ZAMBIA Law and Practice Contributed by: Mulenga Chiteba, Constance Namatai Mwango and Bwalya Milunga, Mulenga Mundashi Legal Practitioners
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 misgivings about the arm’s length claim of the transactions between Mopani and GIAG. This, in the Supreme Court’s view, rightly raised reasonable suspicion sufficient 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. Nestlé Zambia Trading Limited v The Zambia Revenue Authority – 2018/TAT/03/DT In this case, Nestlé Zambia Trading Limited ( “Nestlé Zambia” ) appealed against the deci - sion of the ZRA on an assessment resulting from a transfer pricing audit covering the period of 2010 to 2014. Nestlé Zambia argued that the ZRA wrongfully assessed when it was found liable for additional tax, as Nestlé Zambia’s non- compliance with the arm’s length principle had not been tested. Nestlé Zambia also argued that the ZRA had erred in law and fact by issuing its assessment on the premise that Nestlé Zambia could not run at a loss since incorporation, when all the evi - dence provided to the ZRA showed the various factors which led to Nestlé Zambia’s loss-mak - ing, and that the ZRA failed to objectively test the related party transactions, to which it raised transfer pricing concerns but made assumptions and estimates that were excessive and unrea - sonable.
Nestlé Zambia further argued that the ZRA erred in law and fact when it categorised Nestlé Zam - bia as a low-risk distributor when it was shown beyond doubt that Nestlé was an independent full-fledged distributor company undertaking all the sale and distribution functions as well as the typical risk incurred in performing these func - tions. In turn, the ZRA argued that it carried out ade - quate tests on all related party transactions and the analysis of contracts and transactions revealed that Nestlé Zambia’s transactions were mainly with various related parties. The ZRA fur - ther argued that Nestlé Zambia was paying roy - alties to Nestlé South Africa for the exclusive use of Nestlé trade marks and patents as a dis - tribution company in violation of the arm’s length principle, and that the assessments were made under the Income Tax Act and were therefore not estimates or assumptions. The Tribunal held in favour of Nestlé Zambia except for the argument on the categorisation of Nestlé Zambia as a low-risk distributor, 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 Tribunal held that the assessment by the ZRA was wrongly arrived at because said assessment was based on inaccu - rate transfer pricing results emanating from the use of an inappropriate transfer pricing method and disproportionate comparables. The case referred to the OECD Transfer Pricing Guidelines, showing their applicability in Zam - bia, and provided guidance with regard to simi - lar cases involving transfer pricing audits and assessments.
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