In a landmark decision issued on August 20, 2025, the Supreme Court of Zambia, in the case of Zambia Revenue Authority vs Nestlé Zambia Limited (Case No. 03/2021), established relevant doctrine on Transfer Pricing matters, particularly on the burden of proof and the functional characterization of intra-group companies.
Rise and Development of the Case
Nestlé Zambia had reported consistent losses between 2010 and 2014. In response, the Zambia Revenue Authority (ZRA) conducted an audit that increased the company’s taxable base to ZMW 56,579,048 (approximately USD 9 million), resulting in an additional tax liability of ZMW 13,860,103 (about USD 2.2 million).
Nestlé appealed to the Court of Tax Appeals on six grounds, including challenges to the method employed, comparability, compensation for historical losses, functional characterization as a limited risk distributor (LRD), and the use of foreign comparables. The Court ruled in favor of Nestlé on all grounds except for the functional categorization as an LRD. The appeal reached the Supreme Court, which partially reversed the Court’s decision.
Key Supreme Court Ruling: Burden of Proof and Functional Profile
The Supreme Court confirmed three crucial aspects:
- Validity of the ZRA audit: The authority, protected by Article 106 of the Income Tax Law, acts legitimately when making Transfer Pricing adjustments; thereafter, the burden of proving the transaction complies with the Arm’s Length Principle falls on the taxpayer. The Supreme Court upheld this, supporting the initiation of the proceedings.
- Comparables and methodology: The Court of Appeals invalidated the study for using comparables from developed countries. The Supreme Court overturned that part, stating that rejecting the method solely based on jurisdictional comparison exceeds its jurisdiction. The taxpayer must prove that the transaction was at Arm’s Length, and limited local jurisdictions cannot be imposed.
- Nestlé Zambia’s role as an LRD: The Supreme Court agreed with the Court of Appeals in considering Nestlé Zambia to be a Limited Risk Distributor, since strategic functions (marketing, treasury, know-how) were centralized in Nestlé South Africa and other related entities. It based its decision on evidence of operational controls and the license contract that reserved ownership of the know-how for Nestlé SA.
As a result, the Supreme Court upheld the ZRA’s appeal, overturned the reassessment order, and dismissed Nestlé’s appeal, validating the original assessment.
Regulatory Background and International Relevance
The case sets the first substantial Transfer Pricing precedent in Zambia. In the absence of specific regulations, the Court and the ZRA relied on the OECD Transfer Pricing Guidelines and the UN Practical Manual for developing countries.
Zambia has advanced its Transfer Pricing regulations since 2018, strengthened by its adherence to the OECD/BEPS inclusive framework due to structures similar to BEPS standards (master file, local file, country-by-country report).
Additionally, the Mopani precedent (2016) demonstrated the Zambian tax authority’s ability to challenge artificial intra-group prices of large mining groups, consolidating its Transfer Pricing determination. For further information, you can access the complete analysis here.
Conclusion: Implications and Recommendations
The Supreme Court ruling in Zambia vs. Nestlé Zambia establishes a solid guideline: Taxpayers must demonstrate that their intra-group transactions are at Arm’s Length, especially when facing tax assessments. The burden of proof is clear, and the functional definition (such as LRD) must be supported by consistent documentation and operational evidence.
International companies operating in Zambia should:
- Thoroughly document functions, risks, and assets (functional analysis).
- Justify the comparable selection, including international ones.
- Implement Transfer Pricing policies aligned with BEPS criteria and OECD practices.
- Anticipate functional categorization risks and prepare for technical defense in audits.
Strengthen Your Transfer Pricing Strategy
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Source: TPCases