JHB 
A regional case with global implications
A recent Zambian Supreme Court judgment in a transfer pricing dispute involving Nestlé Zambia has redefined the expectations placed on multinational companies operating across Africa. By ruling in favour of the Zambian Revenue Authority (ZRA), the court upheld an assessment of approximately $573 000 (ZAR 9.8 million) and reinforced two important principles:
The burden of proof in transfer pricing disputes lies squarely with the taxpayer.
Tax authorities have the right to request extensive documentation, even if not explicitly required by regulation.
For South African and regional multinationals, the implications are clear: transfer pricing policies, documentation, and functional analyses must be stronger than ever before.
Continuous losses invite closer scrutiny
Between 2010 and 2014, Nestlé Zambia operated at a loss during its start-up period, despite the broader Nestlé Group remaining profitable. This discrepancy triggered the ZRA’s audit, which questioned whether intercompany transactions were structured to shift profits out of Zambia.
The case highlights a key takeaway for all multinational entities: Companies that report consecutive losses, or operate under thin capitalisation (excessive debt-to-equity ratios), are at high risk of being audited.
In short — consistent losses no longer go unquestioned, especially where cross-border related-party transactions exist.
The burden of proof rests with the taxpayer
One of the most significant outcomes of this judgment is the clarification of the evidentiary burden. While Nestlé Zambia argued that it had applied an appropriate method to confirm arm’s length pricing, the ZRA adopted a different approach. The taxpayer contended that the onus shifted to the ZRA to justify its choice — but the Supreme Court disagreed.
THE RULING MADE IT CLEAR: “The burden is on the taxpayer to provide cogent evidence that an assessment is wrong.”
This sets a high compliance bar. Even where a taxpayer follows recognised methodologies, it remains their responsibility to prove the accuracy and appropriateness of their transfer pricing model.
This underscores the importance of maintaining detailed, defensible documentation, especially where methodologies may be contested.
Documentation is everything
Perhaps the most consequential aspect of this case is the court’s view on documentation. At the time of audit, Zambia’s regulations did not require a formal “local file”, yet the court ruled that the revenue authority retains the power to demand relevant information, even if not explicitly prescribed by law.
This means that taxpayers must be prepared to produce information dating back up to ten years, often within tight deadlines. Failure to do so can result in adverse findings, regardless of intent or prior legal obligations.
For multinationals operating in Southern Africa, the lesson is unmistakable:
Maintain comprehensive local and master files in line with OECD standards.
Document all functional and risk analyses supporting intercompany transactions.
Prepare for retrospective scrutiny, even in jurisdictions with less formal transfer pricing rules.
Strengthening your transfer pricing position
The Nestlé Zambia judgment serves as a cautionary precedent that is likely to influence future audits across the region — including in South Africa. With SARS actively increasing its use of data analytics and third-party reporting, transfer pricing documentation gaps are now high-risk.
To mitigate exposure, multinationals should:
Conduct periodic transfer pricing policy reviews.
Perform robust benchmarking and functional analyses.
Ensure intercompany agreements align with actual economic substance.
Implement a group-wide documentation strategy to ensure consistency across jurisdictions.
At MMS Group, our transfer pricing specialists assist multinational clients in developing, implementing, and defending compliant, defensible policies aligned with OECD and SARS standards.
Preparation is the new defence
The Zambian ruling signals a clear shift: tax authorities hold the advantage in transfer pricing disputes. The responsibility to prove compliance, substantiate methodology, and justify intercompany arrangements rests firmly with the taxpayer.
For multinationals, the only effective strategy is preparation through strong documentation, transparent policies, and proactive compliance.
In transfer pricing, the bar has been raised and only those prepared will meet it. Reach out to our team if you are concerned about your transfer pricing documentation.