ZAMBIA Law and Practice Contributed by: Mulenga Chiteba, Constance Namatai Mwango and Diana Chisale, Mulenga Mundashi Legal Practitioners
4.4 Transfer Pricing Issues for Inbound Investors The primary transfer pricing issue for inbound inves - tors who operate through local corporations or sub - sidiaries is whether the loans granted by the investors to their associated local corporations, or the goods and/or services rendered by the investors to the local subsidiaries, are done on an “arm’s length basis”. 4.5 Challenges to Related-Party Limited Risk Distribution Arrangements Local tax authorities challenge the use of related-party limited risk distribution arrangements for the sale of goods and the provision of services locally. 4.6 Local Transfer Pricing Rules and OECD Standards Zambia’s local transfer pricing rules, and enforcement thereof, do not vary from the OECD standards. Zambia recently made amendments to the Income Tax (Trans - fer Pricing) Regulations 2000 when it promulgated the 2018 Transfer Pricing (Amendment) Regulations, the 2020 Transfer Pricing (Amendment) Regulations, the 2021 Transfer Pricing (Amendment) Regulations and the 2022 Transfer Pricing (Amendment) Regulations. As a result, the Income Tax (Transfer Pricing) Regu - lations 2000 are now construed in a manner that is consistent with the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, as supplemented and updated from time to time. 4.7 Transfer Pricing Disputes and Mutual Agreement Procedures Local tax authorities are more aggressive on transfer pricing now, owing to the amendments to the Transfer Pricing Rules which require taxpayers to prepare and maintain transfer pricing records and documentation. The Income Tax Act requires taxpayers to maintain documentation and records for a period of ten years after the completion of the transaction or operation to which they relate. The Transfer Pricing Rules empower the local tax authorities to request additional informa - tion they consider necessary from the taxpayer dur - ing the audit process. This further documentation may encompass new information, which can be used by the tax authorities for earlier years.
Where there is a double taxation treaty in force between the jurisdictions of the parties to a controlled transaction, the provisions of that treaty will prevail over the provisions of the Income Tax Act in the reso - lution of any dispute concerning international transfer pricing. The use of the mutual agreement procedure (MAP) is only permissible where it is contained in a double taxation agreement. Given the lack of case law pertaining to transfer pricing disputes and the fact that the Zambia Revenue Authority does not release information on such disputes, it is difficult to state with certainty how often international transfer pricing disputes are resolved through double taxation treaties and MAPs. There is no publicly available information to ascertain whether MAPs are becoming more common on the back of more enquiries and disputes. 5. Taxation of Non-Local Corporations 5.1 Compensating Adjustments Compensating adjustments are allowed/made when a transfer pricing claim is settled. There are no difficul - ties in operating a MAP where a transfer pricing claim applies, as long as the MAP is available in a double taxation agreement. 5.2 Local Branches and Local Subsidiaries There is no difference in the way local branches of non-local corporations and local subsidiaries of non- local corporations are taxed. 5.3 Capital Gains of Non-Residents There is no capital gains tax in Zambia. However, if a non-resident sells shares in a company in Zambia, property transfer tax on the value of the sale will apply, at a rate of 8% of the realised value of the shares. Property transfer tax at 8% is also payable on the transfer of any shares in a non-resident holding com - pany that holds at least 10% of the issued shares in a company incorporated in Zambia. The realised value for the transfer of shares in a non-resident company is limited to the value of the effective shareholding in the Zambian entity. Effective shareholding is defined as the extent of control or ownership in the company
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