Strategic taxation review

DOUBLE TAXATION RELIEF

• Introduction
In terms of the gross income definition, income may
be deemed to be from a source within Zimbabwe
even if the true source of the income is from a place
outside Zimbabwe. Because of this deeming provision
they may be instances that the same income flow is
taxed in two different jurisdictions causing more
burden on a tax payer. In order to reduce the tax
impact on a taxpayer, the Income Tax Act has
provisions which provide relief on tax payers
 Objectives
• Understand the concept of double taxation
relief and to which income flows it applies to.
• Calculate double taxation reliefs in respect of
foreign income.
 Relevant sections and Frameworks
• Income Tax Act:
▪ Section 91 – Relief from Double Taxation
▪ Section 92 – Reduction of tax payable as a
result of double taxation agreements
▪ Section 93 – Relief from double taxation in
cases where no double taxation agreements
have been made
 DOUBLE TAXATION RELIEF
Introduction
• a) Agreements are styled as being for the avoidance of double taxation and the
prevention of fiscal evasion‖. The latter function is effected partly through the
application of the ―arm’s length principle, to which reference is made below
and partly through the exchange of information between the tax authorities of
the countries which are parties to an agreement. With regards to double
taxation the disadvantage to the taxpayer arises from the frequent overlapping
of tax jurisdictions in the case of cross-border transactions. Double taxation
agreements arise where, for example, a taxpayer resident in country A
conducts operations in, or derives investment income from, country B, which
means tax liability may arise in both countries by reason of the taxpayer’s
residence and the application of the source principle.
• b) Most agreements between Zimbabwe and other countries have been
entered into only since 1980. The agreement with South Africa, however,
which was entered into in 1965, is substantially different.
• The main effect of all the agreements is either to restrict or, conversely, to
preserve the power which each country might otherwise have had to
impose liability on residents of the other country. The limitation takes
various forms, such as
• i) In the case of business or professional profits of a non-resident, a
requirement that liability arises if operations in this country are
conducted only in a particular way;
• ii) In the case of investment income payable to a non-resident, the
imposition of ceilings on the rates of various withholding taxes; and
• iii) The granting of relief, subject to limits, where foreign income is being
taxed in Zimbabwe, in recognition of tax payable on that income in the
country of origin.
• In the case of a Zimbabwean taxpayer with foreign income there are,
similarly, limitations on his liability in the other country concerned.
 Section 91
• This section empowers the President to enter into agreements
with the governments of other countries for the avoidance of
double taxation and for assistance in the administration and
collection of taxes levied under this Act and taxes on income
levied under the laws of such other countries.
• The manner in which agreements are to be ratified and
published is fully set out. Any subsisting agreements as at 1st
April 1967, are deemed to have been proclaimed in terms of
this Act.
• Note that, in terms of subsection (5), the periods of
prescription do not apply to assessments arising from the
implementation of double taxation agreements.
 Section 92
• Where an agreement with a foreign country has been made in terms
of section 91, foreign tax paid on income from that country may be
allowed as a credit against Zimbabwe tax paid on such income. The
section sets out the manner in which the credit is to be calculated and
the conditions under which it is to be given.
• The calculation of double taxation relief is split into two parts in order
to provide respectively for foreign company dividends which are
taxable at the fixed rate of 20% and other foreign income such as
foreign interest which is taxable as income from investments.
• The relief to be allowed is, in the first instance –
(a) The Zimbabwe tax suffered on the foreign income on which relief is to
be granted; or
(b) The foreign tax; whichever is the lesser amount
 Example:
• Company A received a dividend of $15 200
(net of a South African withholding tax of 5%)
from a company incorporated in South Africa.
Calculate the amount of tax payable in
Zimbabwe in respect of the dividend
 Solution:

The foreign dividend id deemed to be from a source

within Zimbabwe hence the amount of tax payable
is calculated as follows:
$
• Gross dividend ($15 200 * 100/95) 16 000
• Tax @ special rate of 20% 3 200
• Less South African tax (the lower of the two)
(800)
• Total tax payable in Zimbabwe 2 400
 note
• Where there are two or more types of
incomes from a source in a foreign country the
restriction under paragraph (a) of subsection
(3) is calculated on the total foreign income
and not on the individual amounts of the
various types. It will be noted that the total
amount of relief is allocated automatically
over the various foreign countries from which
income subject to relief is received.
 Section 93 - Absence of double taxation
agreement
• If a person in Zimbabwe (or a person outside
Zimbabwe who is deemed by virtue of the
provisions of Sections 12(1)(d) and 12(4), to have
received income from Zimbabwe) pays foreign tax
on income from a country which has not entered
into an agreement with Zimbabwe under Section 91,
and also pays tax in Zimbabwe on the same income,
such person will be entitled to claim relief in respect
of such foreign tax as if the terms of subsections (3)
and (4) of Section 92 were applicable.
 Section 93 - Absence of double taxation
agreement
• If the true source of any income is Zimbabwean
then, of course, no relief can be given in terms of
this section even though tax may have been paid
in another country.
• In ITC 1535 (1992) 54 SATC 356 the court held that
Zimbabwe was obliged to grant relief on royalties
which was designated in the Act as being deemed
to be from a source in Zimbabwe, despite the
possibility of it being from a true source in
Zimbabwe.
 Section 93 - Absence of double taxation
agreement
• Summary:
• a) If the Zimbabwean tax is less than or equal
to the foreign tax withheld the DTR = the
Zimbabwean tax
• b) If the Zimbabwean tax is more than the
foreign tax withheld the DTR = the foreign tax
withheld such that the additional Zimbabwean
tax chargeable will be equal to the
Zimbabwean tax less foreign tax paid.
TAXATION OF DECEASED ESTATES AND
TRUSTS
 Introduction
• As in the case of individuals and companies it
is possible for a deceased estate or trust to
constitute a taxpayer and to be liable to tax on
his taxable income..
 Introduction
So how does an estate come into being:
• ▪ An estate is a legal persona, which come into being by operation of law as
follows; o A deceased estate commences its existence with the death of an
individual. It consists of the whole of the deceased’s property. It is administered
under the Estate Duty Act by the executor and terminates when any necessary
realization of assets has been effected, the master of High Court has effected final
liquidation and distribution account.
• o An insolvent or assigned estate is created by the order of the court on
presentation of petition for surrender sequestration or statutory assignment of the
debtor’s estate.
• ▪ A trust on the other hand is not generally a person though it may be regarded
as a person for tax purposes especially when it has income the subject to which no
beneficiary is entitled to. It comes into existence through the will of a deceased
person or can be created by an existing person as shall be seen later
 Objectives
• Identify income in the pre-death and post-
death period;
• Identify different types of beneficiaries to a
trust and deceased estate;
• Identify expenditures which are allowable to a
deceased estate.
• Calculate the taxable income in the hands of a
Trust
 Relevant sections and Frameworks
• Income Tax Act Chapter 23:06
• Estate Duty Act 23:03
 Key Learning Points

• ▪ Taxation of income generated by assets

(property) in a deceased estate
Application of the Income Tax Act in relation
to deceased estates – Sect 11
• Section 11 to the Income Tax Act deals with
the taxation of income derived from assets in
deceased estates
Application of the Income Tax Act in relation
to deceased estates – Sect 11
• Key definitions in section (Sect 11 (1))
• Ascertained beneficiaries – means a person named or
identified in the will of a deceased person who by reason of
the will acquires on death of the deceased person any
immediate certain right to claim the present or future
enjoyment of the income so received or accrued.
• ▪ Asset in deceased estate - does not include a right to claim
an amount which becomes due and payable before the death
of the deceased person. Therefore, the above definition
excludes:
o Debtors as at time of death.
o Cash Balances.
Application of the Income Tax Act in relation
to deceased estates – Sect 11
• General Principle
• ▪ Period up to death - On the death of a
taxpayer an assessment is raised on deceased
taxable income accruing to the date of death.
• ▪ Period after death - A new taxpayer a
deceased estate then comes into being and
there arises the question of determining in
which part’s hands the income accruing in the
post death period should be taxed.
 Income accruing during the post death
period – Sect 11

• Sect 11 (4) (a) - an amount received or accruing by virtue of

a right forming part of the assets in a deceased estate which
did not become due and payable before the death of the
deceased person (subject to par b) shall be income for the
purposes of the Income Tax Act, if the amount would have
been income of the deceased person had it been received
in his lifetime. o E.g. contractual commission falling due
after death, leave pay, rental income from properties.
• o The income is therefore taxable in the hands of either
the deceased estate or ascertained beneficiary.
 Income accruing during the post death
period – Sect 11

• ▪ Sect 11(4) (b) - an amount received in a deceased

estate (received in the post death period) which would
have been income of a deceased person had it been
received in his lifetime shall not be income for the purposes
of the Income tax Act if— o the deceased person had no
right to claim the amount in his lifetime; and
• o the amount is received ex gratia or in pursuance of a
gratuitous promise made after the death of the deceased
person;
• o E.g. bonus voted for after death.
 Income accruing during the post death
period – Sect 11
Expenditure against post death income
o If the expenditure is allowable under the
general deduction formula it will also be allowed
be it to the estate or to the beneficiary but
inadmissible, expenditure is disallowed in the
determination of taxable income of part
concerned.
 Income accruing during the post death
period – Sect 11

• ▪ Ordinary resident
• o An estate is regarded to be ordinarily
resident in Zimbabwe if the deceased was
ordinarily resident in Zimbabwe at the time of
his death.
 Income accruing during the post death
period – Sect 11

• Medical expenses
• o Medical expenses of the deceased paid
after death is claimed as a credit in the pre-
death period.
 Applicable taxation rates

• General Principle – The source of the income determines

the rate of tax to be applied
• Pre death period
Employment Income – Apply PAYE rates
Trade and Investments – 25% + Aids Levy

• Post death period (Deceased Estate/beneficiary)

• Employment Income – Apply PAYE rates
• o Trade and Investments – 25% + Aids Levy
 Deceased Estate: Estate Duty Act
• Estate duty is a tax levied on the estate or
property of a deceased person. The rate of tax is
5% the dutiable amount of the estate.
Framework
Gross property (assets) xxxx
Less deduction (xxxx)
Dutiable amount xxxx
• Note the first ZWL 50,000 of the dutiable
amount is duty free.
 Estate Gross property (Sect 4)

• The following items constitute the property of the deceased person

or the estate
o all property held at date of death by the deceased which was
acquired after 1 January 1967. (Sect 4 (1) (a)
o all property held at date of death by the deceased which was
acquired before 1 January 1967. (Sect 4 (1) (c)
o Property assumed (deemed) to be that of the deceased at date of
death. Sect 4 (1) (b)

• ▪Note: the asset should be in the possession of the deceased person

at the time of death to be included in the property of the deceased
estate.
 Property Sect 4 (2)

• “property” means any right in or to property, movable or

immovable, corporeal or incorporeal, and includes ▪
any fiduciary, usufructuary or other like interest in
property (including a right to an annuity charged upon
property) held by the deceased immediately prior to his
death; and
• ▪ any right to an annuity (other than a right to an
annuity charged upon any property) enjoyed by the
deceased immediately prior to his death which accrued
to some other person on the death of the deceased;
 Property Sect 4 (2) – continued
▪ If deceased was not ordinarily resident in Zimbabwe property does
not include:
▪ any right in immovable property situated outside Zimbabwe; or
▪ any right in movable property physically situated outside Zimbabwe;
or
▪ any debt not recoverable or right of action not enforceable in the
courts of Zimbabwe; or
▪ any goodwill, licence, patent, design, trade mark, service mark,
copyright or other similar right not registered or enforceable in
Zimbabwe or attaching to any trade, business or profession in
Zimbabwe; or
▪ any stocks or shares held by him in a body corporate which is not a
company
 Deemed Property (Sect 4 (3))
• All insurance policy proceeds on the life of the deceased as exceeds the
aggregate amount of any premiums or consideration proved to the satisfaction
of the Master to have been paid by any person who is entitled to the amount
due under the policy, together with interest at nine per centum per annum
calculated upon such premiums or consideration from the respective dates of
payment to the date of death: excluding
o a policy the amount due under which is recoverable by the surviving spouse or
child of the deceased under a duly registered ante-nuptial or post-nuptial contract;
o any amount due and recoverable under a policy which has been ceded by the
deceased in his lifetime bona fide and for full consideration, otherwise than as
security for payment of any sum of money or the fulfilment of any other obligation;
or
o policies for purposes of paying estate duty
o Policies taken out by a person other than the deceased before 1 January 1967 etc
 Deemed Property (Sect 4 (3))
• ➢ any property donated by the deceased
under a donatio mortis causa; (donations
made in anticipation of death)
• ➢ any property exceeding two hundred
dollars in value donated under a donation
inter vivos made before the 1st January, 1967,
unless such donation was made and took
effect more than two years before the date of
the death of the deceased;
 Deemed Property (Sect 4 (3))
• ➢ any property exceeding ten million dollars in value in any one calendar year
donated under a donation (other than a donation to a spouse under a duly
registered ante-nuptial or post-nuptial contract or a donatio mortis causa) made on
or after the 1st January, 1967—
o (i) in the case of a deceased not referred to in subparagraph (ii), by the deceased; or
o (ii) in the case of a deceased who was married in community of property, by the
deceased or by a spouse who was so married to the deceased to the extent to which the
property would, if it had not been donated, have formed part of the estate of the
deceased; or
o (iii) by a body corporate, if such property was disposed of under any donation made by
it at the instance of the deceased and if, having regard to the circumstances under which
that donation was made by such body corporate, the Master is of the opinion—
• ▪ A. that it was not made in the ordinary course of the normal income-earning
operations of that body corporate; and
• ▪ B. that the selection of the donee who benefited by the donation was made at the
instance of the deceased;
 Deemed Property (Sect 4 (3))
• o unless—
• ▪ I. such donation is deemed to have been
made more than five years before the date of
death of the deceased donor; or
• ▪ II. such donation is deemed to have been
made to a person who predeceased the
donor;
 Allowable deductions (Sect 5)
• ➢ funeral and death-bed expenses
• ➢ Debts payable out of the deceased person’s property to
persons ordinarily resident in Zimbabwe excluding to
companies which the deceased held some interest.
• ➢ Masters administration expenses in respect of the
estate property
• ➢ Donations to charitable organizations or institution of
public character
• ➢ The value of family house as defined by s 21 capital gain
Tax Act, where the deceased is survived by spouse or
child.
 Allowable deductions (Sect 5)
• ➢ any debts due by the deceased to persons ordinarily
resident outside Zimbabwe which have been discharged from
property included in the estate to the extent that the amount
of such debts exceeds the value of any assets of the deceased
outside Zimbabwe and not so included;
• ➢ the value of one motor vehicle of the deceased which is
accepted by the Master as the family motor vehicle
• ➢ Proceeds from pension and benefit funds as have been
included in the estate.
• ➢ Where the deceased is survived by his or her spouse, so
much of the dutiable proceeds of insurance policies as do not
exceed one hundred million dollars.
Sect 19 – Deduction of capital gains tax
• ➢ There shall be deducted from any duty
payable under this Act the amount of any tax
paid by the deceased or his estate in terms of
the Capital Gains Tax Act [Chapter 23:01], in
respect of any property that is deemed to be
the property of the deceased in terms of
paragraph (d) of subsection (3) of section four.
 Taxation of Income accruing to Trusts:
Income Tax Act
• Types of Trusts
• Will Trust
• ▪ The deceased person will nominate certain people in his
will who will take charge of his assets upon his death
(Trustees)
• ▪ Such people will administer the assets of the trust and
make distributions to the beneficiaries as directed by the will.
• ▪ Sometimes the will may state the time or at what age the
assets of the trust shall be distributed or handed over to the
beneficiaries. The trust will then be wound up when all the
distributions have been made.
• Inter Vivos Trust
• ▪ The person will by a written trust deed
names certain person(s) as trustees and hand
over various assets to them as initial capital of
trust.
• ▪ The trustees will then administer this capital
and receive any income accruing there from in
accordance with the conditions set out in the
trust deed.
Taxation of Income Accruing to the trusts

• NB!!!! a trust is not taxable unless it has

income to which no beneficiary is entitled. In
most cases the commissioner will tax the
beneficiaries of the trust. The question will
then turn out to be whether any beneficiary of
a trust has a vested right or a contingent one.
Where a beneficiary has vested right he is
taxable on the trust income whether
distributed or not.
 Identity of trust income
• The general rule is that trust income will retain its identity in the
hands of the beneficiary. In other words, if the trust receives a bank
interest and distribute it to the beneficiary, the income will still be
called bank interest in the hands of a beneficiary.
• An annuity however forms an exception to the general rule, thus
the exemptions granted in respect of dividends and certain interest
in terms of paragraph 9,10 and 11 of third schedule do not apply to
any annuity paid out of such exempt income. In other words, the
source of income is the creating instrument, not the asset from
which the income is derived.
• As long as an amount is received as an annuity by beneficiary it will
be taxable indiscriminately, no matter whether the trust income is
from an exempted source.
 Trust expenditure
• If the expenditure is allowable under the
general deductions formula it will also be
allowable against trust income, and prohibited
expenditure is disallowed.
 Expenditure on exempt income
• It has to be reinforced once again that no expenditure is allowable in
respect of exempt income. This scenario is usually more often in trust
cases.
• For instance, the trustees maybe paid commission based on the
income created by them, of which part of the income will be from an
exempt source.
• ➢ Where such a circumstance applies, the allowable part of the
commission will be reduced by: AXB
C
• ➢ Where:o A is the exempt income,
o B is direct expenditure applicable on creation
of trust income,
o C is total gross income created by the trustees.
 question
• Mhere trust was created on 31/07/09 and is administered
by Tendai and Tinotenda. During the current year of
assessment, the trust earned a total income amounting to
$80,000.00, included in this income is dividend from a
company incorporated in Zimbabwe amounting to
$20,000.00. the trustees were paid commission amounting
to $12,000.00. How much is allowable against trust income?
• Solution ZWL
• Total commission paid 12 000
• Less ($12 000x$4 000/$80 000) (3 000)
• Allowable commission 9 000
Summary of deceased estates and trusts
 WITHHOLDING TAXES
• Introduction
• The concept of withholding taxes allows for the
collection of taxes at source. In this case the paying
entity pays a net amount to the recipient and remits
the tax withheld to the tax authorities (ZIMRA). In
certain instances, income subject to withholding taxes
is exempt from further taxes (i.e. the withholding tax
withheld would be treated as a final tax). The
withholding taxes we are going to discuss in this study
unit are levied in terms of the Income Tax Act.
 OBJECTIVES
• • Identify the various types of withholding
taxes.
• • Determine the withholding taxes which are a
final tax.
Relevant sections and Frameworks
• Income Tax Act:
• • Sect 26
• • Sect 28
• • Sect 30
• • Sect 31
• • Sect 32
• • Sect 34
• • Sect 36J
 WITHHOLDING TAXES-General
• All withholding taxes, with the exception of Non-Resident
Shareholders’ Tax, are payable to ZIMRA within 10 days of
the payee being paid or becoming entitled to the payment,
dividend, interest, fees commission, royalty or remittance.
• Non Resident Shareholders’ Tax is payable within 30 days
of distribution of or becoming entitled to the dividend. For
all withholding taxes penalties of up to 100% of the unpaid
tax can be imposed. Interest is charged at 10% per annum
for each month or part thereof during which the tax and
penalties remain unpaid. Below we are going to discuss
the various types of withholding taxes in detail.
 1. Contract Payments.
• Withholding tax of 10% should be withheld
from payments of more than $1,000 to
residents and non-residents in terms of
contracts unless a valid clearance certificate
(ITF263) is provided by the payee.
2. Resident and Non-Resident Shareholders
Tax: Sec 26 & 28
• The following should be withheld from
dividends paid to non-resident shareholders
and resident individuals, partnerships and
Trusts.
• Dividend from Listed Companies 10%
• Dividend from all other companies 15%
Please note that the above withholding tax does
not apply if the dividend is payable to a company
incorporated in Zimbabwe.
3. Non Residents Tax on Fees – Sect 30 and
17th schedule
• Non-residents tax on fees are levied in terms of section 30
(a.r.w the 17th Schedule) of the Income Tax Act. In terms
of the 17th schedule par 2(1) every payer of fees to a non-
resident person shall withhold non-residents’ tax on fees
from those fees and shall pay the amount withheld to the
Commissioner within 10 days of the date of payment or
within such further time as the Commissioner may for
good cause allow. The withholding tax rate is 15%.
• From the above requirement there are two important
terms that are key to triggering the requirement for the
payment of the non-resident tax on fees, namely:
3. Non Residents Tax on Fees – Sect 30 and
17th schedule
• a) Non-resident person’ means - a person,
other than a company, who; or a partnership
or foreign company which is not ordinarily
resident in Zimbabwe. This means the
definition is met any time that a resident tax
payer in Zimbabwe makes payments to a
foreign resident entity or individual.
 3. Non Residents Tax on Fees – Sect 30 and
17th schedule
• b) Fees - means any amount from a source within Zimbabwe payable in respect of any services of
a technical, managerial, administrative or consultative nature, but does not include any such
amount payable in respect of—

(i) services rendered to an individual unconnected with his business affairs; or

(ii) services rendered by any person in his capacity as an employee, other than a director, of the payer;
(iii) education or technical training; or
(iv) the repair of goods outside Zimbabwe; or
(v) any project which is specified for the purposes of this subparagraph by the Minister by notice in a
statutory instrument;
(vi) services rendered to a licensed investor in respect of his operations in an export pro- cessing zone;
(vii) services rendered to an industrial park developer in respect of the operation of his industrial park;
• i. export market services rendered by an agent of a company that exports goods from Zimbabwe:
• Provided, however, that the fees payable to the agent must not exceed 5% of the “free on board
value” (as that phrase is defined in the Customs and Excise Act [Chapter 23:02]) of the exports of
the company for the year of assessment concerned, as confirmed on acquaintance by the
company of the export documentation relating to its exports in that year;
3. Non Residents Tax on Fees – Sect 30 and
17th schedule
• Therefore, let’s apply the above definition to
the following examples of payments that may
be made to non-resident persons/entities.
Service Comment
Student registration fees paid to a foreign
This is education related and is specifically
university or body e.g. Wits University, excluded from the definition of fees,
ACCA therefore does not attract the non-
resident tax on fees.
Annual license fees – e.g. payment for The service is in connection with the right
pastel accounting package license fees of use rather than technical in nature
therefore does not meet the definition of
fees hence no withholding tax levied.
Management fees paid to a foreign parent Managerial fees paid to a connected
company entity therefore subject to the
withholding tax.
Payment for repair of machinery in Specifically excluded therefore not subject
South Africa to the withholding tax.
 4. Non-resident tax on remittances – sect
31 and 18th schedule
• In terms of the 18th schedule any non-
resident person who effects any remittance in
respect of allocable expenditure shall in
relation to such remittance pay non-residents’
tax on re- mittances to the Commissioner
within 10 days of the date of remittance or
within such further time as the Commissioner
may for good cause allow. The rate of the
withholding tax is 15%.
 4. Non-resident tax on remittances – sect
31 and 18th schedule
• Allocable expenditure: means expenditure of
a technical, managerial, administrative or
consultative nature incurred outside
Zimbabwe by a non-resident person in
connection with or allocable to the carrying on
by him of any trade within Zimbabwe
From the above definitions the following requirements have to be
met for a non-resident tax on remittances be payable to ZIMRA
Requirement
What expenditure is being paid for?
Where was the expenditure incurred?
Who paid for the expenditures?
Was a remittance in connection with
expenditure made?
Technical, managerial, administrative
consultative in nature. E.g. management
fees, training on the use of software
For the withholding tax to apply the
expenditure above should have been
incurred outside Zimbabwe, for the
benefit of the taxpayers Zimbabwe
operations.
The expenditures would have to be paid
by a non-resident person for the
withholding tax to apply. Refer to the X
Ltd. example above.
non-resident person ” means a person
who, or partnership which, is not
ordinarily resident in Zimbabwe, but does
not include a licensed investor;
A remittance in connection with the
expenditure should have been made and
remittance is defined as “the transfer of
any amount from Zimbabwe to another
 4. Non-resident tax on remittances – sect
31 and 18th schedule eg
• X Ltd. a bank based in South Africa and with
operations in Zimbabwe paid an amount of $5,000
for technical consultancy services incurred in South
Africa for the benefit of its Zimbabwean operations.
X ltd. Paid for the services from its cash balances in
Zimbabwe to a supplier in South Africa
• From the above since X Ltd. made a payment to a
South African supplier in respect of allocable
expenditure, X will have to withhold $750 (15% *
$5,000) in respect of the payment.
 5. Non Resident tax on royalties – sect 31
and 19th schedule
• Non-residents tax on royalties are levied in terms
of section 31 (a.r.w the 19th Schedule) of the
Income Tax Act. In terms of the 19th schedule par
2(1), every payer of royalties to a non-resident
person shall withhold non-residents’ tax on
royalties from those royalties and shall pay the
amount withheld to the Commissioner within 10
days of the date of payment or within such further
time as the Commissioner may for good cause
allow. The withholding tax rate is 15%.
 5. Non Resident tax on royalties – sect 31
and 19th schedule
Therefore, in order to determine which payments are subject to this tax we need
to look at two key terms:
• a) Non-resident person; “means a person, other than a company, who; or a
partnership or foreign company which; is not ordinarily resident in Zimbabwe.
This definition is exactly the same as the one under non-resident tax on fees.
• b) Royalties “means any amount from a source within Zimbabwe payable as a
consideration for the use of, or the right to use, any literary, dramatic, musical,
artistic, scientific or other work whatsoever (including cinematograph films or
recordings) in which any copyright exists, any patented article, trade mark,
design or model, plan, secret formula or process, or for the use of, or the right
to use, industrial, commercial or scientific equipment, or for information
concerning industrial, commercial or scientific experience”. From the above
definition the key requirements are that the tax payer should be paying for the
right of use of intellectual property, for the payment to meet the definition of
a royalty.
 We will now apply the above definitions to the
services for which ICAZ is making pay-ments to
non-resident persons:
Service
Student registration fees paid to a foreign
university.
LTS – Access fee for a software for
students.
Information Kinetics – Monthly retainer
fee for software consultants for a
database that serves both members and
students
Comment
The taxpayer will not be paying for the
right of use but rather their students will
receive tuition services from the foreign
university. Therefore does not trigger the
non-resident tax on royalties
The taxpayer will be paying for the right of
use of the LTS system over which a patent
or copy right exists. Therefore the
taxpayer should withhold a non-resident
tax on royalties on payments to LTS.
The tax payer will be paying for the right
of use of a software that allows them to
keep a database of members and
students. Since the taxpayer is paying for
a right of use it therefore meets the
definition of a royalty payment and thus
subject to non-resident tax on royalties.
 6. Resident Tax on Interest: Sec 34 & 21st
schedule
• 15% should be withheld from interest paid by a financial
institution (e.g. banks, building societies, the Reserve
Bank and other financial institutions (including unit trust
managers, asset managers)) on loans and deposits and
income from Treasury Bills, Bankers Acceptances and
instruments traded by financial institutions.
• 5% should be withheld from interest on fixed term
deposits for at least 90 days.
• Please note that the withholding tax deducted will be a
final tax on the gross income which is exempt from
Income tax
 7. Non-Executive Directors Fees: sec 36 J

• 20% should be withheld from payments to

resident and non-resident non-executive
direc- tors who are not subject to PAYE. Non-
executive director’s fee qualifies as business
income and tax withheld is deductible from
income tax payable.
 7. Non-Executive Directors Fees: sec 36 J
Example:
Takunda is a non-executive director for H Ltd and during October
2016 he was in receipt of $2,300 in respect of his board fees for the
quarter ended 30 June 2016. Discuss the tax implications of the
payment to Takunda.
H ltd will be required to withhold 20% of the $2,300 paid to Takunda
since the amount qualifies as a non-executive director’s fees and they
should remit the amount within 10days of making the payment to
Takunda. In Takunda hands the fees received from H Ltd will qualify to
be trade and investments income taxable at a rate of 25.75%.
However, Takunda will be allowed to deduct the tax withheld by H
Ltd. From the tax payable in respect of his director’s fees.
•TRANSFER PRICING
 Introduction
• Transfer pricing legislation (s98A and 98B of the Act) was
introduced on the 1st of January 2014 and was meant to
forestall transfer pricing in transactions involving associates.
The rules complement the ‘old rules’, i.e. section 23 and 24
of the Act. These new transfer pricing rules are both
domestically and externally focused. The concept of transfer
pricing is amongst the suite of measures that have been
legislated in order to reduce instances of tax avoidance by
tax payers. Therefore, the legislation we are going to focus
on here relates to Income splitting (Sect98A) and
Transactions between Associates (Sect 98B).
 Introduction
• The transfer pricing legislation is accompanied
by the definition of associated persons and
deemed control of a company (section 2A and
2B of the Act). The Finance Act no 2 of 2015
enacted transfer pricing methods adopting
these from the OECD Transfer Pricing Guide-
lines for Multinational Enterprises. The new
transfer pricing methods are with effect from
1 January 2016
 TRANSFER PRICING
• Transfer pricing can trigger double taxation and affect the
allocation of tax bases among the various jurisdictions in
which the group operates.
• The globalization of world markets has turned transfer
pricing into one of the dominant sources of international
tax disputes between taxpayers and taxing authorities.
• Transfer prices directly affect the allocation of groupwide
taxable income across national tax jurisdictions, and a
company’s transfer-pricing policies can directly affect its
after-tax income to the extent that tax rates differ across
national jurisdictions
 What is transfer pricing
• Transfer price is the price at which transactions are carried out between companies
part of the same group (i.e. related companies or related parties; see Frequently
asked questions for the definition of "related companies").

• The transactions carried out between related companies must comply with the arm’s
length principle, which is at the heart of any transfer pricing analysis. This means that
the prices applied in transactions between companies from the same group must be
the same as the prices charged by independent companies in comparable economic
conditions. Otherwise, profits will not be correctly reflected in the jurisdiction of each
related company involved in the transaction.

• Transfer pricing is a system of laws and practices used by countries to ensure that
goods, services, intellectual property, and resources transferred or shared between
affiliated companies are appropriately priced based on market conditions. This is
important as transfer pricing may inflate profits in low-tax jurisdictions and decrease
profits in high-tax countries – the so-called “base erosion and profit shifting” concept.
 Transfer pricing and… "arm’s length"
• In order to tackle the issues that arise in the transfer pricing area,
the OECD has issued guidelines that contain recommendations for
multinational companies and tax authorities; OECD international
guidelines are based on the arm’s length principle. What is the
connection between arm’s length and the requirement that a
transfer price between affiliated parties should be similar to the
market price for similar transactions?
• There’s a simple explanation – when two people are close
(affiliates) they tend to hug each other. The TP theory states that
these two individuals should act as if they did not know each
other (independents) and during a transaction just shake hands
and keep each other…at arm’s length.
 Why is transfer pricing a hot tax issue
• Nowadays transfer pricing has become a hot topic for
both multinational companies and tax authorities.

• Since “the greatest crisis in the last 80 years” the

most powerful economies from the world are the
first to seek solutions to avoid “base erosion and
profit shifting”. Through global exchange of
information, new regulations and guidelines give the
authorities freedom to “hunt down” intra-group
transactions and by default the transfer prices.
 Why is transfer pricing a hot tax issue
• Transfer pricing affects the amounts paid as corporate tax – the
current economic conditions and the stringent need for resources
at the state budget have determined the tax authorities to be
more concerned about the topic of transfer pricing. This is also
strengthened by the work of OECD regarding the base erosion and
profit shifting (referred to as BEPS). Transfer pricing is not an exact
science, therefore it is much easier for tax authorities to impose
transfer pricing adjustment and recalculation of taxes to be paid
from the budget. This is why companies which are part of a group
must have strong arguments (organized in the transfer prices file)
that intra-group transaction prices are arm’s length and not used
for an “artificial” increase of spendings or “artificial” cut of
incomes.
 Why is transfer pricing a hot tax issue
• Transfer pricing affects cash flow, investment decisions and performance
indicators – from a multinational company point of view, transfer pricing can
influence cash flow streams (e.g. additional corporate tax imposed by the tax
authorities will reduce the resources at hand), investment decisions (e.g. a
jurisdiction with frequent changes of the transfer pricing legislation will bring
uncertainty for multinational companies that could favor the decision to exit a
certain country) and key performance indicators (e.g. additional corporate tax
imposed by the tax authorities reduces the profitability a company could offer
to its shareholders).

• Transfer pricing affects custom value – for example, the customs authorities
may not accept the transfer prices declared by a company for goods in
customs transit and therefore will impose different price levels for custom
valuation purposes. This raises issues as for the same property / goods two
different values are allocated for tax purposes.
 Why is transfer pricing a hot tax issue
• Transfer pricing can involve revenue or expense adjustments that trigger double
taxation – since transactions between two related parties are not subject to the
same market forces as transactions between independents, over or under-
pricing can affect the allocation of tax bases among the various jurisdictions in
which the group operates. By shifting profits from one jurisdiction to another,
distorted transfer pricing can expose multinational companies to double taxation
if two jurisdictions involved in a cross-border transaction claim taxing rights on
the same profit.
• Transfer pricing can help an organization to identify opportunities for business
optimization – transfer pricing analysis involves a deep understanding of how the
group’s business works, and its key value drivers, and hence could indicate ways
of improvement and/or optimization.
• Transfer pricing is subject to legal requirements – more and more countries have
included transfer pricing in their local legislation imposing fines, penalties,
additional tax, or other forms of constraint for not complying with the
regulations.
 How does it affect my business
• In Zimbabwe, taxpayers should document compliance
with the arm’s length principle surrounding transfer
prices charged in inter-company transactions.
• But, more than fines and penalties, the real issue is
the ADJUSTMENT: if tax authorities consider that the
prices applied in related-party transactions differ
from prices that would be agreed between unrelated
entities (do not meet the arm’s length standard),
then they may adjust tax base, with important
implications on your business:
 How does it affect my business
• Cashflow / Predictability: the company uses the money they have today to pay contingent spending
from the past (retrospective payments, penalties, income tax). If the company does not have profit,
reduction of losses (reduction resulting from the adjustments) translates into smaller amounts of
earnings to be deducted during the next years.
• There are also situations when transfer prices for goods subject to customs duties were not determined
using a method that is accepted by the customs authorities. This being the case, the importer will have
to pay additional customs duties as well as any interest or resulting penalties.

• Development plans: with fewer resources available the company must postpone or rethink their
investment plans.

• Performance indicators: adjustments of performance indicators (especially regarding profitability) will

affect the image of the company on the stock market (for listed companies) and increase the cost of
financing costs required by banks/investors.

• Business of the entire group: these transfer pricing adjustments can trigger double taxation (taxation of
the same profits on both sides of the transaction). The group should seek an amicable settlement in
order to avoid double taxation (on long-term, additional costs) and/or an arbitration agreement. At the
same time, the group (parent company) must review the transfer pricing policy in relation to all
subsidiaries.
 How does it affect my business
• Rewards for those who have a good
understanding of transfer pricing implications...
• Taking a proactive attitude towards transfer
pricing (i.e. analyzing intercompany transactions,
setting a transfer pricing policy, and preparing
solid transfer pricing documentation) could bring
major benefits to a business in terms of fiscal
protection by ensuring a defendable position in
case of a tax audit. Your rule of action should be a
consistent transfer pricing policy!
•Key Definitions
 1. Associates – Section 2A (when persons
deemed to be associates)
Par 1: General Rule
• Where a person, other than an employee, acts in
accordance with the directions, requests,
suggestions or wishes of another person, whether
or not the persons are in a business relationship
and whether or not those directions, requests,
suggestions or wishes are communicated to the
first-mentioned person, both persons shall be
treated as associates of each other for the
purposes of this Act.
 1. Associates – Section 2A (when persons
deemed to be associates)
• Par 2:
• Without limiting the generality of subsection (1) above, the following
shall be treated as a person’s associate:|
a) a near relative of the person, unless the Commissioner is satisfied that
neither person acts in accordance with the directions, requests, suggestions
or wishes of the other; Near relatives are defined as (sect 2):
i. a lineal ascendant of an individual, including a step-father or step-mother;
or ii. a child or a lineal descendant of an individual other than a child; or
iii. a brother, half-brother, step-brother, sister, half-sister, step-sister, uncle,
aunt, nephew or niece of an individual; or
iv. the adopter or adopters of an individual; or
v. the spouse of a relative of an individual referred to in paragraphs (i) to (iv);
 1. Associates – Section 2A (when persons
deemed to be associates)
b) a partner of the person, unless the Commissioner is satisfied that neither person acts in
accordance with the directions, requests, suggestions or wishes of the other;
c) a partnership in which the person is a partner, if the person, either alone or together with 1
or more associates, controls 50% or more of the rights to the partnership’s income or capital;
d) the trustee of a trust under which the person, or an associate of the person, benefits or may
benefit;
e) a company which is controlled by the person, either alone or together with 1 or more
associates;
f) where the person is a partnership, a partner in the partnership who, either alone or together
with 1 or more associates, controls 50% or more of the rights to the partnership’s income or
capital;
g) where the person is the trustee of a trust, any other person who benefits or may benefit
under the trust;
h) where the person is a company—i. a person who, either alone or together with one or more
associates, controls the company; or
• ii. another company which is controlled by a person referred to in subparagraph iii. (i),
either alone or together with 1 or more associates.
 2. Control - 2B When person deemed to
control a company
A person shall be deemed to control a company if the person, either
alone or together with 1 or more associates or nominees—
• a) controls the majority of the voting rights attaching to all classes
of shares in the company, whether directly or through one or more
interposed companies, partnerships or trusts; (Example if I hold
60% of voting rights in Company A, then I am deemed to control
company A) or
• b) Has any direct or indirect influence that, if exercised, results in
him or her or his or her associates or nominees factually controlling
the company (Example if a I have the right to appoint the majority
of the board of directors for Company A, then I may be deemed to
control company A since I can indirectly influence company A
through my board appointees).
• 3. From the above definitions the use of the word
person is being frequently referred to, therefore
we need to also define what is meant by persons
in terms of the income tax act. Sect 2 defines
person to includes a company, body of persons
corporate or un-incorporate (not being a
partnership), local or like authority, deceased or
insolvent estate and, in relation to income the
subject of a trust to which no beneficiary is
entitled, the trust;
 Income splitting – sect 98A
• Where an individual attempts to split income with an associate, the
Commissioner may adjust the taxable income of the taxpayer and the
associate to prevent any reduction in tax payable as a result of the
splitting (tax avoidance).
• A taxpayer shall be treated as having attempted to split income where—
a) the taxpayer transfers income, directly or indirectly, to an associate; or
b) the taxpayer transfers property, directly or indirectly, to an associate with
the result that the associate receives or enjoys the income from that
property;
c) and the sole or main reason for the transfer is to lower the tax payable
upon the incomes of the taxpayer and the associate.
• In determining whether a taxpayer is seeking to split income, the
Commissioner shall consider the value, if any, given by the associate for
the transfer of the income or property concerned.
 Income splitting – sect 98A
• Example
• Company X and Company Y are associate companies as
defined in section 2A of the Income Tax Act. In July 2016
they entered into a transaction in which Company X
transferred one of its rental earning properties to
Company Y. The decision was made when X’s
management noted that they could reduce their taxable
income by transferring this property to Y since Y has
been incurring significant losses over the past 4 years.
Discuss the implications of the above transaction with
reference to the requirements of sect 98A.
 Income splitting – sect 98A
Solution
• Given management’s intentions when they transferred to property to Company Y,
the transactions appear to be a tax avoidance scheme.
• Therefore, we need to apply the requirements in section 98A to determine whether
or not the transactions resulted in income splitting.
• Was a property transferred to an associate who now enjoys/received the income
from that property? – In our case a rent earning property was transferred to company
Y from company X, who are associate companies, therefore this requirement has been
made.
• Was the reason for the transfer to lower the tax payable upon the incomes of the
taxpayer and the associate? – in this case the transfer will reduce the tax payable by
company X and company Y since they have been making losses will most likely not
have any taxable income, therefore requirement met.
• Therefore, since the transaction has resulted in income splitting, the commissioner
will have powers to tax the rental income from the property in the hands of Company
X.
Transactions between associates – sect 98B

• Introduction
• Section 98B stipulates the requirements in respect of
controlled transactions between associates with the
intention of addressing tax avoidance initiatives
amongst tax payers. Therefore, for the rules in this
section to apply there are two main basic
requirements that have to be met:
• a) The transaction in question should be a controlled
transaction as defined; and b) The transactions
should be effected between associates as defined.
 definitions
• 1. Controlled Transactions: The 35 schedule par 1 defines
th

controlled transactions by defined what they are not.

Uncontrolled transactions mean any transactions between
independent persons. For the purpose of this definition it
means that associated persons as defined in Section 2A are not
independent. Interpreting this definition examples of
controlled transactions would include but not limited to
transactions between:
a. Spouses;
b. Near relatives; and
c. A person and a company they control;
• 2. Associates: refer to sect 2A discussion above
 Section 98B Requirements in respect of
controlled transactions between associate
• 98 B Par (1):
• The taxable income for controlled transactions
between associates shall be determined with
reference to the arm’s length principle, where the
conditions of the controlled transactions do not differ
from an uncontrolled transaction i.e. the conditions
in the controlled transactions would not differ from
the conditions that would have applied between
independent persons, in comparable transactions
carried out under comparable circumstances.
 Section 98B Requirements in respect of
controlled transactions between associate

• From the above it can be noted that for the

arm’s length principle to be applied there
should be a comparable uncontrolled
transaction which can be used as a benchmark
against the controlled transaction in question.
Therefore, it is key that we discuss the
meaning of comparable transactions as it is
key element in the applicability of the above
requirement.
 Section 98B Requirements in respect of
controlled transactions between associate
• Comparability: 35 schedule par 3
th

• An uncontrolled transaction is comparable to a controlled

transaction:
• i. Where there are no differences between them that could
materially affect the financial indicator being examined
under the appropriate transfer pricing method; or
• ii. When such differences exist, if a reasonable accurate
comparability adjustment is made to the relevant financial
indicator of the uncontrolled transaction in order to
eliminate the effects of such differences on the comparison.
• Example:
• Company X is a subsidiary to Company Y and are therefore
associated companies as defined in section 2B. Company X sold
machinery to company Y for a sale price of $6,000. For the
purpose of section 98B this sale transaction would qualify to be a
controlled transaction. A comparable transaction would therefore
be a sale of a similar type of machine between independent
persons (uncontrolled transaction). If the machine sold between
the independent persons is not of the same age as the one sold
between company X and Y, then if a reasonable adjustment can
be made to reflect the differences in the ages of the machines it
would then still qualify as a comparable transaction
• Par 3(2) to determine whether 2 or more transactions are
comparable, the following factors shall be considered to the extent
that they are economically relevant to the facts and circumstances of
the transactions —
a) the characteristics of the property or services transferred; and
b) the functions undertaken by each person with respect to the
transactions, taking into account assets used and risks assumed; and
c) the contractual terms of the transactions (e.g. cash sale vs hire
purchase sale); and
d) the economic circumstances in which the transactions take place
(sale effected as part of liquidation proceedings vs normal sale): and
• e) The business strategies pursued by each of the associated persons
in relation to the transactions
• 98B Par (2):
• This paragraph makes provisions where a
controlled transaction between associated
persons is not effected on an arm’s length basis
and results in the avoidance, reduction or
postponement of the liability to tax of either or
both of them. In such a case any income accruing
to the taxpayers shall be determined with
reference to the arm’s length principle as
determined in terms of Par (3).
• 98B Par (3):
• The determination of whether the conditions of a
controlled transaction between associated persons are
consistent with the arm’s length principle, and of the
quantum of any tax payable under subsection (2), are
prescribed in the Thirty-Fifth Schedule.
• 35 schedule Par 4: Transfer Pricing:
th

• In terms of par 4 to the 35 schedule the arm’s length

th

remuneration of a controlled transaction shall be

determined with applying the most appropriate transfer
pricing method to circumstances of the case.
Transfer pricing methods (35 schedule par
th

4(5))
• 1. Comparable uncontrolled price method
• This method compares the price for property
or services transferred in a controlled
transaction to the price charged for property
or services transferred in a comparable
uncontrolled transaction in comparable
circumstances.
Transfer pricing methods (35 schedule par
th

4(5))
• 2. Resale price method
• The method is based on the price at which a product
that has been purchased from an associated enterprise
is sold to an independent enterprise.
• The resale price is reduced by the resale price margin.
• What is left after subtracting the resale price margin can
be regarded, after adjustment for other costs associated
with the purchase of the product (e.g. custom duties), as
an arm’s length price of the original transfer of property
between the associated enterprises.
Transfer pricing methods (35 schedule par
th

4(5))
• Example:
• During the year of assessment Entity X purchased
goods for a consideration of $1,500 for entity Y
which is an associated enterprise. Entity X then
went to sale the goods to an independent entity for
a sale consideration of $1,700. Ordinarily Entity X
earns a margin of 20% on all sales of these goods.
Calculate the transfer price for the goods purchase
from entity Y, that should be used in calculating
entity X’s taxable income
Transfer pricing methods (35 schedule par
th

4(5))
• Solution: $
Resale price 1,700
Less normal sales margin ($1,700 * 20%) (340)
Arm’s length price/transfer price 1,360
• Therefore, when entity X is calculating their
taxable income for the year they should use a
transfer price of $1,360 in respect of goods
purchased from entity Y.
Transfer pricing methods (35 schedule par
th

4(5))
• 3. Cost Plus method
• The method applies the costs incurred by the supplier of
property (or services) in a controlled transaction. An
appropriate cost plus mark-up is then added to the
direct or indirect costs, to make an appropriate profit in
light of the functions performed (taking into account
assets used and risks assumed) and the market
conditions.
• What is arrived at after adding the cost plus mark up to
the above costs may be regarded as an arm’s length
price of the original controlled transaction
Transfer pricing methods (35 schedule par
th

4(5))
• Example:
• During the 2016 year of assessment P ltd sold goods to
S ltd an associated company for a sale consideration of
$3,000. P ltd had originally bought these goods from an
independent entity for a purchase consideration of
$2,700. Ordinarily for similar uncontrolled transactions
P ltd charges a mark-up of 25% on such sales of these
goods. Calculate using the cost plus method the
transfer price to be used for the sale transaction in
determining P ltd.’s taxable income for the year.
Transfer pricing methods (35 schedule par
th

4(5))
• Solution:
$
• Purchase price 2,700
• Add mark-up ($2,700 * 25%) 675
• Transfer price 3,375
• Therefore, P ltd should use a transfer price of
$3,375 in respect of the sales made to S ltd in
calculating their taxable income for the 2016
year of assessment.
Transfer pricing methods (35 schedule par
th

4(5))
• 4. Transactional net margin method
• The method examines the net profit margin
relative to an appropriate base (e.g. costs,
sales, assets etc.) that a taxpayer realizes from
a controlled transaction with the net profit
margin relative to the same base achieved in a
comparable uncontrolled transaction
Transfer pricing methods (35 schedule par
th

4(5))
Transfer pricing methods (35 schedule par
th

4(5))
Transfer pricing methods (35 schedule par
th

4(5))
• The issue to be determined is whether this net margin
of the associated parties is consistent with the net
margin earned by independent parties performing
comparable functions to the associated parties.
• In this case using the profit indicator (PI) of Net
profit/sales, the PI for independent parties in 7.5%
whilst that for connected parties is 8.3%.
• This PI is too high so the selling price for associated
parties should be adjusted upwards in order to get a
7.5% PI.
Transfer pricing methods (35 schedule par
th

4(5))
• 5. The Transactional Profit Split Method
• The transactional profit split method
consisting of allocating to each associated
person participating in a controlled
transaction the portion of common profit (or
loss) derived from such transaction that an
independent person would expect to earn
from engaging in a comparable uncontrolled
transaction
Transfer pricing methods (35 schedule par
th

4(5))
Transfer pricing methods (35 schedule parth

4(5))
• Entity 1 is the tested party. The question is whether
Entity 1’s selling price of $1 200 represents an arm’s
length price.
• To determine the Group gross profit, use the selling
price to 3rd parties which is $1 400 and the cost
(purchases) from 3rd parties which is $1 000. The GP is
thus $400.
• Entity 1 had costs to 3rd parties whilst Entity 2 did not
have any costs to third parties. The profit will therefore
be allocated according to costs to 3rd parties as follows:
• The following criteria should be considered in identifying the most
appropriate method:
• i. The respective strengths and weaknesses of the approved methods;
and
• ii. the appropriateness of an approved method in view of the nature of
the controlled transaction, determined in particular through an analysis
of the functions undertaken by each person in the controlled
transaction, taking into account assets used and risks assumed; and
• iii. the availability of reliable information needed to apply the selected
transfer pricing method or other methods; and
• iv. The degree of comparability between the controlled and
uncontrolled transactions, including the reliability of comparability
adjustments, if any, that may be required to eliminate differences
between them.
• 98B par 4:
• The requirements in section 98B par 1 also applies where a
person (whether or not an associated person) who is resident
in Zimbabwe engages in any transaction with a person
resident outside Zimbabwe in a jurisdiction considered by the
Commissioner-General to provide a taxable benefit in relation
to that transaction.
• This means that transfer pricing rules may also be applied to
uncontrolled transactions where tax payer resident in
Zimbabwe transacts with a non-resident person and the
commissioner is of the opinion that the non-resident will earn
a tax benefit from the transaction
• Sources of information on comparable
uncontrolled transactions – 35 schedule par 7
th

• a) internal uncontrolled transactions, which are

uncontrolled transactions where one of the
parties to the controlled transaction is also a
party to the uncontrolled transaction; and
• b) External uncontrolled transactions, which are
uncontrolled transactions to which neither of the
parties to the controlled transaction is a party
• Services between associated enterprises – 35 schedule par 8
th

• A service charge between a taxpayer and an associated person shall be

considered consistent with the arm’s length principle where—
• a) it is charged for a service that is actually rendered; and
• b) the service provides, or when rendered was expected to provide, the
recipient with economic or commercial value to enhance its commercial
position; and
• c) it is charged for a service that an independent enterprise in comparable
circumstances would have been willing to pay for if performed for it by an
independent enterprise, or would have performed in-house for itself; and
• d) its amount corresponds to that which would have been agreed
between independent enterprises for comparable services in comparable
circumstances.
• A service charge made to a person shall not be consistent with the arm’s length
principle where it is made by an associated person solely because of the
shareholder’s ownership interest in 1 or more other group members, including
for any of the following- costs incurred or activities undertaken by such
associated person:
• a) costs or activities relating to the juridical structure of the parent company of
the first- mentioned person, such as meetings of shareholders of the parent,
issuing of shares in the parent company and costs of the parent company’s
supervisory board; and
• b) costs or activities relating to reporting requirements of the parent company
of the first- mentioned person, including the consolidation of reports; and
• c) costs or activities related to raising funds for the acquisition of participations,
unless those participations are directly or indirectly acquired by the first-
mentioned person and the acquisition benefits or is expected to benefit that
first-mentioned person.