Transfer Pricing in Zambia

The legal framework

Zambia's transfer pricing regime is older than most in the region — Section 97A of the Income Tax Act, Chapter 323, has anchored the arm's length principle in domestic law since 1999 — but the framework practitioners actually work with dates from the Income Tax (Transfer Pricing) (Amendment) Regulations, SI 24 of 2018, which rebuilt the original SI 20 of 2000 around the OECD architecture. Four further statutory instruments (SI 117 of 2020, SI 107 of 2021, SI 89 of 2022 and SI 62 of 2023) have since layered on country-by-country reporting, a higher documentation threshold and mandatory approval for non-prescribed methods. The ZRA's Transfer Pricing Practice Note supplies the Commissioner-General's interpretation and is essential reading, because it is where the administration's operating positions — on ranges, tested parties and comparables — actually live.

Regulation 20 requires the domestic rules to be construed consistently with the OECD Transfer Pricing Guidelines, but with an important caveat: where the Guidelines and Zambian legislation conflict, the legislation prevails. The associated-persons definition in s.97A is deliberately wide, reaching shareholding and management-control links, joint ventures with unrelated parties, and — the catch-all worth reading twice — any arrangement, written or not, that benefits two or more entities on conditions the Commissioner-General considers not at arm's length. The rules also apply to purely domestic controlled transactions, with compensating adjustments available for the Zambian counterparty, so intra-country pricing between group companies is squarely in scope.

Methods, comparables and the commodity rule

All five OECD methods are prescribed and selected on a most-appropriate-method basis under Regulation 12, with no hierarchy. Since SI 62 of 2023 took effect on 1 January 2024, however, Regulation 13(3) requires written approval from the Commissioner-General before any other method may be used — an application to be made in advance, not a position to be defended after the fact.

The provision with the sharpest teeth is Zambia's commodity rule. Section 97A imposes a mandatory reference price on related-party sales of base and precious metals: the monthly average London Metal Exchange cash price, failing which the monthly average Fastmarkets MB cash price, failing which the monthly average of another exchange the Commissioner-General approves. In a copper-dependent economy this is effectively a statutory sixth method, and the Supreme Court's Mopani judgment shows how unforgiving departures from third-party pricing benchmarks can be.

On comparability, Zambia follows TPG Chapter III with no legal preference for domestic comparables — a pragmatic acknowledgment of the scarcity of African data. The ZRA accepts commercial-database searches widened to other countries and regions if the methodology is disclosed and material differences are adjusted, a position the Supreme Court confirmed in Nestlé when it admitted European comparables. Secret comparables cannot found an adjustment, though the ZRA may use undisclosed data for risk selection. Regulation 16 provides for an arm's length range, but the Practice Note narrows it in practice: the interquartile range applies whenever the top of the range exceeds the bottom by more than 25%, and results falling outside are adjusted — by default to the midpoint. A foreign tested party is permitted, but the Zambian taxpayer must be able to produce its financial statements; failure to obtain them is treated as a documentation failure with penalty consequences.

Documentation: what the Zambia Revenue Authority expects

Zambia operates the full three-tier OECD package: master file, local file and country-by-country report under Regulations 21, 22 and 22A, aligned to Annexes I–III of TPG Chapter V. The master and local files must exist by the income tax return due date — the contemporaneous standard — but are not filed with the return. They must be produced in English within 30 days of a written request, and any document in another language must be notarially translated at the taxpayer's expense.

The exemption is narrow: only local groups outside any MNE structure with annual turnover below K50 million escape the documentation obligation, and even they remain bound by the substantive arm's length rule. CbC reporting applies above a Kwacha-only threshold of K4,795 million in consolidated group revenue, with the report due 12 months after year end and reporting-entity notifications due by the last day of the reporting year. Because Zambia has no qualifying competent authority agreements in force for automatic CbC exchange, secondary local filing remains a live obligation for Zambian subsidiaries of foreign-parented groups — a point frequently missed.

There is no separate TP return, but the Related Party Transactions Schedule in the annual return (Section F of the IT46) demands counterparty-level detail: foreign TINs, transaction categories, gross values without offsetting, the method applied, and direct questions on benchmarking, restructurings and intangible transfers. Treat it as what it is — the ZRA's primary audit-selection instrument. Retain documentation for ten years, matching the extended TP assessment window in s.65(3)(b)(i); the general six-year record rule is not the safe benchmark for transfer pricing.

Audits and enforcement: lessons from Mopani and Nestlé

The ZRA has run a dedicated Transfer Pricing Unit within the Large and Specialised Taxpayer Office since March 2016, has procured a commercial comparables database, and selects cases on a risk basis. Enforcement began in mining and mineral pricing and has spread into manufacturing and consumer goods. Critically, the typical challenge is not to the taxpayer's method but to its characterisation — the perennially loss-making entity labelled a limited-risk distributor.

Two Supreme Court decisions define the landscape. Mopani Copper Mines v ZRA (2020) upheld a K240 million assessment on copper sold to shareholder Glencore below the prices achieved with third parties, accepting a CUP comparison and the s.95 anti-avoidance provision while rejecting a hedging arrangement as justification. ZRA v Nestlé Zambia (2025) is arguably more consequential for the wider market: reversing the Tax Appeals Tribunal, the Court held that s.106 places the burden on the taxpayer to displace an assessment with cogent evidence, that interlinked related-party transactions flowing from a common source may be aggregated, that foreign comparables are admissible where economic circumstances are similar or reliably adjusted, and that a distributor reporting five consecutive loss years was properly recharacterised because strategic functions and risks sat with related parties abroad.

The financial stakes compound quickly. The documentation offence under s.97C(7) carries 80 million penalty units — roughly K32 million at the current K0.40 unit value. Adjustments attract incorrect-return penalties of 17.5%, 35% or 52.5% depending on culpability, a 25% understatement penalty under the replaced s.46A(5) where tax is underpaid by a third or more, and interest at the Bank of Zambia rate plus 2% — all within a ten-year assessment window, unlimited in cases of fraud.

Dispute resolution: no advance certainty

Zambia offers no advance pricing agreements of any kind, no TP rulings and no cooperative compliance programme, and none is expected while audit practice matures. The mutual agreement procedure — grounded in s.74(1)(b) and Zambia's 23 treaties in force — is the only treaty-based mechanism, with corresponding adjustments for foreign-initiated adjustments handled under Regulation 19. Unilateral downward corresponding adjustments can be claimed under s.97A without invoking MAP, but taxpayer self-adjustments in the return run one way only: upward. There are no secondary adjustments.

Domestically, the route is an objection to the Commissioner-General within 30 days of the assessment, appeal to the Tax Appeals Tribunal within a further 30 days, and onward appeal to the Supreme Court. Two features shape strategy. First, Zambia applies pay now, argue later — there is no stay of collection pending appeal, so a contested assessment is a funding event. Second, after Nestlé, the evidentiary burden sits unambiguously with the taxpayer; a dispute is won or lost on the contemporaneous file, not on submissions built after the audit letter arrives.

Pillar Two and what changes in 2026

Zambia has not enacted Pillar Two and has set no timetable, despite Inclusive Framework membership since 2017. What it has enacted is a Minimum Alternative Tax: from 1 January 2026, companies and partnerships pay a minimum of 1% of annual turnover, creditable against standard income tax and carried forward up to five years. It is a domestic turnover-based backstop aimed partly at persistent-loss and profit-shifting profiles — precisely the fact pattern litigated in Nestlé — and should not be confused with a qualified domestic minimum top-up tax.

Also from 2026, the 30% of tax EBITDA interest limitation in s.29 extends to third-party as well as related-party debt (with a 70% ratio for railway SPVs), a permanent-establishment anti-fragmentation rule assesses the combined activities of related enterprises, and a discretionary voluntary-disclosure penalty waiver becomes available. On Amount B, Zambia has not adopted the simplified and streamlined approach but will respect its outcome where applied by a covered jurisdiction, in line with the Inclusive Framework political commitment — not where applied by a non-covered one.

How practitioners should respond

Three disciplines matter most in Zambia. First, build the file before you file: documentation must exist by the return date, be producible in English within 30 days, and — where a foreign tested party is used — include that party's financials, or the ZRA will treat the study as no documentation at all. Second, defend the characterisation, not just the margin. Both landmark judgments turned on substance: who actually bears the risks, who sets strategy, and whether a Zambian entity's loss record is explicable. A benchmarking study refreshed every two years is accepted practice, but it will not save a limited-risk label that the functional facts contradict — and from 2026 the 1% MAT taxes persistent losses regardless.

Third, price certainty into the dispute plan. With no APAs, an upward-only self-adjustment rule and pay-now-argue-later collection, the contemporaneous file is the only advance protection available, and MAP the only treaty relief. Miners should reconcile monthly to LME reference prices as a matter of routine; distributors and service entities should assume the Related Party Transactions Schedule is being read by the TP Unit with the Nestlé judgment on the desk. The Academy's postgraduate programmes treat Zambia as a case study in exactly this: a developing-country regime that is OECD-consistent on paper, court-tested in practice, and unforgiving of taxpayers who document after the fact.