Markets

Firms fleece Treasury of millions via forex auction platform

THE Reserve Bank of Zimbabwe (RBZ) is keeping an eye on participants at forex auctions amid revelations Treasury is losing millions in potential tax revenues from cross-border transactions carried out by firms under common ownership, central bank chief John Mangudya has said.

Local companies, Mangudya said, are creating associate firms in other countries, especially South Africa.

In turn, the associate companies, which purport to be unrelated, create invoices for the supply of goods into Zimbabwe.

The local company, taking advantage of availability of foreign currency in the country’s formal market, would then present those invoices at the Reserve Bank of Zimbabwe (RBZ) managed auction system, and siphon millions of dollars out of the country thereby violating transfer pricing laws.

Mangudya said this constituted transfer pricing, which refers to the pricing of cross border or domestic transactions between associates.

Due to the controlling relationship between the associated enterprises, the transfer price may be different to the price that would have been agreed between unrelated enterprises, which is known as the ‘arm’s length price’.

“We have noticed that local companies are creating associates in other countries, mainly in South Africa.

They then create invoices to Zimbabwe,” Mangudya said.

“The one [company] that is based in Zimbabwe will then come to the foreign currency auction system, every week seeking foreign currency. That is the mentality that our company executives have now.

It’s a big challenge which constitutes transfer pricing.”

The apex bank, Mangudya said, was keeping an eye on those companies that are ever present at every forex auction every week.

He said there has been exponential growth in tax issues that has been arising from profit shifting by these related companies.

And this could have significant implications on the economy when companies shift profits to other countries to evade tax.

The shenanigans, Mangudya said, could mean that Zimbabwe is losing millions of dollars through tax leakages where companies are allegedly transferring their profits to other countries where tax rates are comparably lower.

The general rule of transfer pricing, which is defined as the price allocated to a transaction taking place between two related companies, is that it should be restricted to what is called the ‘arm’s length test’.

In 2016, Zimbabwe inserted section 98B and Thirty Fifth Schedule into the Income Tax Act (Chapter 23: 06). Section 98B (1) adopts the ‘arm’s length principle into Zimbabwe’s domestic laws.

This means that the legislation calls for the ‘arm’s length principle’ which should apply to transactions between connected parties.

For tax purposes, such transactions because of their potential to distort tax income, tax authorities in many countries adjust prices of the connected parties if they differ from what would have been charged by unrelated entities, dealing at arm’s length.

But, this has not been the case in Zimbabwe, meaning the country has been losing millions of United States dollars to local companies that have been creating associates and siphon millions of dollars.

Zimbabwe has also endorsed the Organisation for Economic Cooperation and Development ‘Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations’ and the United Nations Manual on the interpretation of transfer pricing as relevant sources of the interpretations for the Thirty-Fifth Schedule of the Income Tax Act.

Zimbabwe also gazetted the country’s final transfer pricing regulations under Statutory Instrument 109 of 2019 in May, 2019.

The SI specified the documentary requirement from a transfer pricing perspective.

This means, there is adequate legislation to charge these local companies that are breaching the transfer pricing rules of the country. 🔺

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