TP Dispute Win for ZRA: What Taxpayers Should Know

In the complex world of taxation, court judgments often serve as guideposts. They clarify how legislation should be applied, setting precedents that taxpayers and revenue authorities rely on to support and defend their positions. Recently, the Supreme Court of Zambia delivered its ruling in the high-profile Zambia Revenue Authority (ZRA) v. Nestlé Zambia Limited (NZL) transfer pricing case, in favour of ZRA.

Case Overview

NZL operates as a distribution company for Nestlé products in Zambia. The products are sourced from various related parties across the globe. In addition, NZL received support services and loans from related entities. ZRA noted that NZL had been loss-making since its incorporation (2010 to 2014 at the time), which prompted a transfer pricing audit.

Following the audit, ZRA issued revised assessments that were challenged before the Tax Appeals Tribunal and ultimately escalated to the Supreme Court.

Key Issues Considered

The dispute centred on:

• The functional characterisation of NZL whether it was a limited-risk distributor or a full-fledged distributor bearing entrepreneurial risks.
• The comparability of benchmarks used in the transfer pricing analysis, particularly the reliance on foreign comparables.
• The burden of proof, whether it rested with ZRA or NZL to demonstrate that related-party transactions were conducted at arm’s length.

ZRA appealed several aspects of the Tribunal’s decision, some arguing that:

• The Tribunal wrongly shifted the burden of proof onto ZRA instead of placing it on NZL upon assessment.

• The Tribunal erred in its functional characterisation of NZL, while recognising the importance of functional analysis, it failed to recognise that the characterisation of NZL as a low risk distributor was crucial in selecting the tested party and the appropriate transfer pricing method.

• The Tribunal incorrectly rejected ZRA’s benchmarks drawn from Western Europe despite the absence of suitable local comparables in Zambia or Africa.

Conversely, NZL cross-appealed, contending that it should not be classified as a limited-risk distributor.

The Supreme Court’s Findings

The Supreme Court held that:

• Once ZRA issues an assessment, the burden of proof rests with the taxpayer to demonstrate that the assessment is incorrect – in this case, to show that NZL’s pricing of related-party transactions was at arm’s length.

• NZL should be treated as a limited-risk distributor, as significant risks and strategic functions rested with related parties outside Zambia. NZL’s cross-appeal for recognition as a full-fledged distributor was dismissed.

• The Tribunal was wrong to reject the use of foreign comparables. Foreign comparables can be used, but one must choose ones that are similar to Zambia’s economic conditions or make adjustments so the comparison is fair and reliable.

Why This Matters

• This is the first Zambian Supreme Court case to clearly articulate the taxpayer’s burden of proof in transfer pricing audits.

• The ruling underscores the importance of functional analysis and characterisation in transfer pricing disputes.

• It also confirms that while global comparables can be relied upon where local data is lacking, macroeconomic factors must be considered and adjusted for proper comparability.

Practical Takeaways for Multinationals

• Ensure that benchmarking data used in transfer pricing analysis is robust, particularly when relying on foreign comparables.

• Recognise that functional and risk profiles will be central to how tax authorities and courts view profit allocation.

• Anticipate that revenue authorities may closely scrutinise persistent losses, especially for entities characterised as limited-risk distributors.

This landmark ruling offers valuable lessons for MNEs operating in Zambia and across Africa. It reinforces the need for robust documentation, reliable comparables, and a clear demonstration that profit outcomes are consistent with the functions performed and risks borne within the group.

If you’d like to discuss how the Zambia vs Nestlé Zambia Limited judgment could affect your group’s transfer pricing approach, documentation strategy, or risk profile in Zambia and beyond, please get in touch with us.