Once a controlled transaction has been identified and a comparability/FAR analysis performed (the TP Foundations lesson), the practitioner must compute the arm's length price or margin — and Zimbabwean law prescribes exactly how. Paragraph 5(5) of the Thirty-Fifth Schedule to the Income Tax Act [Chapter 23:06] sets out five approved transfer pricing methods: the Comparable Uncontrolled Price (CUP) method, the Resale Price method, the Cost Plus method, the Transactional Net Margin Method (TNMM), and the Transactional Profit Split method. Paragraph 4 requires the most appropriate method to be selected for the circumstances; paragraph 5(6)–(7) then imposes a hierarchy — where the CUP method and another method can be applied with equal reliability, CUP must be used, and where a traditional transactional method (CUP, Resale Price or Cost Plus) and another can be applied with equal reliability, the traditional method is preferred. Only one method need be applied (para 4(3)/(8)). A method outside the five is permitted only where none of the approved methods can reasonably apply and the alternative reproduces an independent-dealing result, which the taxpayer must establish (para 5(9)–(10)).

The five methods fall into two families. The traditional transactional methods test the price (CUP) or a gross-level result — the resale gross margin (Resale Price) or the mark-up on costs (Cost Plus). The transactional profit methods test a net result — the net profit margin relative to a base (TNMM) or the division of combined profit (Profit Split). Each is suited to a different fact pattern, which the FAR analysis reveals: CUP for commodities and where a comparable price exists; Resale Price for distributors that on-sell with little added value; Cost Plus for contract manufacturers and routine service providers; TNMM as the workhorse one-sided method where gross-margin data is unreliable; and Profit Split for highly integrated dealings or where both parties contribute unique and valuable intangibles. The whole framework mirrors the OECD Transfer Pricing Guidelines (2022), Chapter II (the methods) read with Chapter III (comparability) — persuasive, non-binding context for the binding Zimbabwean provisions, now held in the TaxTami Source Library.

This lesson explains each method from first principles, shows which financial indicator it tests and which party is the tested party, and works a fully computed Zimbabwean USD example for each — a CUP price adjustment, a resale-price gross-margin computation, a cost-plus mark-up, a TNMM net-margin benchmark with an interquartile-range concept, and a residual profit split. It then walks the selection logic (para 4 + the hierarchy), the role of comparability adjustments (para 3(1)(b)), and the most common method errors ZIMRA challenges. It carries forward the adjustment-and-penalty mechanics from TP Foundations (Section 98B(2) adjustment; Section 98B(2a) 10%/30%/100% penalty by documentation tier), because selecting and applying the right method is the substance of a defensible transfer-pricing position. The next lesson (TP Documentation, Disclosure Return & Penalties) covers the compliance file that protects the 10% tier; the methods here are what that file must justify. Rates: corporate income tax shown as 25% for arithmetic — .

First principles

The TP Foundations lesson established the standard — related-party dealings must be priced as independent parties would price them (the arm's length principle, Section 98B(1)) — and the engine that tests comparability, the FAR analysis (Thirty-Fifth Schedule para 3). What it did not do is compute a number. That is the job of a transfer pricing method: a structured, repeatable technique for turning the comparability analysis into an arm's length price, margin or profit allocation that can be compared against the controlled transaction and, where they differ and Zimbabwean tax was reduced, used to adjust taxable income (Section 98B(2)). A method is therefore the bridge between principle and assessment.

Why method choice is the heart of a TP analysis

Two analysts looking at the same controlled transaction can reach very different arm's length figures simply by choosing different methods or different comparables — which is why paragraph 4 does not leave method choice free-form but requires the most appropriate method to the circumstances of the case, chosen on reasoned criteria, and why paragraph 5(6)–(7) imposes a hierarchy to discipline the choice. In practice, the method is the first thing ZIMRA scrutinises in a transfer-pricing audit: an inappropriate method (or a "best" method asserted without considering the alternatives) undermines the whole position, while a well-reasoned most-appropriate-method analysis, supported by comparables, is the core of the contemporaneous documentation that caps the penalty at 10% (Section 98B(2a)(b)(ii)).

Where this sits

This is the second lesson of the Transfer Pricing module, following TP Foundations and preceding TP Documentation, Disclosure Return & Penalties and Intangibles & Intra-group Services. It assumes the vocabulary from Foundations — associated persons, controlled transaction, comparability, FAR, the adjustment and penalty mechanics — and supplies the computational toolkit those later lessons rely on. It also connects outward: the method chosen for an intra-group fee, royalty or loan interacts with the withholding taxes on that payment (Withholding Taxes module) and, for imported goods, with customs valuation.

B.1 The governing provisions

Method selection and application are governed by paragraphs 4 and 5 of the Thirty-Fifth Schedule to the Income Tax Act [Chapter 23:06], operating under Section 98B (the charge to the arm's length principle and the adjustment/penalty powers). Comparability — which determines whether a method can be reliably applied — is governed by paragraph 3 (covered in Foundations). The Zimbabwean provisions are OECD-aligned: they correspond to Chapter II of the OECD Transfer Pricing Guidelines (2022) (the methods) and Chapter III (comparability), which are persuasive, non-binding interpretive context.

B.2 Paragraph 4 — the most appropriate method

Para 4(1): the arm's length remuneration of a controlled transaction is determined by applying the most appropriate transfer pricing method to the circumstances. Para 4(2): the most appropriate method is selected from the approved methods (para 5(5)) taking into account: (a) the respective strengths and weaknesses of each method; (b) the appropriateness of a method given the nature of the controlled transaction, determined through the FAR analysis; (c) the availability of reliable information (in particular on uncontrolled comparables); and (d) the degree of comparability, including the reliability of any comparability adjustments. Para 4(3): it is not necessary to apply more than one method. Para 4(4): where the taxpayer has used an approved method and the selection is consistent with the Schedule, ZIMRA's examination is based on that method.

B.3 Paragraph 5(5) — the five approved methods

• (a) Comparable Uncontrolled Price (CUP): comparing the price charged for property or services in a controlled transaction to the price in a comparable uncontrolled transaction.
• (b) Resale Price: comparing the resale margin a purchaser of property in a controlled transaction earns on reselling it in an uncontrolled transaction with the resale margin earned in comparable uncontrolled purchase-and-resale transactions.
• (c) Cost Plus: comparing the mark-up on the costs directly and indirectly incurred in supplying property or services in a controlled transaction with the mark-up on such costs in a comparable uncontrolled transaction.
• (d) Transactional Net Margin Method (TNMM): comparing the net profit margin relative to an appropriate base (e.g. costs, sales or assets) that a person achieves in a controlled transaction with the net profit margin relative to the same base in comparable uncontrolled transactions.
• (e) Transactional Profit Split: allocating to each associated person the portion of the combined profit (or loss) from the controlled transaction that an independent person would expect to earn; where arm's length remuneration for some functions can be determined by a method in (a)–(d), the profit split is applied to the residual profit after those functions are first remunerated.

B.4 Paragraphs 5(6)–(10) — the hierarchy and the way out

• Para 5(6): where the CUP method (5(5)(a)) and a method in 5(5)(b)–(e) can be applied with equal reliability, CUP is used.
• Para 5(7): where a traditional transactional method (5(5)(a)–(c)) and another method can be applied with equal reliability, the traditional method is used.
• Para 5(8): only one method need establish the arm's length remuneration.
• Para 5(9)–(10): a method other than the approved five may be used only where the Commissioner is satisfied that none of the approved methods can reasonably apply and the alternative yields a result consistent with independent dealing — and, when an unapproved method is used, the taxpayer must establish that those requirements are met.

B.5 How the methods connect to the charge

A method produces the arm's length figure; comparing it to the controlled transaction's actual figure gives the difference; where the difference reduced Zimbabwean tax, Section 98B(2) includes the arm's length amount in taxable income; the additional tax is the shortfall; and Section 98B(2a) sets the penalty at 10% (compliant contemporaneous documentation), 30% (none/non-compliant) or 100% (fraud). The method, and the documentation justifying it, therefore determine both the adjustment and the penalty tier.

C.1 Comparable Uncontrolled Price (CUP) — testing the price

CUP is the most direct method: it compares the actual price of the controlled transaction with the price in a comparable uncontrolled transaction. An internal CUP uses a price the same group charges to/from an independent party; an external CUP uses a price between two unrelated parties (e.g. a published commodity quotation). CUP demands high product comparability — small differences in the product, contractual terms, volume, timing or market can materially move price, so a comparability adjustment (para 3(1)(b)) may be needed (e.g. adjusting for freight terms or quantity discounts). Because it tests price directly, CUP is the preferred method where it can be applied reliably (para 5(6)); it is the natural fit for commodities (minerals, tobacco, fuel) and any dealing with an observable comparable price.

C.2 Resale Price — testing the distributor's gross margin

The Resale Price method starts from the price at which a product bought from a related party is resold to an independent customer, and works backwards: the arm's length purchase price = resale price − an arm's length resale gross margin (the "resale price margin") that would remunerate the reseller's functions and risks. It tests a gross margin, so it tolerates more product difference than CUP but demands functional comparability of the reseller. It suits a distributor that on-sells without adding much value (no manufacturing, no valuable marketing intangibles). The tested party is the reseller.

C.3 Cost Plus — testing the supplier's mark-up

Cost Plus starts from the costs a supplier incurs in a controlled transaction and adds an arm's length mark-up on those costs to arrive at the arm's length price. It tests the mark-up on costs (a gross-level indicator), and suits contract/toll manufacturers and routine service providers whose functions are well-defined and low-risk. The tested party is the supplier/manufacturer. Consistency in what is included in the cost base (direct + indirect costs) between the controlled and comparable transactions is essential, or a comparability adjustment is required.

C.4 Transactional Net Margin Method (TNMM) — testing the net margin

TNMM compares the net profit margin the tested party earns relative to an appropriate base — costs, sales or assets — against the net margins independent comparables earn on the same base. The base (the profit level indicator, PLI) is chosen to fit the functions: a net cost-plus mark-up (net profit/total costs) for service providers and manufacturers; a return on sales (net profit/sales) for distributors; a return on assets for asset-intensive activities. TNMM is the workhorse one-sided method: net margins are less sensitive to product differences than price or gross margin and comparable net-margin data is more widely available, so TNMM is used where CUP/Resale/Cost Plus cannot be applied reliably. Because comparables yield a range of arm's length net margins, the result is usually expressed as an arm's length range (in practice the interquartile range), and an adjustment is made only if the tested party's margin falls outside that range, typically to the median.

C.5 Transactional Profit Split — dividing the combined profit

The Profit Split method takes the combined profit of the associated parties from the controlled transaction(s) and divides it between them as independent parties would, based on the relative value of their contributions (functions, assets, risks). Two variants: a contribution analysis (split the whole profit by relative contributions) and, more commonly, a residual analysis — first remunerate each party's routine functions using a one-sided method (CUP/Resale/Cost Plus/TNMM), then split the residual profit (attributable to unique and valuable contributions, often intangibles) between them. Profit Split is the method of choice for highly integrated operations and where both parties contribute unique and valuable intangibles, so that no party can be the simple "tested party" for a one-sided method.

C.6 Selecting the most appropriate method (para 4 + the hierarchy)

Selection is a reasoned process, not a default: identify the tested party and its functional profile from the FAR analysis, then ask which method's financial indicator the available reliable data can benchmark. Apply the hierarchy: if a reliable CUP exists, use it (para 5(6)); among the rest, prefer a traditional method (Resale/Cost Plus) over a profit-based method where equally reliable (para 5(7)); use TNMM where gross-margin comparability is weak; and reserve Profit Split for integrated/dual-intangible cases. Only one method is required (para 4(3)); a method outside the five needs the para 5(9)–(10) justification.

C.7 Comparability adjustments

No comparable is perfect. Paragraph 3(1)(b) permits a reasonably accurate comparability adjustment to eliminate the effect of differences (e.g. adjusting a comparable's results for differences in working capital, functions, accounting treatment, or delivery terms). Adjustments improve reliability but cannot rescue a fundamentally non-comparable transaction; an over-adjusted "comparable" signals the wrong comparable or the wrong method.

Illustrative USD; corporate rate taken as 25% (**). Each example shows the method, the arm's length figure, the Section 98B(2) adjustment, the shortfall and the Section 98B(2a) penalty tiers.

D.1 CUP — a tobacco exporter (commodity price)

Facts. Zim Leaf (Pvt) Ltd sells flue-cured tobacco to its overseas parent at US$2.80/kg. An independent grower sells the same grade at auction in the same period at US$3.40/kg (external CUP); volume and terms are comparable after a small freight adjustment. Volume to the parent: 500,000 kg.

Apply CUP (para 5(5)(a); preferred under 5(6)). - Arm's length price = US$3.40/kg; controlled price = US$2.80/kg → under-priced by US$0.60/kg. - Profit shifted out = 0.60 × 500,000 = US$300,000 → Section 98B(2) adjustment. - Additional tax = 300,000 × 25% = US$75,000 (shortfall). - Penalty: 10% = US$7,500; 30% = US$22,500; 100% = US$75,000.

Teaching point. For commodities with an observable market price, CUP is both available and mandatory in preference to other methods (para 5(6)). Selling below the auction price to a parent is a textbook outbound profit shift.

D.2 Resale Price — a related-party distributor (gross margin)

Facts. Zim Distribution buys appliances from its parent and resells to independent retailers for US$1,000,000 (total). Comparable independent distributors performing the same functions earn a resale gross margin of 25%. Zim Distribution actually reports a gross margin of 15%.

Apply Resale Price (para 5(5)(b)). - Arm's length gross margin = 25% → arm's length cost of goods (purchase price) = 1,000,000 × (1 − 25%) = US$750,000. - Arm's length gross profit = US$250,000; reported gross profit = 15% × 1,000,000 = US$150,000. - Under-stated profit = 250,000 − 150,000 = US$100,000 → Section 98B(2) adjustment (the related purchase price was US$100,000 too high). - Additional tax = 100,000 × 25% = US$25,000 (shortfall); penalty 10/30/100% = US$2,500 / 7,500 / 25,000.

Teaching point. Resale Price tests the distributor's gross margin; a margin below comparables means the related purchase price was too high (profit stripped via the buy price).

D.3 Cost Plus — a contract manufacturer (mark-up)

Facts. Zim Manufacturing makes parts solely for the group at a total cost of US$4,000,000 and charges the group cost + 5%. Comparable independent contract manufacturers earn cost + 12%.

Apply Cost Plus (para 5(5)(c)). - Arm's length price = 4,000,000 × 1.12 = US$4,480,000; controlled price = 4,000,000 × 1.05 = US$4,200,000. - Under-charge = US$280,000 → Section 98B(2) adjustment. - Additional tax = 280,000 × 25% = US$70,000 (shortfall); penalty 10/30/100% = US$7,000 / 21,000 / 70,000.

Teaching point. Cost Plus benchmarks the mark-up on costs for routine manufacturers/service providers; a 5% mark-up where comparables earn 12% understates Zimbabwean profit.

D.4 TNMM — a limited-risk service provider (net margin range)

Facts. Zim Services provides back-office support only to group companies, total costs US$2,000,000, reporting a net cost-plus mark-up of 3%. A comparables set of independent providers shows an arm's length interquartile range of net cost-plus mark-ups of 8%–14% (median 11%).

Apply TNMM (para 5(5)(d)), PLI = net profit / total costs. - Tested party's mark-up = 3%, which is below the range (8%–14%) → adjust to the median, 11% (the OECD/established practice where the result is outside the range). - Arm's length net profit = 11% × 2,000,000 = US$220,000; reported = 3% × 2,000,000 = US$60,000. - Adjustment = 220,000 − 60,000 = US$160,000 → Section 98B(2); additional tax = 160,000 × 25% = US$40,000 (shortfall); penalty 10/30/100% = US$4,000 / 12,000 / 40,000.

Teaching point. TNMM yields a range; you adjust only if the tested party is outside it, normally to the median. A 3% mark-up for a routine service provider against an 8–14% range is a classic adjustment.

D.5 Profit Split — integrated parties with dual intangibles (residual)

Facts. Zim Tech and its foreign affiliate jointly develop and exploit a software platform; both own unique, valuable intangibles, so neither is a simple tested party. Combined profit from the controlled dealings = US$5,000,000. Routine functions are first remunerated by TNMM: routine return to Zim Tech = US$800,000, to the affiliate = US$1,200,000 (total routine = US$2,000,000). The residual = US$3,000,000. A contribution analysis (R&D spend, value of intangibles) attributes 40% of the residual to Zim Tech.

Apply Residual Profit Split (para 5(5)(e)). - Zim Tech arm's length profit = routine 800,000 + 40% × 3,000,000 = 800,000 + 1,200,000 = US$2,000,000. - If Zim Tech actually reported US$1,400,000, the adjustment = US$600,000 → Section 98B(2); additional tax = 600,000 × 25% = US$150,000 (shortfall); penalty 10/30/100% = US$15,000 / 45,000 / 150,000.

Teaching point. Where both parties bring unique value, one-sided methods fail; residual profit split first pays routine returns, then divides the residual by relative contribution.

D.6 Choosing between methods — same facts, different method

For a routine distributor with reliable gross-margin comparables, Resale Price (D.2) is most appropriate; if only net-margin comparables are reliable, TNMM on a return-on-sales PLI is used instead. The hierarchy (para 5(6)–(7)) means: a reliable CUP would displace both; and a traditional method (Resale Price) displaces TNMM where equally reliable. Documenting why the chosen method beats the alternatives is the core of the para 4 analysis and the contemporaneous file.

C F (Pvt) Ltd v ZIMRA (18-HH-099) — High Court. The Zimbabwean transfer-pricing authority listed in the Act against Sections 98A–98B (introduced in TP Foundations). For method purposes it underlines that a defensible position depends on a reasoned application of an appropriate method to supportable comparables — the analysis the Thirty-Fifth Schedule paras 3–5 require. ()

Persuasive context. The OECD Transfer Pricing Guidelines (2022), Chapter II (methods) and Chapter III (comparability) — in the TaxTami Source Library — and South African practice on the same methods are persuasive but non-binding in Zimbabwe and should be cited as such (e.g. OECD Ch II on the preference for CUP and on selecting the most appropriate method). Never present foreign/OECD material as Zimbabwean authority, and never invent a case. ()

1. Asserting a "best" method without the para 4 analysis. The Schedule requires selecting the most appropriate method on reasoned criteria; a method asserted without weighing alternatives is vulnerable.
2. Ignoring the CUP preference. Where a reliable CUP exists it must be used over other methods (para 5(6)); reaching for TNMM to get a convenient result is wrong.
3. Using a profit-based method where a traditional method is equally reliable (breach of para 5(7)).
4. Poor comparability / over-adjustment. Forcing a non-comparable into a method via large adjustments (para 3(1)(b)) signals the wrong comparable or method.
5. Wrong tested party. Applying a one-sided method to the complex party (the one with unique intangibles) instead of the simpler party.
6. Inconsistent cost base (Cost Plus) or margin definition (Resale Price/TNMM) between controlled and comparable transactions.
7. Treating a single comparable as conclusive in TNMM. TNMM yields a range; adjust only if outside it, normally to the median.
8. Using Profit Split as a default. It is for integrated/dual-intangible cases; using it to rationalise an outcome where a one-sided method fits is an error.
9. Mismatched PLI. Using return-on-sales for a service provider, or net-cost-plus for a distributor, instead of the PLI that fits the functions.
10. Unapproved method without justification. Any method outside the five needs the para 5(9)–(10) showing that none of the five can reasonably apply.

Work through the questions one at a time. Choose an answer and it is graded immediately, with an explanation and the provision it comes from. Your progress is saved, so you can stop and resume.

• Five approved methods (Thirty-Fifth Schedule para 5(5)): CUP (price), Resale Price (resale gross margin), Cost Plus (mark-up on costs), TNMM (net margin on a base), Profit Split (division of combined profit).
• Two families: traditional transactional (CUP/Resale/Cost Plus — price or gross level) and transactional profit (TNMM/Profit Split — net level).
• Most appropriate method (para 4): chosen on strengths/weaknesses, FAR fit, data availability and comparability — only one method needed.
• Hierarchy: reliable CUP wins (para 5(6)); a traditional method beats a profit-based method where equally reliable (para 5(7)); a method outside the five needs para 5(9)–(10) justification.
• Method fit: CUP → commodities; Resale Price → routine distributors; Cost Plus → contract manufacturers/services; TNMM → one-sided workhorse (yields a range, adjust to median if outside); Profit Split → integrated / dual unique intangibles (residual).
• Comparability adjustments (para 3(1)(b)) improve reliability but cannot rescue a non-comparable.
• From method to assessment: the arm's length figure drives the Section 98B(2) adjustment, the shortfall, and the Section 98B(2a) 10%/30%/100% penalty by documentation tier.
• Authority: C F (Pvt) Ltd v ZIMRA 18-HH-099; OECD Guidelines (2022) Ch II/III persuasive, non-binding.
• Continuity: next — TP Documentation, Disclosure Return & Penalties (the file that justifies the method and protects the 10% tier), then Intangibles & Intra-group Services.

Table 1 — The five methods at a glance

Table 2 — Selection hierarchy (paras 4, 5(6)–(10))

Diagram — selecting and applying a method

flowchart TD
 A[Controlled transaction + FAR analysis] --> B{Reliable CUP available?}
 B -->|Yes| C[Use CUP - para 5 6]
 B -->|No| D{One simple tested party?}
 D -->|Yes - distributor| E[Resale Price or TNMM return on sales]
 D -->|Yes - manufacturer or service| F[Cost Plus or TNMM net cost plus]
 D -->|No - both unique intangibles| G[Profit Split - residual]
 C --> H[Compute arm's length figure]
 E --> H
 F --> H
 G --> H
 H --> I{Differs from controlled and Zim tax reduced?}
 I -->|No| J[No adjustment]
 I -->|Yes| K[Section 98B 2 adjustment -> shortfall -> penalty 10 or 30 or 100 percent]

Statutes & sections (Income Tax Act [Chapter 23:06]) - Thirty-Fifth Schedule, para 4 — most appropriate method and selection criteria; para 4(3) one method; para 4(4) examination based on the taxpayer's method. - Thirty-Fifth Schedule, para 5(5) — the five approved methods (CUP; Resale Price; Cost Plus; TNMM; Profit Split); para 5(6)–(7) — the hierarchy (CUP preference; traditional-method preference); para 5(8) — one method suffices; para 5(9)–(10) — unapproved methods only where none of the five can reasonably apply. - Thirty-Fifth Schedule, para 3 — comparability and comparability adjustments (applied throughout). - Section 98B — arm's length charge (98B(1)); adjustment (98B(2)); penalties (98B(2a): 10%/30%/100%). - Finance Act — corporate income-tax rate applied to adjustments. **

International instruments (persuasive, non-binding) - OECD Transfer Pricing Guidelines (2022), Chapter II (transfer pricing methods) and Chapter III (comparability analysis) — in the TaxTami Source Library.

Case law - C F (Pvt) Ltd v ZIMRA (18-HH-099) — Zimbabwean transfer-pricing authority (Sections 98A–98B). OECD/South African materials persuasive only.

ZIMRA guidance - ZIMRA transfer-pricing documentation and return guidance. **