Zimbabwe introduces digital economy tax, transfer pricing filing requirement

By Walker Nyachowe, Founder & Managing Director, Walker Consulting Services, Zimbabwe

 Zimbabwe’s 2019 budget, introduced by the Minister of Finance and Economic Development, Honourable Professor Mthuli Ncube, had a mixture of austerity and revenue-boosting measures aimed at enhancing economic performance.

Of note was the introduction of a new tax on the digital economy, namely, on satellite broadcasting services and e-commerce. Other noteworthy developments were the introduction of transfer pricing return filing requirements and penalties as well as proposals to put in place transfer pricing guidelines.

Digital economy tax

 With effect from 1 January 2019, income exceeding USD500,000 earned in any year of assessment by foreign satellite broadcasters or e-commerce platforms from local residents with services from offshore sources shall be deemed to be earned by such non-resident service providers from a source within Zimbabwe and liable to income tax.

The revenues will be taxed at a special flat rate of 5%. Section 19A and 19B (Permanent Establishment) of the Income Tax Act, (Chapter 23:06) shall not apply to the taxation of income deemed to have accrued from a source within Zimbabwe.

In implementing the new Zimbabwe digital economy tax, reference is made to Action 1 of the OECD/G20 base erosion profit shifting (BEPS) plan.

Zimbabwe transfer pricing documentation, penalties

With effect from 1 January 2019, Zimbabwe taxpayers are required to submit annual transfer pricing returns to the Commissioner showing transactions entered between controlled and/or associated enterprises. The information must be provided on a prescribed form showing disclosure of the details of the transactions or contemplated transactions.

The new law provides for a 100 percent penalty on any shortfall leading to a transfer pricing adjustment if the noncompliance is due to fraud or tax evasion. A 30% penalty is imposed on a shortfall amount where contemporaneous transfer pricing documentation does not exist. A 10% penalty is imposed on a shortfall amount if the taxpayer’s transfer pricing documentation complies with the new Zimbabwe transfer pricing regulations.

Further transfer pricing regulations will be provided to assist in the application, interpretation, and simplification of the legislation.

 Zimbabwe transfer pricing – in general

Transfer pricing rules were introduced for the first time in Zimbabwe in the 2016 National Budget Statement. With effect from 1 January 2016, the Zimbabwe Income Tax Act, (Chapter 23:06) was amended by the insertion of a new Section 98B and a new Schedule Thirty-Five to provide taxpayers with adequate guidance on the tax treatment of transactions between related parties.

With the introduction to the Income Tax Act of the new section 98B on 1 January 2016, all persons engaged in business transactions, operations, or schemes with an associated person must report taxable income consistent with the arm’s length principle.

Unlike in other tax jurisdictions where transfer pricing regulations are applied to cross-border transactions only, the Zimbabwe transfer pricing laws are applicable to both international and domestic related party transactions.

The primary methods to be used in arriving at an acceptable transfer price are the comparable uncontrolled price method, resale price method, and cost plus method. Other permitted methods include the transactional net margin method and the transactional profit method.

The Commissioner may accept a different transfer pricing method if the above methods cannot be reasonably applied.

The Zimbabwe Revenue Authority has advised that the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrators are a relevant source of interpretation, although recourse may also be made to the UN Practical Manual on Transfer Pricing for Developing Countries.

With effect from the tax year ended 31 December 2016, taxpayers with related party transactions, shall keep a transfer pricing policy document as required in the 35^th Schedule to the Income Tax Act, (Chapter 23:06) to enable the Commissioner General to ascertain whether a transaction was conducted in accordance with the arm’s length principle.

Pre-2016 tax years

It should be noted that, even prior to the promulgation of the transfer pricing law, Zimbabwe tax laws contained provisions that broadly attempted to deal with transfer pricing issues.

For example, Section 19 of the Income Tax Act contains special provisions relating to persons carrying on business extending beyond Zimbabwe and gives the Commissioner the power to determine a taxpayer’s taxable income in such manner as appearing to him most appropriate, having regard to circumstances of the taxpayer.

Further, Section 19A deals with the basis of charge to and determination of company tax to non-resident companies operating through a permanent establishment in Zimbabwe.

Section 23 also has implications for transfer pricing as it broadly contains provisions relating to the determination of taxable income of persons buying and selling any property at a price in excess of or less than the fair market price. This section empowered, as it still does, the Commissioner to determine the fair market price (arm’s length price) at which a purchase or sale had taken.

Finally, Section 98 deals with tax avoidance in general, empowering the Commissioner to curb all schemes and adjust taxable income if, in his opinion, transactions had not been conducted at arm’s length.