The Minister of Finance has proposed two amendments to the regulations which govern transfer pricing transactions between related entities as well as to the documentation requirements as outlined in the Income Tax (Transfer Pricing) (Amendment) Regulations, 2018 (Transfer Pricing Regulations).
First, the Minister proposed an amendment to provide for the Country by Country (CbC) report, and secondly to increase the threshold for the requirement of local companies to provide transfer pricing documentation to ZMW 50 million from ZMW 20 million.
The first proposed amendment will provide for the automatic exchange of the relevant CbC reports with other tax jurisdictions for entities operating in Zambia that are part of the multi-national enterprises (MNEs) group. The measure is one of the requirements under the Inclusive Framework on Base Erosion and Profit Shifting (BEPs), which Zambia is a member of.
CbC reporting is an Organization for Economic Co-operation and Development (OECD) recommended requirement aimed at addressing base erosion and profit shifting by ensuring MNEs report certain financial information on a country-by-country basis – aggregate data on the global allocation of income, profit, taxes paid and economic activity.
We anticipate that the requirements for CbC reports of financial tax data will create tax transparency and respond to demands from the media, lobby groups and non-government organisations for information on how much tax MNEs operating in Zambia are paying and whether it is fair.
This amendment will enable the Zambian tax authorities to perform more efficient transfer pricing assessments on transactions between related parties and BEPS risk assessments, as well as enable it to measure the fiscal and economic effects of tax avoidance.
However, one of the conditions for receiving and using CbC reports is that a jurisdiction must have in place the necessary framework and infrastructure to ensure the appropriate use of CbC report information, a requirement Zambia is yet to attain as per Action 13 of the OECD Guidelines.
Once effected, this amendment is a leap to addressing the shortcomings and recommendations identified in the Country‑by‑Country Reporting – Compilation of Peer Review Reports (Phase 3) on Zambia's performance hitherto with regards to implementation CbC reporting.
The second proposed amendment seeks to increase the threshold for providing transfer pricing documentation by local small and medium-sized businesses that have an annual turnover of ZMW 50 million and above. Currently, businesses with an annual turnover of ZMW 20 million and below are exempt.
This amendment will exonerate businesses in the exempt brackets from considerable administrative burden though it is unclear whether this exemption will apply to other transfer pricing matters such as transfer pricing audits.
However, the tax authorities will still require taxpayers to comply with the Transfer Pricing Regulations, including ensuring all related party transactions are undertaken at arm's length.
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