The Tax Appeals Tribunal issued a decision generally finding for the Zambia Revenue Authority in a case concerning transfer prices used with respect to certain cross-border related-party transactions and business models.
The decision provides the first substantive judicial guidance in Zambia with respect to arm’s length arrangements between related parties. The case is: Nestlé Zambia Trading Ltd. v. Zambia Revenue Authority  TAT 03 (30 October 2018, 31 October 2018 and 28 March 2019).
The Zambia Revenue Authority (ZRA) conducted a transfer pricing audit with respect to the taxpayer’s operations in Zambia. The taxpayer had reported losses for the financial years 2010 to 2014, and the ZRA noted that the taxpayer had been continuously declaring losses for the five-year period under review.
The ZRA’s attention was specifically drawn to the following factors:
Three key points outlined by the ZRA as the basis for the additional assessment were that:
The taxpayer initiated an appeal in early 2018 with the Tax Appeals Tribunal regarding the transfer pricing assessment, and in contesting the tax assessment, asserted that the ZRA had:
The tribunal addressed the first three grounds together, given that these issues were closely correlated, and concluded that it was erroneous for the ZRA to have aggregated the transaction because they were unrelated and not closely linked.
KPMG transfer pricing professionals in South Africa have noted the following with respect to this tribunal decision:
…the key consideration is whether a transaction conveys economic value from one associated enterprise to another, whether that benefit derives from tangible property, intangibles, services or other items or activities. An item or activity can convey economic value notwithstanding the fact that it may not be specifically addressed in Chapter VI. To the extent that an item or activity conveys economic value, it should be taken into account in the determination of arm’s length prices whether or not it constitutes an intangible within the meaning of paragraph 6.6. [Emphasis added]
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