Transfer pricing - Zambia

• The Zambia TP rules are in Section 97A and 97D of the Income Tax Act (ITA).
  
  
• The Zambia TP rules are applicable to controlled transactions between a person that is liable for tax in Zambia and another associated person who may or may not be liable to tax in Zambia. Therefore, the Zambia TP rules are applicable to domestic transactions.
  
  
• The definition of a person in Section 2 of the Income Tax Act excludes a partnership. However, it should be noted that Section 97C (1) (d) includes a partnership for TP purposes.

• Zambia has adopted OECD TP Guidelines July 2017 recommendations per the amendment to the TP regulations that were affected through government gazette dated 6 April 2018, ns.
  
  
• The amendment seeks to enhance the existing TP regulations by providing detailed guidance on application of arm’s-length principle and Zambia’s TP documentation requirement.
  
  
• However, the local regulations will prevail in case of any inconsistencies.
  
  
• Zambia has not explicitly adopted BEPS Action 13 for TP documentation in their local regulations.

• The comparable uncontrolled price method (CUP method);
  
  
• The resale price method (RP method);
  
  
• The cost -plus method (CP method);
  
  
• The transactional net margin method (TNMM); and
  
  
• The transactional profit split method (TPS method).

(please note that The Commissioner-General acknowledges that the suitability and reliability of a method will depend on the facts and circumstances of each case).

• Zambia has a self-assessment regime. The duty of developing a TP policy solely lies on the taxpayer.

• Transfer pricing documentation must be prepared and retained in a contemporaneous manner, meaning it should be in place at the time the income tax return is filed. Upon receiving a written request from the Commissioner General (CG), this documentation must be submitted within 30 days.
  
  
• TP documentation must be prepared on an annual basis and maintained for 10 years.
  
  
• MNE’s with multiple entities in the jurisdiction are required to have stand-alone TP reports for each entity.
  
  
• Local entities with an annual net turnover equal to or exceeding ZMW50 million are required to prepare documentation.
  
  
• An ultimate parent entity that is tax resident in Zambia, with consolidated group revenue of Zambian Kwacha (ZMW)4,795 million, approx. (EUR750 million) in the previous accounting year must file a CbC report with the Commissioner General, 12 months after the last day of the reporting year of the multinational enterprise with respect to that reporting accounting year.

• The TP documentation (master file and local file) have the same content as those of the OECD. The TP reports are to be prepared in the local language (English).

• The audit program is risk-based, concentrating on thinly capitalized MNEs and specific sectors of the economy, such as mining-related companies and distributors.
  
  
• The ZRA will usually challenge the characterization of the entity. The methodology is not often challenged.
  
  
• The ZRA will implement a TP adjustment if methodology applied is challenged.
  
  
• Publication, the mining industry (mining companies and suppliers) and distributors seemed to be the revenue authorities’ main focus.

• In an instance where the TP documentation requested for by the ZRA is found to not align to the guidelines as per the Regulations, the penalties that relate to non-compliance of TP regulations of ZMW24 million may apply.
  
  
• Failure to submit, late submission or incorrect disclosures may result in an offence and liability on conviction to penalties specified under the ITA (i.e., from 1 January 2018 to 31 December 2018, penalty is ZMW3,000, and with effect from 1 January 2019, penalty of ZMW24 million).

• The Zambia regulations state the following methods as the approved TP methods from which an appropriate method can be chosen from:
  • CUP;
    
    
  • Resale price;
    
    
  • Cost-plus;
    
    
  • TNMM;
    
    
  • Transactional profit-split.
• The TP methods are consistent with the OECD Guidelines and the UN Practical Manual on TP for Developing Countries.
  
  
• The Zambia legislation permits the use of a different method from those listed above, however, the ZRA must be satisfied that:
  • none of the approved method can be reasonably applied; and
    
    
  • the method applied yields a result that is consistent with the arm’s length principle.
• The taxpayer is required to also state why the five methods were regarded as less appropriate or non-workable and why the selected method is regarded as most appropriate.
  
  
• There is no legal requirement to only consider local comparables in performing a benchmarking study, local comparables are rarely used as it may be challenging to find information locally.
  
  
• Benchmarking studies are not required to be conducted every year. In practice, a new benchmarking study is conducted in one year and subsequently updated in the next two years.
  
  
• The interquartile range calculation using spreadsheet quartile formulas is acceptable.
  
  
• The weighted average result is preferred, as per common practice.
  
  
• The full range is considered the ‘arm’s length range’ where the comparability analysis identifies a number of comparables that are equally reliable. However, where the highest point of the full range exceeds 25% of the lowest point in the range the ZRA requires the interquartile range to be used as the ‘arm’s length range’.

• Zambia does not have ant APA Programme.

• Persons that are tax resident in Zambia and not Multinational Enterprises whose turnover is below K50 million are excluded from the requirement to prepare transfer pricing documentation rules. This means that an associated business established solely in Zambia with a turnover of below K50 million is not required to prepare and maintain transfer pricing documentation. This is because they are not and do not belong to a multinational enterprise group. However, all the transfer pricing rules other than documentation rules apply to these locally established businesses (ZRA Guidance On Preparing Transfer Pricing Documentation, 2020).

• Zambia became a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes (Global Forum) in January 2024.