TAX MATTERS: Ready for first time TP returns submission?
MNEs and companies with associate transactions will be required for the first time in Zimbabwe to file transfer pricing (TP) returns. Disclosure is also required when a taxpayer has transactions with tax havens i.e. low tax jurisdiction countries.
The return is to be filed at the same time with the Income Tax Return (ITF12C) on August 31, 2020, being the new submission date for 2019 income tax returns following an extension granted by the government owing to Covid-19.
The Zimbabwe Revenue Authority (Zimra) announced in March that it has received assistance from the ATAF International Taxation team in coming up with an advance version of the transfer pricing return that taxpayers are directed to file with their annual self-assessment corporate income tax return for the year ended December 31, 2019.
The return supplements the new transfer pricing reporting requirements Zimbabwe introduced in 2019.
The transfer pricing return must be completed by all taxpayers with international and/or domestic related party transactions.
The information requested in the return will assist Zimra to identify and assess potential risks to Zimbabwe’s tax base from abusive transfer pricing practices and ensure that it focuses its resources on the highest risk cases.
This will provide greater tax certainty and reduce compliance costs for complaint taxpayers in Zimbabwe (https://www.ataftax.org/zimbabwe-introduces-new-transfer-pricing-return-for-taxpayers).
Related party or associate transactions are those entered into with near relatives, between companies under the same control (affiliates or sister companies), a partner and fellow partner in a partnership, trustees with their trust or trustee and beneficiary (ies) etc.
A company is deemed controlled by a person when that person alone or together with one or more associates or nominee controls the majority of the voting rights of the capital in the company whether directly or through one or more interposed companies, partnerships or trusts.
Control is deemed also if the person alone or together with associates directly or indirectly influences the policy or operation of the company.
When you have engaged in the purchase or sale of goods or services, loan transactions, sale or leasing of intangibles, or intra group service agreement etc with your associate you are required to prepare the necessary transfer pricing documentation regardless of transaction value.
Transfer pricing is not an exact science. Therefore, tax authorities can impose TP adjustment requiring taxpayers to have strong arguments that intra-group transaction prices were at arm’s length.
Transfer pricing affects cash flow, investment decisions and performance indicators. The additional corporate tax imposed by the tax authorities will affect cashflow, investment decisions, certainty and profitability.
Other consequences include adjustment for customs value — rejection of transfer prices declared by a company and impose different price levels.
Transfer pricing can involve revenue or expense adjustments which may trigger double taxation especially where a corresponding adjustment has been denied to the counter party or by the other jurisdiction.
Additional taxes in the form of withholding taxes and accompanying penalties will also arise.
Finance Act No 1 of 2019 has explicitly stated that 100 percent penalty will apply on additional tax arising from TP adjustments if there is evidence that the avoidance, reduction or postponement of the liability to tax was actuated by the use of fraud or evasion.
In the event that there is lack of contemporaneous transfer pricing document to support the transaction giving rise to the amendment assessment despite absence of fraud or evasion, a 30 percent penalty level will apply on the assessed tax. The same applies to a taxpayer who has not complied with transfer pricing guidelines.
If the taxpayer has done all that it can including having in place transfer pricing documentation which comply with transfer pricing guidelines and there is no fraud or evasion, but nonetheless a TP assessment is made by Zimra, a reduced penalty level of 10 percent will apply on the shortfall tax.
Besides the penalties as aforesaid, tax default is subject to interest charge. A new interest regime which provides for 25 percent interest for any month or part thereof during which tax remains unpaid was gazetted through SI282 of 2019 to take effect from January 1, 2020.
This interest has not discriminated between foreign currency and ZWL$ taxes and may prove a heavy burden for defaulting taxpayers.
While there is a leeway for the commissioner-general to adjust the penalty based on taxpayer representations there is limited scope with regard to interest.
Interest is meant to compensate the fiscus for time value of money and the commissioner general has no authority whatsoever to waive it except through an Act of Parliament. Other indirect penalties include damaging of business image.
Where for some reason the transfer pricing documentation has not been prepared and it’s impractical to complete the exercise by the due date, it may be worth writing to the taxman seeking an extension of time.
The letter for seeking extension can only be considered if done before the due date. For those who have already prepared their TP policy documents, they must ensure that transactions as reflected in the tax returns pass the arm’s length test.
If there is a divergence between transfer pricing policy documents including underlying contracts and the financial records (accounts) it may be necessary to make adjustments to the income tax return before return submission.
Even if price, terms and conditions are similar to those of independent parties, TP documentation is still required because it is mandatory. Without TP documentation a taxpayer will not be able to evidence to Zimra that associate transactions are occurring at arm’s length.
There are, however, practical challenges and other considerations for completion of return, adjustments and other matters underlying TP returns which require face to face discussion with an expert and you are urged to consult with your tax expert.
Meanwhile, Matrix Tax School (Pvt) Limited will be hosting a two-hour webinar seminar on “Transfer Pricing- First Time Submission Practical Challenges and Aftermath” on August 12, 2020.
Tapera is the chief executive of Matrix Tax School. He writes in his personal capacity.