Automated Summary
Tax Type
Transfer pricing adjustment dispute
Key Facts
The Supreme Court of Zambia, in Appeal No. 03/2021, allowed the Zambia Revenue Authority's (ZRA) appeal against a Tax Appeals Tribunal decision regarding a transfer pricing assessment of Nestlé Zambia Limited (NZL) for tax years 2010-2014. The Tribunal had ruled that ZRA's assessment was erroneous, finding that ZRA incorrectly shifted the burden of proof, improperly aggregated transactions between NZL and its related parties, failed to recognize NZL's legal obligation to provide transfer pricing documentation, and used inappropriate comparables from Western Europe. The Supreme Court found merit in four of ZRA's five grounds of appeal, reversing the Tribunal's decision and upholding ZRA's position that NZL bore the burden of proving its transfer pricing was at arm's length.
Issues
- The court assessed whether the Tribunal correctly classified NZL as a low-risk distributor and whether this classification was crucial for selecting the appropriate transfer pricing method.
- The court considered whether NZL was legally obligated to provide transfer pricing documentation at the time of the audit, despite the absence of specific regulations requiring it.
- The court determined whether the Tribunal correctly applied the legal principle that the burden of proof lies with the taxpayer to demonstrate that an assessment is incorrect, rather than shifting it to the tax authority.
- The court determined whether the Tribunal erred in finding that Western European comparables were not suitable for transfer pricing analysis in Zambia due to economic differences.
- The court examined whether the Tribunal erred in finding that the transactions between NZL and related parties could not be aggregated for transfer pricing purposes, contrary to OECD Guidelines.
Tax Years
- 2013
- 2014
- 2012
- 2011
- 2010
Holdings
The Supreme Court of Zambia allowed the Zambia Revenue Authority's appeal, ruling that the Tax Appeals Tribunal erred in shifting the burden of proof to ZRA, improperly rejected the use of aggregation for transfer pricing analysis, and failed to recognize the requirement for NZL to provide transfer pricing documentation. The court also upheld ZRA's use of Western European comparables and found no merit in NZL's cross-appeal regarding its classification as a low-risk distributor.
Remedies
The Supreme Court allowed the appeal filed by Zambia Revenue Authority (ZRA) against the Tax Appeals Tribunal's decision. The court found that ZRA succeeded on four out of five grounds of appeal. The court also awarded costs to ZRA, the successful party, to be taxed in default of agreement.
Tax Issue Category
Transfer Pricing
Legal Principles
- The court applied the arm's length principle, which requires transfer prices between related parties to reflect prices that would have been set between unrelated enterprises acting independently. This principle was central to the case and was referenced throughout the judgment.
- The court determined that under section 106 of the Income Tax Act, the burden of proof lies with the taxpayer to demonstrate that an assessment is incorrect, not with the tax authority. This was a key point in reversing the Tribunal's decision.
Disputed Tax Amount
13860103.00
Precedent Name
- Brady v Group Lotus
- Adcock Ingram Limited
- Prime Plastichem
- Nicholson v Morris
- Wilson Masauso Zulu
Cited Statute
- Tax Appeals Tribunal No. 1 of 2015
- British Acts Extension Act, Cap 10
- Income Tax (Transfer Pricing) Regulations No. 24 of 2018
- Income Tax Regulations of 2000
- Income Tax Act, Cap. 323
- Section 95 of the Income Tax Act
- English Law (Extent of Applications) Cap 11
Judge Name
- Kabuka
- Kajimanga
- Chisanga
Passage Text
- As was properly reasoned by the Tribunal, it is indeed odd that a fully-fledged and apparently, independent entity such as NZL does very little administration on its own, without interference from its related parties such as Nestlé Zimbabwe and Nestlé South Africa. The Tribunal was not oblivious to the fact that NZL, bore some risk in its day to day operations. However, from its analysis of the evidence before it, the ultimate risk as stated at page 41 of the record, lies with Nestlé South Africa and the risk to NZL was inevitably low. Even from a functional analysis perspective, when one considers the functions carried out by NZL, it is clear that its related parties bore the greater risk.
- Starting with the issue raised in ground one of the appeal, on who bears the burden of proof where an assessment has been made by the tax authority, and the tax payer disputes the correctness of such assessment. Learned Counsel for ZRA has correctly, pointed out and his counterpart Learned Counsel for NZL has magnanimously, conceded the settled position of the law, that the burden of proof generally, lies on the person making the assertion. In our view that legal position is no different in this particular instance, where an assessment has been made by the tax authority and the tax payer disputes the assessment asserting it is incorrect. The burden to prove the assertion with cogent evidence, clearly, lies on the taxpayer.
- On ground two, ZRA faults the Tribunal's findings that transactions between NZL and its related parties should not have been aggregated but should have been tested individually contrary to the OECD Transfer Pricing Guidelines. In that regard, we have noted that, chapter 3, A.3.1, paragraph 3.9 at page 110 of the said Guidelines provides that, the ideal scenario in order to arrive at a precise approximation of arm's length conditions is to apply the conditions on a transaction by transaction basis. It is nonetheless, acknowledged that there are situations where transactions are separate but so closely linked, that they can only be evaluated adequately by aggregating them.