Zambia sets an important precedent in Transfer Pricing enforcement

On 19 November the ATI webinar Landmark Transfer Pricing Ruling: Lessons from the Zambia Revenue Authority vs. Nestlé Zambia Case took place, gathering more than 80 participants.

The event opened with remarks from Markus Paffhausen, advisor at the ATI Secretariat, who introduced the webinar and situated it within the broader work of the Addis Tax Initiative (ATI), and specifically its work on Action 3. During the Fourth International Conference on Financing for Development (FFD4), the ATI adopted a new guiding agenda, the Seville Declaration on DRM, which will shape its direction in the coming years. Action 3 of the Declaration reads: “ATI members commit to apply coherent and coordinated policies that foster DRM and combat tax-related illicit financial flows (IFFs).”

The webinar and the case presented illustrate how partner countries can challenge abusive transfer practices by multinational enterprises. A recap of the event follows below.

Presentation of the case 

Fanwell F. Chibwe, Assistant Director for Litigation & Corporate Advisory at the Zambia Revenue Authority (ZRA), presented a clear and structured overview of the dispute, outlining the timeline, legal reasoning, and main procedural steps.

In a nutshell, the case originated from a ZRA transfer pricing audit covering the years 2010–2014, during which Nestlé Zambia consistently reported losses. Although Nestlé initially won most points before the Tax Appeals Tribunal, ZRA challenged the ruling, prompting the Supreme Court to take over the case which later overturned that decision, holding that the Tribunal had incorrectly shifted the burden of proof. The Court also confirmed ZRA’s authority to aggregate related-party transactions, in line with internationally recognised transfer pricing standards.

Chibwe explained that Nestlé raised six grounds of appeal. The Tribunal ruled in Nestlé’s favour on five of them but supported ZRA on the key issue of distributor characterisation. ZRA maintained that Nestlé Zambia operated as a limited-risk distributor, while Nestlé argued that it functioned as a fully-fledged distributor. Due to the parent company’s international structure, ZRA considered that strategic and operational risks in areas such as marketing, distribution, storage, operations, and sales were effectively assumed by the parent company rather than by the Zambian subsidiary.

The tribunal’s critical findings

Key findings included:

• Control and oversight evidence: the financial controller from Nestlé Zimbabwe demonstrated greater knowledge of Nestlé Zambia’s operations than its own employees. No witness from Nestlé Zambia testified, which indicates the actual locus of control.
• Extensive related party services: Nestlé Zambia received strategic management, sales support, finance, accounting, legal, procurement, supply chain, HR, and IT services from related entities, demonstrating comprehensive external control.
• License agreement analysis: the General License Agreement showed “know-how” remained exclusive property of Nestle SA as licensor, meaning ultimate risks in marketing, distribution, storage, and selling, stayed with the parent company.

ACCESS THE ZRA PRESENTATION

Chibwe then explained ZRA’s arguments before the Supreme Court. The Court accepted ZRA’s arguments on four of five grounds, fundamentally reshaping transfer pricing law in Zambia.

Implications for Africa

Chibwe also shared broader implications for the continent:

• Strengthened authority: the ruling confirms revenue authorities' power to make transfer pricing adjustments, with burden of proof shifting to taxpayers. This provides legal clarity and reinforces authorities’ position in similar disputes.
• Legal precedent: as one of Zambia’s first substantial Supreme Court decisions on transfer pricing, the ruling offers a strong framework that other African jurisdictions can cite and follow.
• Revenue mobilisation: by successfully challenging a major multinational's structure, ZRA demonstrated capability to protect the tax base and supported wider African efforts to tackle illicit financial flows.

Implementation in practice: ATI Action 3 

The ZRA vs Nestlé case represents a practical implementation of principles championed by ATI Action 3. It shows how a partner country can take practical steps to combat tax-related illicit financial flows and strengthen domestic revenue mobilisation (DRM) through disciplined transfer pricing enforcement. 

What is next for Zambia and other developing economies?

While the ZRA vs. Nestlé case was decided based on traditional transfer pricing rules, applying the OECD's Amount B framework would have significantly altered the dispute's complexion by providing a more standardised and predictable approach. Chibwe presented a comparison between how the case would have been viewed under traditional rules approach and under Amount B approach.

The Amount B framework aims to provide a simplified and predictable approach for routine distribution functions, addressing common challenges such as limited access to comparable data, resource constraints for complex analysis, and frequent disputes. However, Chibwe stressed the importance of first conducting an internal assessment to evaluate whether Pillar II or Amount B is suitable. “It is essential for ATI members to evaluate their position and where they stand: is Amount B the right decision?” he noted, and added: “Before you can adopt it, conduct a feasibility study. Do an empirical analysis of the legal entities that will fall in the scope of Amount B. Zambia is still considering this adoption and making steady progress”.

Another key recommendation was the importance of collaboration: “If you are going to read dividends, accounts… collaboration is the way to go”, referring to the effective partnership between ZRA’s legal department and auditors. During the final Q&A session, Chibwe reaffirmed that combined skills and coordination had been essential to presenting a formidable case. He also underlined the importance of capacity building: “These are big operations… capacity building is needed among employees!”.

A turning point

The judgment in the ZRA vs. Nestlé case represents an important shift, showing that African tax administrations are becoming more capable and prepared to pursue litigation to ensure that profits are taxed where real economic activity takes place. The ruling resulted in a direct increase in government revenue, strengthening domestic revenue mobilization, and also created clear legal guidance on transfer pricing principles. It offers a practical framework for ATI member countries to reinforce their tax systems, address profit shifting more effectively, and secure needed domestic revenues to support sustainable development.