Malawi vs Eastern Produce Malawi Ltd, July 2018, Malawi High Court, JRN 43 af 2016

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Eastern Produce Ltd is part of Camellia Plc Group, and is is engaged in the growing, production and processing of tea in Malawi.

The Malawi tax administration conducted a tax audit and found that transfer prices for intergroup service transactions had not been at arm’s length.

However, in the notifications to Eastern Produce Ltd. no reference was made to the local arm’s length regulations – only the OECD Transfer Pricing Guidelines.

Eastern Produce Limited complained to the High Court and argued that: “The decision and proceeding by MRA to use OECD (Organisation for Economic Cooperation and Development) guidelines whilst performing transfer pricing analysis and as a basis for effecting amendments to tax assessments was illegal.


With regard to transfer pricing in 2014, the law was contained in Section 127A. Section 127A provides as follows:
“where a person who is not resident in Malawi carries on business with a person resident in Malawi and the course of such business is so arranged that it produces to the person residentin Malawi either no profits or less than profits which might be expected from that he had been no such relationship, then the profits of that resident person from that business shall be deemed to be the amount that might have been expected to accrue if the course of that business had been conducted by independent persons“.

Section 127A of the Taxation Act is not a stand-alone provision. The Taxation (Transfer Pricing) Regulations, 2009 guide the application of Section 127A of the Taxation Act on transfer pricing issues in Malawi.”

The methods shall be applied in determining the price payable for goods and services in transactions between related enterprises for the purposes of Section 127A of the Act; and A person shall apply the method most appropriate for his enterprise, having regard to the nature of the transaction, or class of transaction, or class of related persons or function performed by such persons in relation to the transaction.”

“…there is no dispute between the applicant and the respondent that the law on transfer pricing issues in Malawi was governed by Section 127A and the Taxation (Transfer Pricing) Regulations, 2009, as cited above. This legal position was even accepted and confirmed by the deponent in crossexamination. What this means is that any transfer pricing issues arising from controlled transactions between related enterprises, as is the case at hand, was to be resolved by the Act and the Regulations, and not OECD Guidelines.”

In its Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (July 2010 edition, page 206), the OECD states that there are two main issues in the analysis of transfer pricing for intra group services (which the Agreement purports)….’ The deponent in cross-examination admitted that Section 127A has to be applied together with the 2009 Regulations. The deponent admitted that the Guidelines are sometimes used as an interpretation tool/aid.”

I have to mention that, looking at ET 2, ET4 and ET6, it is very clear that the respondent did not make any reference to the Transfer Pricing Regulations, 2009. Instead, the respondent placed much emphasis on the OECD Guidelines as cited above. I am even at pains to note that the respondent did not even use the OECD Guidelines as an interpretation tool to the local Transfer Pricing Regulations. ET2, ET4 and ET6 are not showing that the OECD Guidelines were only used as an interpretation aid. Any person reading these exhibits will definitely conclude that the respondent applied the law contained in the OECD Guidelines.”

The use of these Guidelines at the expense of the Transfer Pricing Regulations, 2009 is illegal.”

The other issuel have to resolve is the rejection and its aftermath of the method used by the applicant. There is no dispute that the transaction involved herein is a controlled transaction. There is therefore no dispute that it involves transfer pricing issues. Definitely, the transfer price that was to be set between the applicant and its parent company was to be based on the arm’s length principle as per Section 127A of the Taxation Act read together with Taxation (Transfer Pricing) Regulations, 2009.”

Section 6(2) of the Transfer Pricing Regulations, 2009 have placed the burden of choosing a Transfer Pricing method on the taxpayer. In the present case, that burden was with the applicant. Again, Section 7 of the Regulations provides for documentation that may be required by the Commissioner General where a taxpayer has applied a transfer price. In the present case, it was submitted by the deponent that they rejected the transfer price set by the applicant and disallowed the commission on humanitarian grounds. In the first place, let me state that enterprises are under an obligation to keep documentation that assist them in arriving at appropriate transfer price basing on the arm’s length principle. This information may as well be requested by the Commissioner General to assist in assessing whether the correct analysis was done before arriving at an appropriate transfer price as provided for in Section 7 of the Transfer Pricing Regulations, 2009. I am of the considered view that where a taxpayer fails to provide such information, the Commissioner General is indeed at liberty to reject the transfer price or method used by the taxpayer. It is my humble view that though the Regulations places the burden on the taxpayer to choose a method, after the Commissioner General has rejected the method, the Commissioner General has to arrive at an appropriate method to be used.”


The court ordered the applicant [company] within the next 14 days, to submit to the respondent all the necessary documentation pursuant to Section 7 of the Regulations, 2009 for the respondent [tax administration] to undertake a comprehensive analysis of the transfer pricing issues and arrive at an appropriate transfer price method. The respondent to communicate its decision after 21 days of its receipt of such documentation. Thereafter, the respondent to communicate the correct tax payable by the applicant. An order similar to certiorari quashing the notice of amended assessment for the year ended June 2009 as the same was issued beyond the limitation period provided under the law in Section 91 of the Taxation Act.  Each party should bear its own costs.


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