Transfer pricing is a tax which has implications for businesses who share employment services amongst their various entities. One example is that of a multinational enterprise (MNE) with one or more offices in more than one country.

Where such an MNE has employees who are based in the home country but are managed from the head office, this has transfer pricing implications. Another example would be where a holding company’s employees are shared amongst its various subsidiaries.

What is transfer pricing?

Transfer pricing is defined as follows:

“… a price, adopted for bookkeeping purposes, which is used to value transactions between affiliated enterprises integrated under the same management at artificially high or low levels in order to effect an unspecified income payment or capital transfer between those enterprises.” (OECD Transfer Guidelines for Multinational Enterprises and Tax Administration)

The restriction is embodied in what is called the “arm’s length test”. With effect from January 1, 2016, a new section 98B and a Thirty Fifth Schedule (‘the Schedule’) to section 98B have been inserted into the Income Tax Act [Chapter 23:06].

Section 98B (1) adopts the arm’s length principle into Zimbabwean domestic law:

“For the purposes of this section, where a person engages directly or indirectly in any transaction, operation or scheme (hereinafter referred to as a controlled transaction), with an associated person, the amount of taxable income derived by a person that engages in that transaction shall be consistent with the arm’s length principle, where the conditions of the controlled transaction do not differ from an uncontrolled transaction, that is to say, from the conditions that would have applied between independent persons, in comparable transactions carried out under comparable circumstances.”

An “uncontrolled transaction” is defined as “any transaction between independent persons.”

A “comparable transaction” has been defined with reference to paragraph 3 of the Schedule which sets the factors to be considered to determine whether transactions are comparable.

The purpose of the arm’s length principle is to, as far as possible, put associated persons and independent persons on an equal footing for tax purposes. In order to comply with transfer pricing requirements, a business is required to price its services according to the arm’s length principle.

To this end, businesses must consider how to manage their staff in order to avoid transfer pricing issues.

For legal advice, contact our Tax Law Team