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Transfer Pricing Alert
Transfer Pricing Amendment Regulations, 2018 are
out!
Following the finalisation of a consultative
process towards the end of 2017, The Minister of
Finance has now officially updated the Transfer
Pricing legislation in Zambia through the
issuance of the Income Tax (Transfer Pricing)
(Amendment) Regulations, 2018.
The amended Transfer Pricing (TP) Regulations
provide new detailed guidance to taxpayers with
respect to how the arm’s length principle will be
determined.
The issuance of the amended TP Regulations has
kept the momentum going in respect of the rapid
progression in TP compliance in Zambia. This
follows the issuance of the draft TP Regulations
in 2017 (which have now been enacted) and
Cabinet’s announcement in 2017 to sign up to
the Organisation for Economic Development and
Co-orporation (OECD) Base Erosion and Profit
Shifting (BEPS) Inclusive Framework.
Why
For detailed information
please contact:
TP compliance is now a key consideration of tax
authorities the world over. The concern is
Jyoti Mistry whether the transfer pricing policies adopted by
Jyoti.mistry@pwc.com multinational companies reflect the underlying
Tel: +260 211 334000 value and substance of transactions and
Cell: +260 77740641 activities undertaken by local entities.
Lydia Pwadura Taxpayers now need to ensure that all related
Lydia.g.pwadura@pwc.com party transactions are supported by local TP
Tel: +260 211 334000 documentation. This should properly reflect the
Cell: +260 963874779 risks assumed, capital and skills employed.
George Chitwa They should also be able to demonstrate that the
George.chitwa@pwc.com actual consideration and terms and conditions
Tel: +260 211 334000 negotiated are aligned to the substance and value
Cell: +260 971027555 of the underlying transactions and activities.
George Chitwa
George.chitwa@pwc.com
Detailed Guidelines
Tel: +260 211 334000
What transactions are affected?
Cell: +260 971027555
George Chitwa - Local and cross-border intercompany
George.chitwa@pwc.com transactions of business enterprises in
Tel: +260 211 334000 Zambia; and
Cell: +260 971027555
- Specific transactions between related parties
e.g. management services, financing
arrangements, transactions of both tangible
and intangible items (e.g. royalties, etc.)
Low Value Adding Services
The Regulations also provide specific guidance
on the TP treatment of “low value added
services”. Where an intercompany service is
deemed to be low value adding, the acceptable
mark-up that can be charged cannot exceed
5%.
Low value adding services are characterised as
follows:
- They are not provided by any member
of the group to unrelated customers;
- They do not create valuable intangible
property; and
- They do not involve the assumption,
control or creation of significant risks.
Exceptions
All enterprises are affected by the Regulations
with the exception of local enterprises that are
not part of a Multinational Enterprise (“MNE”)
group and have an annual turnover of less
than K20 million (approximately USD2
million).
An MNE is defined in the Regulations as “…a
business entity that is part of a multinational
enterprise group”.
An MNE group is defined as “…a group of
associated business entities established in two
or more countries”.
Proving arm’s length
The amended TP regulations provide detailed
guidance on how taxpayers can prove that
their related party or controlled transactions
are at arm’s length and therefore acceptable to
the Zambia Revenue Authority (ZRA).
The key consideration will be whether such
transactions are comparable to uncontrolled
transactions (i.e. transactions on the open
market between independent parties).
As per global best practice in Transfer Pricing,
the Regulations provide detailed steps to
ascertain whether a company’s intercompany
transactions are at arm’s length.
This includes guidance on carrying out
functional analyses checks and the selection of
the appropriate TP methods to test the
intercompany transactions.
The 5 TP methods that may be used are as
follows:
1. Comparable uncontrolled price method;
2. Resale Price Method;
3. Cost Plus Method;
4. Transactional Net Margin Method; or
5. Transactional Profit Split Method.
A taxpayer may only use one TP Method to
determine whether a given controlled
transaction is at arm’s length.
The Regulations provide that a TP Method other
than the 5 listed, may be used in the following
circumstances:
- Where none of the 5 methods can be
reasonably applied to determine the arm’s
length conditions; and
- Where such other method indicates a result
that would be achieved by independent
parties engaging in a comparable
uncontrolled transaction under comparable
circumstances.
Taxpayers will need to apply to the
Commissioner-General to be able to use a
method other than the prescribed 5. Approval
will be at the Commissioner-General’s
discretion.
Documentation requirements
- Preparation, on an annual basis, of TP
documentation in line with local TP
Regulations and OECD TP Guidelines and
the UN TP Manual in support of
intercompany transactions; and
- Maintenance of specific TP information in
respect of the intercompany transactions
entered into by a company.
The TP documentation should be prepared by
the annual Income Tax return filling deadline
(i.e. 21 June) but is not to be filed.
TP documentation/information should be
provided upon request by ZRA within 30 days.
Penalties
Failure to provide TP documentation will be an
offence under the Income Tax Act 1966, as
amended (ITA), with defaulters liable to various
penalties.
This publication has been prepared as general information on matters of interest only, and does not constitute
professional advice. You should not act upon the information contained in this publication without obtaining specific
professional advice.
© 2018 PricewaterhouseCoopers Limited. All rights reserved. In this document, “PwC” refers to
PricewaterhouseCoopers Limited which is a member firm of PricewaterhouseCoopers International Limited, each
member firm of which is a separate legal entity.
How this affects you
In order to comply with the TP Regulations,
any person engaging in controlled transactions
will be required to have contemporaneous
documentation to verify that all related party
transactions are consistent with the arm’s
length principle.
The meaning of the term contemporaneous in
this instance, is that the TP documentation
that a company has in support of its related
party transactions must at all times be
reflective of the current dynamics of the
company and the controlled transactions. The
Regulations provide that this should be
reviewed on an annual basis.
Given that the prescribed documentation is
required within 30 days from the date of
request by ZRA, this practically means that
affected companies must have the prescribed
documentation readily at hand.
Our assistance
In view of the above, we would recommend
that you review your TP position and ascertain
which level you may need our assistance.
Our experienced local TP team, together with
the support of specialist TP staff in our global
centres of excellence, provide tailored and
business oriented TP solutions, including the
following:
- Preparation of local TP documentation
in line with local requirements and
global best practice (OECD);
- Review and localisation of global
company TP policies to ensure that
these fit within the parameters of local
TP provisions and global best practice;
- Assisting in liaising with ZRA in the
event of TP audits, including
objections to assessments;
- Reviewing specific transactions
(including the provision of
intercompany management services)
and developing supporting systems to
support arm’s length results;
- Assisting with developing/reviewing
TP policies, etc.
We look forward to hearing from you. We shall
keep you updated of any developments.