Comprehensive transfer pricing rules as a means of regulating foreign direct investment in Zimbabwe

Abstract

Transfer pricing refers is a practice that is mainly conducted by Multinational Enterprises to evade their tax obligations. This is done by the transfer of profits from a country where the payable tax is higher and declaring them in a country were the payable tax will be less. This practice affects the host state as the tax base of that state is reduced. In some countries, this practice has resulted in annual losses that amount to billions. Developed countries have successfully tackled the challenge of Transfer Pricing. The United States of America and the United Kingdom were the first countries to introduce transfer pricing legislation. Other developed countries followed the trend and now have comprehensive regimes that do not promote illicit financial flows. With these developments in the developed countries came the Organisation for Economic Cooperation and Development which assisted countries in further developing their governing laws. The main contribution that was introduced by the organisation were reports that interpreted complex terms and provided guidelines that can be used in the adoption of new laws. Africa has always lagged behind in the regulation of Transfer Pricing. Most States that have governing legislation adopted the laws in the last 10 years and some countries are still in the process of adopting new regulating laws. The OECD guidelines have been instrumental in the developments taken by the African countries. Zimbabwe recently amended its Income Tax Act to provide for the regulation of illicit financial flows. However, as with most African countries, the laws are not comprehensive enough to ensure that Multinational Enterprises desist from evading their tax obligations. Therefore, there is need for further development of the governing laws. The Arm’s length principle has become the accepted standard to be used in the assessment of Transfer Pricing issues. The principle entails that related companies should transact as if they are not related. This mainly deals with the manner in which they charge each other for services rendered or for the sale of goods. Price fixation is a practice that is common with such companies which is targeted at manipulation of profits in a targeted country. Therefore, with the introduction of the arm’s length principle, such practices are effectively addressed. In this study, the issues surrounding illicit financial flows and the legislation governing Transfer Pricing in Zimbabwe will be discussed. A comparative study with the United Kingdom will also be undertaken to assess how the existing laws can be improved to become more comprehensive.