“Its all about Transfer Pricing “
⛏️ Analysis of the Proposed Quoted Price Method (QPM) for Mineral Transfer Pricing
The proposal to amend the 35th Schedule of the Income Tax Act to include the Quoted Price Method (QPM) as an approved transfer pricing method for minerals exported from Zimbabwe is a targeted measure aimed at securing the country’s tax base from potential profit shifting by multinational mining corporations.
Effective January 1, 2026, this rule will mandate that transactions involving mineral exports to related parties must be benchmarked against publicly available, independent international commodity prices.
1. The Core Objective: Curbing Profit Shifting
A. Addressing Under-invoicing
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The Problem: Multinational mining companies often sell minerals to related, offshore entities (e.g., a trading hub in a low-tax jurisdiction). Without strict regulation, there is a risk of under-invoicing, where the Zimbabwean entity sells the mineral at an artificially low price to the related party, shifting profit out of Zimbabwe and reducing its taxable income (Corporate Income Tax). The related party then sells the mineral at the true market price, realizing the profit offshore.
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The Solution: The QPM directly combats this by requiring the use of verifiable, independent benchmarks. By referencing the prices from reputable global exchanges—the London Bullion Market Association (LBMA), the London Metals Exchange (LME), or the Shanghai Metals Market (SMM)—the “arm’s length price” is objectively determined, leaving little room for subjective pricing and manipulation.
B. Enhancing Tax Base Certainty
The QPM provides ZIMRA with a definitive, objective standard to audit and assess the taxable income of mining companies. This greatly reduces the ambiguity and compliance disputes that often arise with subjective methods like the Comparable Uncontrolled Price (CUP) method. The use of a quoted price is generally considered the most reliable application of the CUP method for commodities.
2. Impact on the Mining Sector and Compliance
A. Stricter Compliance Burden
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Mandatory Reference: Mining taxpayers exporting to related parties will no longer have the discretion to choose a different transfer pricing method (e.g., Resale Price Method or Cost Plus Method) if the QPM is applicable. They must use the designated exchange prices.
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Documentation and Timing: Companies will need robust systems to document the exact price quoted on the relevant exchange (LBMA, LME, or SMM) at the “pricing date” of the transaction. This date is critical and must be consistent with the actual conduct of the parties. Clear evidence of the price-setting policy and the date/time reference used must be maintained.
B. Challenges with Price Fluctuation and Comparability
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Timing Differences: Commodity prices are notoriously volatile. The price quoted on the exchange at the time of a contractual agreement may differ significantly from the price at the time of shipment, final assay, or invoicing. Clear rules will be needed to specify the exact date, time, and quality adjustment to be used for the transfer price to ensure fairness. The OECD guidelines, which this proposal aligns with, suggest that in the absence of reliable evidence, the pricing date may be deemed the date of shipment.
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Commodity Specificity: The listed exchanges cover a wide range of metals and bullion (LBMA for gold/silver/platinum/palladium; LME for base metals like copper and nickel). However, the QPM may be difficult to apply to highly processed minerals or those that lack a direct exchange quote. For minerals sold as concentrates (e.g., copper concentrate) or unrefined bars (doré), the quoted price must be adjusted for differences in quality, transport costs (e.g., Freight On Board vs. Cost, Insurance, and Freight), treatment, and refining charges, which requires detailed analysis.
3. Alignment with International Trends
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BEPS Alignment: The mandatory use of commodity price reference methods is in line with guidance issued by the Organisation for Economic Co-operation and Development (OECD) on the transfer pricing of commodities (specifically, the guidance incorporated under BEPS Actions 8-10).
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Global Standard: By referencing these widely accepted global benchmarks, Zimbabwe is adopting an international standard used by other resource-rich economies to ensure that a fair share of the value created from its natural resources is taxed within the country.
Conclusion
The Quoted Price Method for mineral exports to related parties is a powerful and necessary tax safeguard for Zimbabwe’s mining sector. While it imposes a stricter compliance regime on taxpayers, its primary impact is to secure the taxable base by eliminating the opportunity for profit shifting through under-invoicing, ensuring that export prices align with verifiable international market rates.
The effectiveness of this proposal will depend on ZIMRA issuing clear practice notes detailing:
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The specific minerals to which the QPM must be applied.
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The permissible adjustments for quality differences, shipping, and treatment costs.
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The acceptable criteria for determining the pricing date (e.g., date of contract vs. date of shipment).
Analysis of the five main Transfer Pricing Methods recognized globally by the OECD (and generally adopted in Zimbabwe’s 35th Schedule), followed by a specific breakdown of how the LBMA price is used for gold transactions.
🌍 The Five Main OECD Transfer Pricing Methods
Transfer pricing methods are designed to determine the Arm’s Length Price—the price that would have been agreed upon by two independent parties dealing with each other at market rates. They are broadly categorized into Traditional Transaction Methods and Transactional Profit Methods.
I. Traditional Transaction Methods (Preferred)
These methods look directly at the price or the gross margin of a controlled transaction (between related parties) and compare it to an uncontrolled transaction (between independent parties). The OECD prefers these methods when highly comparable data is available.
| Method | Focus/Principle | Best Suited For | Why QPM is a CUP |
| 1. Comparable Uncontrolled Price (CUP) | Compares the price of the controlled transaction to the price of an identical or highly similar uncontrolled transaction. | Homogenous products, like commodities, financial loans, or simple services, where market data is readily available. | The Quoted Price Method (QPM) is considered the most reliable application of the CUP method, as the price is derived directly from a highly public and comparable external benchmark (the exchange). |
| 2. Resale Price Method (RPM) | Starts with the price at which the related distributor sells the product to an independent third party. A market-based gross margin is then subtracted to arrive at the arm’s length transfer price for the initial intercompany sale. | Distribution companies that buy finished goods from a related manufacturer and resell them without significant further processing. | |
| 3. Cost Plus Method (C-P) | Starts with the supplier’s cost for goods or services in a controlled transaction. A market-based gross profit mark-up is added to this cost base to arrive at the arm’s length transfer price. | Manufacturers of semi-finished goods or providers of routine services where costs are easier to benchmark than prices. |
II. Transactional Profit Methods
These methods look at the net profits derived from the controlled transaction, as a comparable gross price or margin may be difficult to find or misleading.
| Method | Focus/Principle | Best Suited For |
| 4. Transactional Net Margin Method (TNMM) | Examines the net profit margin (e.g., net operating profit to sales, costs, or assets) realized by an enterprise from a controlled transaction and compares it to the net margin of independent enterprises engaged in comparable activities. | Routine functions like contract manufacturing, limited-risk distribution, or simple support services. This is the most commonly used method globally. |
| 5. Profit Split Method (PSM) | Determines the combined profit (or loss) from controlled transactions and then splits that profit between the related parties based on their relative functional contributions (assets used, risks assumed, and functions performed). | Highly integrated transactions where both parties contribute unique and valuable intellectual property (intangibles) and their contributions cannot be easily separated and benchmarked individually. |
🥇 Using the LBMA Price for Gold Transfer Pricing
The London Bullion Market Association (LBMA) price is the globally recognized benchmark for gold, often serving as the starting point for the mandatory QPM for gold exports.
1. The LBMA Gold Price Benchmark
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What it is: The LBMA Gold Price is an electronic, centrally cleared auction administered independently by ICE Benchmark Administration (IBA).
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When it is set: The price is set twice daily (AM and PM fixings, around 10:30 AM and 3:00 PM London time), providing a transparent and tradeable reference point used worldwide.
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What it represents: It represents the benchmark price for unallocated, loco London gold in US Dollars per fine troy ounce.
2. Required Adjustments for Transfer Pricing
While the LBMA price is the foundation, Zimbabwean gold exporters selling to a related party cannot simply use the quoted price. They must make documented adjustments to ensure the final price truly reflects an arm’s length transaction, taking into account the specifics of the actual mineral being sold.
| Adjustment Factor | Description/Reason | Impact on Price |
| Timing | The price must reference the LBMA fix on the specific date and time the price risk is transferred (e.g., date of shipment or date of contract). | Crucial due to price volatility. |
| Purity/Fineness | The LBMA price is for Good Delivery gold (typically 99.95% fine). Gold exported as unrefined bars (doré) will require a discount to account for lower purity and the cost of final refining. | Discount |
| Treatment & Refining | The final price must factor in the costs of refining the unrefined product to the standard LBMA purity, as well as the associated charges. | Discount |
| Incoterms/Logistics | The LBMA price is “Loco London” (delivered in London). Adjustments must be made for freight, insurance, and other transport costs if the price is being set on an FOB (Free on Board) basis in Zimbabwe. | Discount/Premium |
By mandating the QPM, ZIMRA ensures that the mining company accounts for these international price standards, leaving less room for the exporter to reduce the price arbitrarily to shift profits offshore.
Would you like to explore the compliance and documentation requirements for Zimbabwean companies applying the QPM, or discuss the difference between the TNMM and Profit Split Method in more detail. Get in touch with our TP department.
