Recently, the Tax Appeals Tribunal (TAT) issued a decision for the Zambia Revenue Authority (“ZRA”) in the case of: Nestlé Zambia Trading Limited v. Zambia Revenue Authority [2018] TAT 03, regarding transfer prices used with respect to its cross-border related-party transactions and business model. The decision provides the first substantive judicial guidance in Zambia with respect to arm’s length arrangements between related parties.
Case summary:
The Zambia Revenue Authority (“ZRA”) performed a transfer pricing audit with respect to Nestlé Zambia Trading Limited’s (“Nestlé Zambia”) operations on the basis that Nestlé had consistently reported losses for a period of five years, between 2010 and 2014 (inclusive).
The ZRA issued an assessment adjusting Nestlé Zambia’s profit to ZMW 56,579,048 and levied a gross tax of ZMW 13,860,103. Nestlé Zambia lodged an appeal with the Tax Appeals Tribunal Holden at Lusaka (“Tribunal”). The ZRA outlined following issues by as the basis for the assessment:
- Significant related-party transactions and shared services with related parties;
- Management fee payments;
- Payment for the use of intellectual property;
- The taxpayer earned continuous negative operating margins for a period of more than five years;
- There were continuous losses for a period of five years; and
- Significant volumes of related-party transactions took place.
However, on 16 February 2018, Nestlé Zambia filed an appeal with the Tax Appeals Tribunal regarding the ZRA assessment. There were six grounds of appeal upon which Nestlé Zambia challenged the ZRA’s assessment.
Decision of the case:
Finally, the Tax Appeals Tribunal found for the ZRA with the re-categorization of Nestlé Zambia as a limited risk distributor. The Tribunals findings were based on, inter alia, the following:
- There was ‘significant control exercised by Nestlé Zimbabwe’ over Nestlé Zambia;
- ‘Essential functions’, such as strategic management, sales and marketing support etc., were provided by related parties; and
- As Nestlé SA retained ‘ownership, property in the products and attendant risk in the know-how’ the ultimate risk in marketing, distribution, storage and/or selling of the products lay with Nestlé SA and not Nestlé Zambia.
The decision provides the first substantive judicial guidance in Zambia on the difficult territory of establishing arm’s length arrangements between related parties. It gives taxpayers much to consider and apply in evaluating their own arrangements.
