Several companies, institutions and individuals may found themselves facing onerous tax obligations after the Zimbabwe Revenue Authority instituted ‘serious’ investigations into suspected cases of transfer pricing, feared to have prejudiced the country billions of dollars.
The investigation and assessments will highly likely cover instances of understated tax declaration, calculated or unintended, running several years back, which might result in Zimra looking into transactions done over the past 7 years.
Areas being investigated regarding cases of transfer pricing include transactions and payments for management fees, royalties and loans extended by multinationals or between associated companies in a holding group among others.
While there are no known official figures on how much Zimbabwe loses annually through transfer pricing, Reserve Bank Dr John Mangudya Governor said in 2015 that the country had lost more than $500 million during that year alone, which had no authentic or bona fide justification.
Authorities also believe Zimbabwe might have been creamed of over $3 billion between 2015 and 2017, $1,8 billion of the money through illicit transfers and the balance through perceived regular transactions such as management fees, technical consultancy fees and royalties, among others.
It is estimated that Africa loses over $60 billion annually through transfer pricing involving multi-national companies. Another estimate says that between 1970 and 2008, illicit financial flows were over $800 billion from Africa.
Last year the United Nations Economic Commission for Africa inaugurated a 10-member High-Level Panel on Illicit financial flows from Africa chaired by former South African president Thabo Mbeki to look into the problem.
Zimra chairperson Willia Bonyongwe said the ongoing investigation into transfer pricing comes after Zimbabwe enacted new legislation illegal practice, with the legislation taking effect from 1 January 2016. The provisions augment current anti-avoidance sections of the Income Tax Act.
Mrs Bonyongwe said Zimra was already seriously looking into a number of cases, including one she would not discuss for confidential reasons, but said the revenue collector sought to recover about $30 million. Some companies have approached the courts to contest Zimra.
Since the new rules empower Zimra to adjust transactions deemed to be inconsistent with the arm’s length principle, it empowers the taxman to make adjustments that potentially may create additional tax liabilities for companies.
In a typical case of how transfer pricing occurs, the Minerals Marketing Authority of Zimbabwe noted that when auctioning diamonds, Government contracted market First Element claimed to have invited 80 to 100 companies when in reality there were just a few buyers, less than five. Government has since disengaged First Element.
Upon scrutiny, it was discovered that the Botswana domiciled company would only bring a number of different people, but from one or a few companies, passing off as buyers from several different companies.
This created room for collusion and transfer pricing, prejudicing the country of substantial revenue. The country is feared to have lost revenue running into billions while Treasury received only $637 million from 2009 to 2014.
“We have received a lot of training in transfer pricing, we have also legislated it because some of it was not legislated. It was legislated in 2016. We first had a self-assessment system, so what Zimra is now doing is that they going to all the assessments, which have been filed and zeroing on transfer pricing, where there have been issues with it,” she said.
“What we are doing is dealing with issues relating to 2016. There is debate whether we need to go back before the legislation was crafted, but the law, as it stands in term of Zimra, we can go back six years, but that is a policy decision, which would have to be taken,” she added.
There has also been debate among stakeholders over whether penalties should be imposed on those found to have prejudiced the country. “In some cases, it is willful and more like (tax evasion). Each case will be looked at on the basis of its merits, but we are aware and our eyes have been opened to those issues (transfer pricing),” Mr Bonyongwe said.
“It is things like ‘what constitutes management fees’, some calculate it as a percentage of turnover, but the principles says it has to be an actual management fee because it involves taking money out of the country, as such, it has to be for services, which have rendered,” she said.
“There are also issues around royalties, to say when you say you are paying for royalties what exactly will you be paying for, because sometimes it entails paying for the brand, or patent where you have people producing products whose formulae are owned by a foreign company. So if you pay for the brand and patent, is there no double payment there?”
The Zimra boss added that there were instances where companies extended loans that were clearly beyond the beneficiaries’ capacities to repay and it was also such irregularities the investigations would cover. “That involves money going out, is it prudent? No, so there are issues around that.”