Nestlé Zambia had reported continuous losses for more than five years. Following an Transfer Pricing audit covering years 2010 – 2014, the tax administration issued an assessment whereby profits were adjusted to ZMW 56,579,048 resulting in additional taxes of ZMW13,860,103 plus penalties and other levies.
The assessment was based on Nestlé Zambia being characterised as a limited risk distributor instead of a full fledged dristributor.
Nestlé Zambia held that the tax administrations characterisation of the entity as a limited risk distributor was incorrect and that the assessment had not been performed in accordance with the arm’s length principle.
The Tribunal ruled in favor of Nestlé, except for it’s position on the characterisation of the entity as a limited risk distributor (ground four cf. the excerp below).
“The summary of our findings is that there was basis for initiating a transfer pricing audit in this case because as has been stated in Paragraph 1.129 of the OECD Guidelines that, “When an associated enterprise consistently realises losses while the Multinational enterprise group as a whole is profitable, the facts could trigger some special scrutiny of transfer pricing issues.” We opine that the Appellant being in continuous loss making position, triggered an enquiry into transfer pricing issues but the manner in which the Respondent went about the enquiry was wrong. There could be transfer pricing issues that require scrutiny particularly in light of the testimony from AWl that the Appellant is continuously making losses while it’s related parties are making profits.
The Appellant succeeds in Grounds One, Two, Three, Five and Six but fails in Ground Four. The net effect is therefore that the assessment by the Respondent that the Appellant was liable to pay a sum of ZMW13,860,103.00 was wrongly arrived at. This is so because the said assessment was based on inaccurate transfer pricing results emanating from use of an inappropriate transfer pricing method, disproportionate comparables and an unjustified add back of unrealized exchange losses. By reason of the foregoing, the assessment by the Respondent is accordingly and hereby set aside.“