Spotlight on Zambian Transfer Pricing

So we all know you can’t ignore transfer pricing (TP), pretty much no matter where you’re doing business. Today, we look at the historical evolution, current regulatory framework, and emerging trends that define Zambia’s approach to TP, and the impact on businesses operating there. Our aim is to provide you with valuable insights and strategic perspectives, empowering you to navigate the complexities of Zambia’s TP with confidence.

In 2012, the Zambian government initiated pivotal TP reforms, training four officers from the Zambia Revenue Authority’s (“ZRA”) Large Taxpayers Office to conduct audits in mining and non-mining units. Recognising the necessity for clear documentation rules, the reforms aimed to streamline audits and set expectations. Then, in 2016, a dedicated TP Unit was established to expedite lengthy audit cases and address compliance challenges arising from the absence of specific guidelines. Zambia joined the Inclusive Framework on BEPS in 2017, and so committed to OECD and G20 standards, reinforcing the regulatory framework for fair taxation. Subsequent amendments in 2018, 2021, 2022, and 2023 fortified TP Rules, emphasising the arm’s length principle, documentation, and country-by-country reporting (“CbCR”). So Zambia is definitely welcoming TP with open arms.

Zambia’s TP compliance obligations apply to both cross-border and domestic related party transactions. This is a trend in many African countries nowadays as the likes of Nigeria, Kenya and Ghana also impose domestic TP rules, i.e. taxpayers must demonstrate that all transactions with connected parties are on arm’s length terms, even when both parties are in Zambia.

Affected taxpayers are required to prepare documentation substantiating the arm’s length nature of controlled transactions for the relevant fiscal year. TP documentation must be prepared annually and must be completed by the due date of the submission of the annual income tax return. The documentation is to be submitted, upon request by the ZRA, within 30 days.

Exemptions to these documentation requirements apply to companies whose annual turnover does not surpass the threshold of ZMW 20 million (approximately USD 2 million) in any given fiscal year. While exempt from the specific TP documentation requirements, these taxpayers must of course still adhere to the arm’s length principle when engaging in transactions involving associated parties. Additionally, as of 1 January 2021, CbCR for ultimate parent entities of a Multinational Enterprise (“MNE”) group tax-resident in Zambia was introduced. CbCR submission is deemed compulsory if annual consolidated group revenue exceeded the threshold of ZMW 4 795 billion. The CbCR is required to be submitted within 12 months after the end of their financial year.

It is worth mentioning that the record-keeping timeframe for TP documents extends to over ten years and failure to adhere to any of the above TP regulations may result in penalties of up to 80 million penalty units, equivalent to ZMW 24 million.

So things are complex in TP in Zambia! Lots of rules and regulations and lots to worry about!