introduced by an amendment to the existing transfer pricing legislation (Section 98B of the Income Tax Act), which required taxpayers who engage in related party transactions in a year of assessment, to keep transfer pricing documentation supporting the arm’s length nature of the respective transactions and present such documentation to Zimra upon request.
Legislation to mitigate transfer pricing risk was already in place but there was no legal requirement to submit a Transfer Pricing return.
Zimra head of corporate communications Francis Chimanda, said the taxman was now better positioned to deal with the issue of transfer pricing.
“Indeed, we believe there could have been outward flow of money due to related party transactions, which are not at arm’s length due to lack of sufficient legislation to tackle transfer pricing issues.
“Zimbabwe Revenue Authority now has the relevant legislation to enforce under Sections 98A, 98B as read with the 35th Schedule of the Income Tax Act (Chapter 23:06),” said Mr Chimanda.
“Previously, before the legislation was updated, Zimra used to apply the anti-tax avoidance legislation under Section 98 of the Income Tax Act but the application was not effective. Tax cases on which the anti-tax avoidance legislation was applied went to court because taxpayers appealed the Commissioner General’s decisions which they were not agreeable to.”
All in all, the amendment of the country’s transfer pricing legislation entailed changes to provide for penalties, on a graduating scale, for failure to adhere to stipulated requirements; requiring taxpayers to submit annual returns showing transactions entered between controlled and/or associated enterprises; providing for Transfer Pricing Documentary Requirements, which will act as a guide to associated enterprises in the recording of transactions, in compliance with the Arm’s Length Principle; and Providing for Transfer Pricing Guidelines which will assist in the application and interpretation and simplification of transfer pricing legislation.
Tax experts, associate director and head of Transfer Pricing at Ernst & Young Fungai Vongayi and Josephine Banda, tax partner and head of the Ernst & Young Central Africa (Zimbabwe, Zambia and Zimbabwe) told The Herald Finance & Business that the review of the Income Tax Act in respect of transfer pricing will help the authorities to fight the problem.
“Tax avoidance or non-disclosure has been a concern for many tax jurisdictions around the world. As Africa is steadily making progress in becoming integrated within the highly complex and globalised tax environment, many structural measures are being put in place to mitigate tax leakage through tax evasion or avoidance. Disclosing incorrect information in the Transfer Pricing Return is an offence.
“As with the submission of annual Income Tax Returns, the public officer is liable for the information disclosed in the Transfer Pricing Return. Incorrect declaration in the Transfer Pricing return will result in an adjustment to the Taxable Income plus penalties and interest and in some instances prosecution of the public officer. The completion of the Transfer Pricing Return is therefore an obligation which requires due attention.
“The introduction of the requirement to submit a Transfer Pricing Return, will assist in making taxpayers appreciate the importance that the Government places on Transfer Pricing risk management,” they said.