ZAMBIA Law and Practice Contributed by: Mulenga Chiteba, Constance Namatai Mwango and Bwalya Milunga, Mulenga Mundashi Legal Practitioners
The Zambia Revenue Authority v Nestlé Zambia Trading Limited, SCZ Appeal No 3 of 2021 This case emanated from an appeal from the decision of the Tax Appeals Tribunal which held in favour of Nestlé Zambia except for the argument on the cat - egorisation of Nestlé Zambia as a low-risk distribu - tor, and stated that it was erroneous for the ZRA to have aggregated the unrelated, discontinuous and not closely linked transactions as a means to test for arm’s length. The Supreme Court of Zambia allowed ZRA’s appeal and set aside the decision of the Tax Appeals Tribunal. The Court held that the burden of proof in tax matters lies squarely on the taxpayer to demonstrate, with cogent evidence, that an assess - ment is incorrect. This finding was anchored on Sec - tion 106 of the Income Tax Act, which provides that every assessment stands “good” unless proved oth - erwise by the person assessed. The Court also found that the ZRA was entitled to aggregate Nestlé Zambia Limited’s related-party transactions when conducting its transfer pricing audit. It noted that, although the OECD Guidelines recommend a transaction-by-transaction approach where possible, aggregation is permissible where transactions are interlinked or flow from a common source. On this basis, the Tax Appeals Tribunal was faulted for holding that the transactions should have been tested individually. On documentation, the Supreme Court rejected Nestlé’s argument that there was no obligation to pro - vide transfer pricing information before the Income Tax (Transfer Pricing) Regulation No 18 of 2018 came into force. It held that Sections 47 (1) and 58 of the Income Tax Act conferred sufficient power on the Commis - sioner-General to request any relevant documentation for audit purposes, and Nestlé was therefore obliged to furnish such information when requested. The Supreme Court further upheld the Tax Appeals Tribunal’s classification of Nestlé as a low-risk dis - tributor, finding that the company performed limited functions and operated with substantial direction and support from related parties. With respect to the use of comparables, the Supreme Court clarified that while benchmarks must as far as possible reflect conditions similar to Zambia’s economic environment, the Tax
the arm’s length principle, and that one of the major reasons for the mispricing was to reduce tax liability. Mopani argued that Section 95 of the Income Tax Act was wrongly invoked by the ZRA in the case of trans - fer pricing as that section can only be invoked where there is reason to believe that the main purpose of the transaction was to avoid or reduce liability with respect to tax, in which case the Commissioner-Gen - eral of the ZRA would direct that a particular adjust - ment be made. Section 95 (1) of the Income Tax Act provides that: “Where the Commissioner-General has reasonable grounds to believe that the main purpose or one of the main purposes for which any transaction was effected (whether before or after the commencement of this Act) was the avoidance or reduction of liability to tax for any charge year, or that the main benefit which might have been expected to accrue from the transac - tion within the three years immediately following the completion thereof, was the avoidance or reduction of liability to tax, he may, if he determines it to be just and reasonable, direct that such adjustments shall be made as [regards] liability to tax as he considers appropriate to counteract the avoidance or reduction of liability to tax which would otherwise be effected by the transaction.” The ZRA explained the nature of the symbiotic busi - ness relationship between Mopani and GIAG and how that special relationship reflected in the sales of the copper produced by Mopani. The ZRA further stated that the audit by the ZRA revealed issues that could cause any prudent tax authority to have mis - givings about the arm’s length claim of the transac - tions between Mopani and GIAG. This, in the Supreme Court’s view, rightly raised reasonable suspicion suf - ficient to lead the ZRA to invoke Section 95 of the Act. The Supreme Court of Zambia held in favour of the ZRA and ordered that Mopani pay a total of ZMW240 million in taxes assessed for the 2006 to 2010 tax years. This particular case shows the applicability of the Commissioner-General’s discretion under Section 95 of the Income Tax Act concerning transfer pricing.
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