Transfer Pricing Rules in Zimbabwe

In the modern globalized economy, the movement of goods, services, and capital between related business entities is more common than ever. If you are a parent company with subsidiaries, or if you exercise control over other businesses, you are no longer just managing operations; you are navigating a complex regulatory landscape known as Transfer Pricing (TP).

In Zimbabwe, the Zimbabwe Revenue Authority (ZIMRA) has significantly tightened the reins on how related parties price their transactions. This article provides a simplified yet deep dive into the Zimbabwean Transfer Pricing rules, the concept of the “Arm’s Length Principle,” the interplay with International Financial Reporting Standards (IFRS), and the specific legislative requirements you must follow to stay compliant.

1. What is Transfer Pricing and Why Does it Matter?

Transfer Pricing refers to the pricing of transactions between “associated persons” (related parties). These transactions can include the sale of physical goods, the provision of management services, the licensing of intellectual property, or the provision of intercompany loans.

The primary concern for tax authorities like ZIMRA is “profit shifting.” If a Zimbabwean company sells a product to its foreign sister company at a price significantly below market value, the profit stays with the foreign company, and Zimbabwe loses tax revenue. Conversely, if a foreign parent overcharges its Zimbabwean subsidiary for management fees, the Zimbabwean taxable profit is artificially reduced.

To prevent this, Zimbabwe (following OECD guidelines) enforces the Arm’s Length Principle.

The Legal Framework in Zimbabwe

Zimbabwe’s TP landscape is anchored in the Income Tax Act [Chapter 23:06]. Key provisions include:

• Section 98B: This is the heart of TP legislation in Zimbabwe. It empowers the Commissioner of ZIMRA to adjust the taxable income of a taxpayer where a transaction between associated persons does not reflect the Arm’s Length Principle.
• The 35th Schedule: Introduced to provide detailed guidelines on how the Arm’s Length Principle should be applied, how methods are selected, and the comparability factors to be considered.
• Statutory Instrument 109 of 2019 (SI 109/2019): These regulations prescribe the documentation requirements. It mandates that taxpayers maintain “contemporaneous documentation”—meaning your TP policy must be ready at the time you file your tax return, not just when an audit starts.

 

Do You Have Control? Insights from the Act.

According to Section 98B and the 35th Schedule of the Income Tax Act [Chapter 23:06], “Control” is not just about owning 51% of shares. It is defined broadly to capture any relationship where one party can influence the financial or operational decisions of another.

Associated Persons Criteria

You are considered to have “Control” if you fall into any of these categories:

• Direct/Indirect Ownership: You own, directly or indirectly, a significant portion of the capital or voting rights in another company (typically interpreted as 25% or more in Zimbabwean tax practice, though the Act focuses on “effective control”).

• Common Control: Two companies are “controlled” by the same third person or group of persons.

• De Facto Control: Even without majority shares, you have the power to appoint the majority of the Board of Directors or manage the company’s daily operations.

• Family Relationships: In the case of individuals, control extends to “near relatives” (spouses, parents, children, and siblings).

Do You Have Control? Insights from Accounting Standards

The TP rules apply to “associated persons.” While tax law provides its own definitions, Zimbabwean tax practice heavily leverages the definitions of “control” and “significant influence” found in International Financial Reporting Standards (IFRS).

IFRS 10: Consolidated Financial Statements

Under IFRS 10, a parent controls a subsidiary if it has:

1. Power over the investee (e.g., voting rights).
2. Exposure or rights to variable returns from its involvement.
3. The ability to use its power to affect the amount of those returns.If you meet these criteria, you are a “Parent,” and all transactions with that subsidiary fall squarely under Transfer Pricing scrutiny.

IFRS 3: Business Combinations

IFRS 3 deals with the initial acquisition of control. From a TP perspective, the “fair value” assessments required during a business combination often set the benchmark for future intercompany transactions.

IAS 28: Investments in Associates

What if you don’t have full control? IAS 28 defines an “Associate” as an entity where you have significant influence—usually 20% to 50% of voting power. Under Zimbabwean law, even if you don’t “control” the company, being an associate often qualifies you as an “associated person,” making your transactions subject to TP rules.

IFRS 11 & IAS 31: Joint Arrangements

IFRS 11 (which replaced IAS 31) classifies joint arrangements as either Joint Operations or Joint Ventures. Transactions within these structures are also scrutinized to ensure that one party isn’t benefiting at the expense of the Zimbabwean fiscus.

The Arm’s Length Principle (ALP)

The ALP is the international standard for TP. It states that transactions between related parties should be priced as if they were between two independent, unrelated parties dealing under normal market conditions.

The “Sister Company” Example:

If your company sells 1,000 tons of maize to a stranger for $300/ton, but sells it to your sister company for $150/ton, the $150 price is not “arm’s length.” ZIMRA will likely “re-characterize” the transaction and tax you as if you sold it for $300/ton.

6 Approved Transfer Pricing Methods

ZIMRA recognizes five primary methods (plus the Quoted Price Method for commodities) to justify your pricing:

Traditional Transactional Methods

1. Comparable Uncontrolled Price (CUP) Method: The “gold standard.” You compare the price charged in a controlled transaction to the price charged in a comparable transaction between independent parties.
2. Resale Price Method (RPM): Used primarily by distributors. You take the price at which the product is resold to a third party and subtract an appropriate gross margin.
3. Cost Plus Method: Commonly used for manufacturing or service providers. You add an appropriate “mark-up” to the costs incurred by the supplier.

Transactional Profit Methods

4. Transactional Net Margin Method (TNMM): You look at the net profit margin relative to an appropriate base (e.g., costs, sales, or assets) that a taxpayer realizes from a controlled transaction.
5. Profit Split Method: Used when transactions are so integrated that they cannot be evaluated separately. The total profit is split based on the relative contribution of each party.

The Quoted Price Method (Special to Zimbabwe)

For commodities (like minerals or agricultural products), ZIMRA often refers to quoted prices on international exchanges (e.g., London Metal Exchange) to determine the arm’s length price.

Specific “Red Flags“

ZIMRA has specific rules that are more rigid than standard OECD guidelines:

• The 1% Management Fee Rule: General administration and management fees paid to a non-resident related party are only deductible up to 1% of the entity’s total allowable deductions. Anything above this is disallowed for tax purposes and treated as a “deemed dividend,” subject to 15% withholding tax.
• Thin Capitalization (3:1 Ratio): If you provide a loan to your subsidiary, the interest is only deductible if the Debt-to-Equity ratio does not exceed 3:1. If the company is “too thin” on equity, the interest on the excess debt is disallowed.

Documentation and Compliance

Compliance is not just about having a fair price; it is about the burden of proof. Under SI 109/2019, you must maintain a “Local File” containing:

1. Group Structure: Organizational charts and ownership percentages.
2. Functional Analysis: A detailed report on the FAR (Functions performed, Assets used, and Risks assumed) by each party.
3. Economic Analysis: Proof of how you selected your method and the “comparables” (market data) you used.
4. ITF 12C2 Return: Every year, you must submit this specific Transfer Pricing Return alongside your Corporate Income Tax return.

Penalties

Zimbabwean penalties for TP non-compliance are among the strictest in the region:

• Penalty: If you have documentation, but ZIMRA makes an adjustment because they disagree with your pricing.
• Penalty: If you have no documentation or it is fundamentally flawed.
• Penalty: If ZIMRA determines there was intentional tax evasion or fraud.

Conclusion

If you are a parent company or have control over other entities in Zimbabwe, Transfer Pricing is no longer optional—it is a critical survival skill. By aligning your internal pricing with the Arm’s Length Principle and maintaining robust contemporaneous documentation, you protect your business from debilitating penalties and ZIMRA audits.

Always remember: In the eyes of the taxman, “Because we are family” is not a valid reason for a discount. Treat your subsidiaries like strangers in your contracts, and you will stay on the right side of the law.