Zambia - ZRA benefits from long term technical assistance

A great milestone has been reached by the Zambia Revenue Authority (ZRA) by winning the first transfer pricing case in the Supreme Court of Zambia. This was a case in which a multinational corporation engaged in the extractive industry carried out tax avoidance practices to primarily reduce their tax liability in Zambia.

In 2008 the Zambia Revenue Authority begun to carry out comprehensive tax audits on mining companies. These audits focused on revenues, costs and transfer pricing practices of companies in the extractive industry. An extended audit was carried out on Mopani Copper Mines (MCM) Plc that focused on the possible transfer pricing practices with one of the shareholders Glencore International AG (GIAD), due to the nature of the related party transactions that were taking place. Concerns on the transfer pricing and hedging practices that the company was involved in arose during the course of the audit. These concerns were that the prices of the minerals were pegged at a very low price compared to other mining companies in Zambia.  MCM claimed that the prices were at arm’s length and that the Revenue Authority failed to consider the hedging agreements that were in place to minimise exposure to price risks.

The Revenue Authority raised assessments for the 2006 to 2010 charge years and the taxpayer argued against these assessments on the basis that the data used to raise the assessments was wrong. MCM argued that the prices for the minerals they used were determined by the London Metal Exchange. The matter was taken to the Tax Appeals Tribunal as MCM appealed against the assessments that ZRA had raised. The tribunal ruled in favour of ZRA and the taxpayer was asked to pay the tax due. However, the taxpayer was not pleased with the ruling and appealed to the Supreme Court of Zambia. After a long legal battle, the Supreme Court of Zambia ruled in favour of the Zambia Revenue Authority in May 2020. The Court ordered MCM to pay an additional tax of USD13 million.

This victory has been a result of the long-term capacity building programmes that the Zambia Revenue Authority has embarked on to handle transfer pricing and counter Base Erosion and Profit Shifting (BEPS) practices among Multinational Enterprises (MNEs). The African Tax Administration Forum (ATAF), the OECD, the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum), as well as other international partners such as the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF), have over the years successfully worked with the Zambia Revenue Authority to build transfer pricing audit capacity in Zambia.

This support has included technical assistance programmes on transfer pricing and other BEPS related issues. This has resulted in the enactment of transfer pricing legislation and the creation of the International Taxation Unit in the Zambia Revenue Authority which is responsible for handling transfer pricing cases. The Transfer Pricing Practice Note was published in 2018 which provided taxpayers with transfer pricing methods and documentation rules. In 2020 the transfer pricing audit manual was released to assist with transfer pricing audits. 

Zambia has continued to receive technical assistance with transfer pricing issues and capacity building has continued to be developed in areas such as the Exchange of Information (EOI) and Mutual Agreement Procedures (MAP) in line with meeting the BEPS minimum standards that have been set by the OECD.