BY VALERIA THANDO SIZIBA
Transfer pricing (TP) regulations are essential for countries to protect their tax base, eliminate double taxation and, to enhance cross-border trade.
The Organisation for Economic Co-operation and Development (OECD) Guidelines, published in 1995 represent a consensus among OECD member countries and have largely been followed in domestic transfer pricing regulations.
While Zimbabwe is not a member of the OECD, the guidelines together with the African Tax Administration Forum (ATAF) Practice Notes and United Nations (UN) Practical Manual on Transfer Pricing are relevant sources of interpretation of the Zimbabwe TP regulations.
Transfer pricing rules have therefore been developed mainly within the member countries, i.e, developed countries, of the OECD only because of their historical and economic backgrounds.
Thus, developing countries are encountering difficulties with administering the TP guidelines.
One major challenge is the cost associated with transfer pricing compliance.
While transfer pricing is an international tax issue, it must be stressed that TP regimes are creatures of domestic law and each country implements its own rules.
One important issue for implementing TP rules is the documentation requirement.
Statutory instrument 109 of 2019 as read with section 90 and 35th schedule to the Zimbabwe Income Tax Act specifies the nature of the required documentation in Zimbabwe.
These requirements largely mirror the OECD Transfer Pricing Guidelines.
In developing countries like Zimbabwe, resources, monetary and otherwise, may be limited for businesses, especially small and medium enterprises (SMEs) who have to prepare detailed and complex transfer pricing reports and comply with the transfer pricing regulations.
Transfer pricing reports often run into hundreds of pages with many legal, tax, and accounting experts employed to create them.
This kind of complexity and knowledge requirement puts a remarkable strain on businesses where resources tend to be scarce and the appropriate training in such a specialised area is not readily available.
This, therefore, begs the question: Could there be recourse for businesses to ease the financial and administrative pressure of TP compliance?
Some countries have transfer pricing safe harbour rules.
Safe harbour rules provide that if a taxpayer meets certain criteria, it is exempt from the application of a particular rule, or at least from scrutiny as to whether the rule has been met.
In OECD countries, exemptions from the application of TP rules, or documentation requirements, are usually applied to small and medium enterprises (SMEs) and small transactions.
These safe harbours aim to save businesses from the disproportionately large cost of applying transfer pricing rules, as well as reducing the administrative burden for tax authorities from having to scrutinise low-risk taxpayers or transactions.
Historically, the OECD has taken a negative stance on safe harbours.
In this regard, the 1995 version of the OECD Transfer Pricing Guidelines considered the use of safe harbours and ultimately recommended against the adoption of safe harbours, concluding that the problems of safe harbour approaches outweighed their potential benefits.
There are some risks to safe harbours, such as, they may favour low-profit margin transactions that do not develop the economy in the long term, they may over time no longer reflect business realities, and may unreasonably either favour or disfavour certain taxpayers.
On a practical level, however, several countries have adopted safe harbour rules.
SMEs in Zimbabwe contribute largely to the economy and it has always been a government objective to reasonably incentivise them.
The adoption of these safe harbour rules may aid this objective.
The types of safe harbour rules are discussed below.
The first safe harbour rule is the exemption of eligible taxpayers from applying TP rules.
Such eligible taxpayers are either small businesses or businesses engaged in small transactions.
For example, in Mexico small individual taxpayers (defined as taxpayers whose income from business activities and interest in a fiscal year does not exceed US$161,500) are exempt from applying transfer pricing rules (OECD 2012).
Eligible taxpayers under this safe harbour regime are not required to show that they have complied with the arm’s length principle, nor do they have to prepare TP documentation to that effect.
The disadvantage of exempting taxpayers from compliance with the transfer pricing rules is that if the prices fixed for intra-firm transactions are not arm’s length, this regime may be used to shift profits to more favourable jurisdictions or to shift income to loss-making entities within the group.
However, given the size of these taxpayers or transactions, the tax loss is minimal and the benefits of applying the safe harbour regime are likely to outweigh the relative loss of revenue from exemption from transfer pricing rules.
Secondly, taxpayers may be exempted from TP documentation.
It must be observed here that the taxpayers are still required to comply with transfer pricing rules, the exemption applies to the preparation of TP documentation.
In this case, the disproportionate cost of acquiring the services of tax accountants skilled in the preparation of TP documentation is avoided.
Thirdly, the tax authorities can exempt small transactions and minor expenses from the application of TP rules.
Safe harbours for small transactions may entail exemption from transfer pricing documentation or audit, as long as the value of the transaction falls within the defined limit (UN 2017: para B.4.5.2).
Lastly, SMEs can be exempted from both documentation requirements and transfer pricing rules.
This is most common for SMEs in OECD countries.
The rationale for this is that the category of taxpayers involved does not contribute significantly to revenue collection, however, this may not be suitable in a Zimbabwean set-up considering the revenue contribution of SMEs to the fiscus.
Simplification of TP rules and reduction of taxpayer administrative burdens are high-priority government objectives in themselves.
The safe harbour approaches recognise this situation while attempting to strike an appropriate fiscal balance.
The issue that the Zimbabwe Revenue Authority (Zimra) must consider is not whether or not to apply safe harbour rules, rather it is an issue of how.
The method employed should be thought out thoroughly with anti-abusive rules considered.
Businesses on the other hand can approach the Ministry of Finance and table their concerns.
It is an open secret that employees in accounting departments that are obligated to cope with TP, regard this as either boring or dreadful, especially when dealing with tax advisors, who, not entirely without cause, are prone to emphasise the myriad of risks involved in noncompliance with transfer pricing.
Resources must be dedicated to deal with this issue as the revenue authority is rapidly gaining an appetite to enforce compliance, otherwise, businesses that are found wanting will face serious ramifications.
Meanwhile, as the first quarter of the year comes to an end, we inch closer to the corporate income tax and transfer pricing compliance deadline.
This deadline has typically been April 31, however, in light of the current Covid-19 situation, the filing deadline for the Tax Year 2020 has been extended as per the Zimra Public Notice 36 of 2021.