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Zambia vs Nestlé Trading Ltd, March 2019, Tax Appeals Tribunal, Case No 2018/TAT/03/DT

In this case 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.

 

Zambia vs Nestle March 2019
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