Recent Transfer Pricing Case in Zambia

NESTLE Zambia Trading Limited vs Zambia Revenue Authority [2018] TAT 03
(30 and 31 October 2018 and 28th March 2019)

The Zambia Revenue Authority (the ZRA) performed a transfer pricing audit with respect to Nestlé Zambia’s operations on the basis that Nestlé Zambia had reported losses for the financial years 2010-2014. Nestlé Zambia had declared losses since incorporation, and the net profit margins were negative for the five-year period under review.

The ZRA’s attention was drawn to the fact that there were significant related party transactions, management fee payments ad payments for the use of intellectual property .As a result of the audit, the ZRA adjusted Nestlé Zambia’s profit.

Nestlé Zambia filed an appeal to the Tax Appeals Tribunal and challenged the ZRA’s assessment on six grounds:

  1. The ZRA wrongfully assessed that Nestlé Zambia was liable for the additional tax, as Nestlé Zambia’s non-compliance with the arm’s length principle had not been tested.
  2. The ZRA had erred in law by issuing its assessment on the basis that Nestlé Zambia could not run at a loss since incorporation (disregarding Nestlé Zambia’s reasons for such losses).
  3. The ZRA failed to objectively test the related party transactions, relying instead on assumptions and estimates that were excessive and unreasonable.
  4. The ZRA had incorrectly characterised Nestlé Zambia as a limited risk distributor (LRD), which was not the case, as Nestlé Zambia performs functions, builds customer relationships and assumes risks akin to a fully-fledged distributor.
  5. The ZRA’s benchmarking study was not comparable to the nature of Nestlé Zambia’s business, or the economic conditions in Zambia.
  6. The ZRA had incorrectly added back unrealised foreign exchange losses attributable to a loan, when they had not been recorded as part of Nestlé Zambia’s expenses in the financial statements.

With specific reference to Nestlé Zambia being re–characterised as an LRD, the ZRA argued that:

  • Nestlé Zimbabwe controls and oversees Nestlé Zambia’s operations.
  • The sourcing and invoicing of Nestlé Zambia’s products is performed by Nestlé Ghana.
  • Inventory risk does not entirely lie with Nestlé Zambia, but is partly borne by suppliers who are Nestlé manufacturing entities.
  • The level of investment in Nestlé Zambia is low, which indicates that most of the risks are not assumed by Nestlé Zambia.
  • Nestlé Zambia employs a relatively small number of staff, predominantly engaged in marketing, stores and accounting functions.
  • Nestlé Zambia’s customers collect orders from the warehouse using their own transport.


Nestlé Zambia succeeded on all grounds of appeal, except for its position on the characterisation of the entity as an LRD.

The Tribunal found that there was a significant level of control by Nestlé Zimbabwe as regards the strategic direction of its operations and that “know how” was owned by Nestle SA who assumed the risks attributable to marketing, warehousing and distribution of products which supported the characterization of LRD.