Nestlé Zambia Limited (NZL) had made continuous losses during the period in question. Following an audit, the Zambia Revenue Authority (ZRA) issued an assessment adjusting NZL’s income, resulting in additional taxable income.
While the Tax Appeals Tribunal found that the ZRA was justified in initiating a transfer pricing audit of NZL, it held that the resulting assessment was invalid due to the ZRA applying inappropriate transfer pricing methods and using comparables from unsuitable jurisdictions. NZL filed a cross-appeal, arguing that the Tribunal had erred in categorising it as a low-risk distributor and that the Tribunal had exceeded its jurisdiction by directing the ZRA to reassess.
The ZRA filed an appeal and NZL filed a cross-appeal against the decision of the Tax Appeals Tribunal.
In their appeal, the ZRA argued that the Tribunal had misinterpreted the law, incorrectly criticised the ZRA’s use of methods and comparables, and overlooked NZL’s obligation to demonstrate that its transactions were conducted at arm’s length. The ZRA relied on Zambian and foreign case law, emphasising that taxpayers must disprove an assessment and maintain sufficient documentation.
In its cross-appeal, NZL countered that it was a fully-fledged distributor and that ZRA had failed to conduct a proper benchmarking study, having selected comparables from economies that were far more advanced than Zambia.
Judgment
The Supreme Court ruled that, under Section 106 of the Income Tax Act, the onus is on the taxpayer to provide evidence once an assessment has been made. The Tribunal was correct to find that ZRA could initiate an audit. However, the Court found that the Tribunal had erred in rejecting ZRA’s methods solely on the grounds of comparability, and in directing a reassessment since the Tribunal had no jurisdiction to order ZRA to reopen the case.
Regarding NZL’s classification, the Court agreed with the Tribunal that the evidence supported treating NZL as a low-risk distributor, as the greater risks and strategic functions lay with Nestlé South Africa and other related parties.
The Court therefore allowed ZRA’s appeal in part, setting aside the Tribunal’s order for reassessment and dismissing NZL’s cross-appeal. The Court affirmed that ZRA’s audit was justified, that NZL was responsible for proving that its transfer prices were at arm’s length, and that the Tribunal’s finding regarding NZL’s risk profile was supported by evidence.