Zimbabwe’s transfer pricing regulations (SI 109 of 2019), require taxpayers with related-party transactions to prepare a contemporaneous Transfer Pricing (TP) Document that substantiates the arm’s length nature of the transactions. A contemporaneous document must be in place by the time of filing the income tax return (IFT12C) and the TP return (ITF12C2). It must be made available to the Zimbabwe Revenue Authority (ZIMRA) within seven days upon request.
A Transfer Pricing document serves as a primary defensive tool for substantiating that transactions between related entities were conducted at arm’s length. Its absence compromises the credibility of declared positions and significantly weakens a taxpayer’s defence in the event of an audit or dispute. The burden of proof in transfer pricing disputes lies with the taxpayer. In objections or appeals, the taxpayer must substantiate the basis of inter-company pricing decisions.
Commissioner’s Remedy: Where ZIMRA finds the TP return unsupported due to lack of contemporaneous documentation in place, the Commissioner is empowered under Section 98D of the Income Tax Act to disregard the taxpayer’s declared positions and apply alternative estimated arm’s length values. This discretion is the Commissioner’s remedy for non-compliance and forms the basis for TP adjustments. This remedy applies even in the absence of tax evasion or artificial arrangements and enables ZIMRA to make TP adjustments based on estimates, often without regard to the taxpayer’s commercial or factual context due to lack of credible supporting evidence.
Where the taxpayer’s income tax assessment is amended by the Commissioner in accordance with section 98B of The Act as read with the 35th schedule, the Commissioner imposes penalties under Section 98B(2a) as follows:
- 100% of the tax shortfall – in cases involving fraud or evasion.
- 30% of the tax shortfall – where contemporaneous documentation is absent or non-compliant with the Transfer Pricing Documentation Regulations.
- 10% of the tax shortfall – where compliant documentation exists but the Commissioner still deems an adjustment necessary.
Compliance Expectation: Transfer pricing documentation must be prepared on a contemporaneous basis, as required under the Income Tax Act and the Transfer Pricing Documentation Regulations. This means finalising the documentation before submission of the income tax return, using the current year’s financials and functional analysis. Non-compliance exposes taxpayers to severe penalties. The documentation must reflect the actual inter-company arrangements and be updated annually to remain valid.
Practical Considerations: Businesses should not assume that retrospective TP documentation will suffice. ZIMRA is clear in that, without a contemporaneous document, any filed TP return is incomplete from a compliance perspective. This invites audit scrutiny, administrative penalties and potential adjustments that could have been avoided through early preparation.