This document discusses transfer pricing regulations in Zambia, which incorporate recommendations from the OECD’s BEPS Actions 8-10. It covers various aspects of these regulations, including the legislative basis, the definition of related parties, documentation requirements, audit practices, and penalties for non-compliance.
Zambia has embraced OECD recommendations related to BEPS Actions 8-10. The regulations include the preparation of transfer pricing documentation, adherence to the arm’s length principle, and the introduction of a safe harbor for low-value intra-group services. While the Regulations align with OECD Guidelines and the UN Practical Manual on Transfer Pricing, they take precedence in case of conflicts.
a) References to OECD/EU/Local Rules: Zambia’s transfer pricing rules apply to related party transactions within the country and across borders. These rules are based on Section 97 (A-D) of the Income Tax Act and the Income Tax (Transfer Pricing) Regulations.
b) Definition of Related Party: The regulations apply when a person or corporate entity directly or indirectly holds 50% participation in the management, control, or capital of another entity.
c) Nature of Transfer Pricing Documentation: Although Zambia has not yet officially implemented BEPS Action Plan 13, the country has focused on enhancing transfer pricing audit capacity, particularly in the mining sector. Recent cases have demonstrated the ability to combat base erosion and profit shifting schemes.
d) Tax Havens & Blacklists: Zambia does not maintain a tax haven or non-cooperative jurisdiction blacklist.
e) Advance Pricing Agreement (APA): The Zambian Income Tax Act does not provide for APAs, but taxpayers can consult tax authorities for guidance on interpreting and applying the Act.
f) Audit Practice: Zambia’s audit practice has concentrated on the mining sector, with expanded mining audit teams addressing transfer pricing issues. The tax authorities are developing a risk log for mining companies operating in Zambia.
a) Level of Documentation: Regulations require participants in controlled transactions to maintain annual contemporaneous documentation, following the local file template in the OECD Guidelines. Specific requirements regarding budgets and financial estimates are also included.
b) Industry Analysis: Identifying value drivers in the relevant industry provides insights into common industry profitability levels.
c) Company Analysis: This section includes information about the local entity’s management structure, organization chart, and business strategies. It also covers involvement in business restructurings and intangibles transfers.
d) Functional Analysis: An assessment of activities, responsibilities, assets, and risks is conducted in line with OECD Guidelines.
e) Choice of Transfer Pricing Method: Zambia follows the OECD Transfer Pricing international standards and adopts the five OECD transfer pricing methods. Specific documentary requirements apply when using the Comparable Uncontrolled Price (CUP) method for acquiring assets from non-connected entities outside Zambia.
f) Economic Analysis – Benchmark Study: Zambia follows the comparability analysis guidance outlined in Chapter III of the OECD TP Guidelines.
g) Inter-company (IC) Legal Agreement: Legal agreements are of lower importance since the OECD’s 2017 Guidelines prioritize the “conduct of parties.”
h) Financial Statements: Parties must ensure their conduct aligns with reported accounts. The taxpayer must provide financial information, including annual local entity financial accounts, allocation schedules, and financial data for comparables.
i) Production Process for TP Relevant Returns, Documents, Forms, and Financials: The chart outlines filing requirements, formats, deadlines, and language requirements, specifying that documentation should be in English.
k) Notification Requirement: Zambian entities required to file a country-by-country report must submit the notification form specifying their role in the group.
l) Record Keeping: In addition to contemporaneous documentation, a person involved in a controlled transaction must maintain information following the master file template in Annex I to Chapter V of the OECD Guidelines.
m) Penalties and Interest Charges: Zambia does not have specific transfer pricing penalties. Instead, general penalties apply, including imprisonment and fines for tax offenses against the Act. Penalties also apply to incorrect returns and late payment of taxes, with additional interest charges.
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