What happens when a multinational distributor reports losses year after year, and the tax authority decides that those losses no longer make commercial sense?
In a landmark 2025 judgment, the Supreme Court of Zambia (Court) answered that question decisively in Zambia Revenue Authority v. Nestlé Zambia Limited (Case No. 03/2021) 1. After nearly a decade of litigation, the Court reinstated the Zambia Revenue Authority’s (ZRA) transfer pricing assessments against Nestlé Zambia Limited (Nestlé Zambia), delivering one of the most comprehensive and influential transfer pricing decisions to emerge from Africa to date.
The case traveled from the Tax Appeals Tribunal (Tribunal) to the Court, with each forum addressing issues that resonate widely across tax administrations, multinationals, and advisors. The ruling now stands as a cornerstone of Zambia’s transfer pricing jurisprudence. It provides authoritative guidance on burden of proof, aggregation of transactions, the use of foreign comparables, documentation expectations and the functional characterization of group entities. More broadly, it signals a shift across African tax administrations toward more assertive, evidence-driven transfer pricing enforcement, raising expectations for multinationals operating in the region.
Factual Background and Dispute
Nestlé Zambia commenced operations in 2010 as a distributor of Nestlé products sourced from related parties within the Nestlé group. Before Nestlé Zambia was established, independent third-party distributors imported and resold Nestlé products in the Zambian market.
From inception, Nestlé Zambia reported consistent operating losses. This pattern, combined with significant volumes of related-party transactions, including purchases of goods, management services, royalties, and other support functions, prompted the ZRA to initiate a comprehensive transfer pricing audit covering the 2010–2014 financial years.
During the audit, the ZRA requested extensive transfer pricing documentation, including master file and local-file-type information, as well as detailed financial data. The authority expressed concerns regarding the sustained losses, the scale of related-party dealings, and a debt-to-equity ratio that raised thin-capitalization questions.
The ZRA rejected Nestlé Zambia’s explanations for its losses (such as increased competition and startup conditions) considering them insufficiently substantiated. Using an aggregated testing approach and comparables from 13 Western European markets, the ZRA classified Nestlé Zambia as a limited-risk distributor (LRD) and concluded that its transfer pricing outcomes were not at arm’s length. As a result, it recalculated profits at ZMW 56,579,048 and levied an assessment of ZMW 13,860,103 (approximately US$599,0722). The Commissioner General upheld the assessment following Nestlé Zambia’s objection.
Nestlé Zambia appealed to the Tax Appeals Tribunal, challenging the assessment on grounds of erroneous benchmarking methodology, inappropriate aggregation of transactions, use of foreign comparables, and its classification as an LRD. While the Tribunal ruled largely in Nestlé Zambia’s favor, it upheld the LRD characterization. The Tribunal found that ZRA had grounds to audit but had used inappropriate methods and comparables, and set aside the assessment, ordering a reassessment. Both parties appealed aspects of the Tribunal’s decision to the Supreme Court, leading to the final ruling.3
Issues Considered by the Court
The appeal4 reached the Supreme Court, which partially reversed the Tribunal’s decision. The Court examined several pivotal questions:
- Burden of proof
- Aggregation of related-party transactions
- Selection and acceptability of comparables
- Documentation requirements
- Functional characterization of the taxpayer
Below is a snapshot of how the ZRA and Nestlé Zambia framed their opposing positions.
Burden of Proof
ZRA’s arguments: The taxpayer bears the burden of proving that an assessment is excessive or incorrect, consistent with Zambian, UK, and US jurisprudence.
Nestlé Zambia’s Arguments: Nestlé Zambia argued that it had submitted all required documentation and that the ZRA failed to properly consider its analysis.
Aggregation of Transactions
ZRA’s arguments: OECD and UN guidance allow aggregation where transactions are closely linked; the Tribunal’s narrow approach was incorrect.
Nestlé Zambia’s Arguments: The transactions aggregated by the ZRA were not closely linked; bundling unrelated transactions (e.g., purchases, royalties, management fees) led to erroneous results.
Comparables
ZRA’s arguments: In the absence of local comparables, it was reasonable to use Western European benchmarks; Nestlé Zambia itself used non-African comparables.
Nestlé Zambia’s Arguments: Western European data reflected materially different economic conditions and business maturity.
Documentation Requirement
ZRA’s arguments: Even before the 2018 regulations, the Income Tax Act empowered ZRA to request any information necessary for tax assessment.
Nestlé Zambia’s Arguments: There was no legal requirement to maintain a local file before 2018; Nestlé Zambia provided a master file and all requested information.
Functional Characterization
ZRA’s arguments: The functional analysis supported classifying Nestlé Zambia as a limited risk distributor status including control and oversight from Nestlé Zimbabwe; extensive related-party services, such as strategic management, sales support, procurement, and supply chain, and the license agreement demonstrated that the “know-how” remained the exclusive property of Nestlé SA.
Nestlé Zambia’s Arguments: Nestlé Zambia was a fully-fledged distributor, bearing inventory risk, credit and other associated risks, and marketing expenses; it bore responsibility for managing logistics, building customer relationships, advertising, etc.; hence, it is not a limited risk distributor.
Court Findings
The Supreme Court’s 2025 decision reaffirmed key international transfer pricing standards outlined in the OECD Guidelines, offering greater guidance and certainty for tax authorities across African jurisdictions.
- Burden of proof confirmed: The Court confirmed that once an assessment is raised, the burden rests squarely with the taxpayer to demonstrate that it is incorrect. Importantly, the Court held that taxpayers must be able not only to justify their chosen transfer pricing methodology, but also to actively rebut alternative approaches adopted by the revenue authority. This sets a higher evidentiary standard than many taxpayers may assume, based on OECD guidance alone.
- Transaction aggregation upheld: The Court approved the ZRA’s aggregation of multiple related-party transactions, relying on OECD and UN guidance and jurisprudence from India5. This approach may broaden the analytical leeway available to African tax authorities, many of which traditionally insist on a transaction-by-transaction analysis. The ruling suggests that even where transaction-level data is available, entity-level aggregation may still be permissible.
- Acceptable comparables: The Court accepted the use of foreign comparables, particularly when domestic data is unavailable. While acknowledging economic differences between Zambia and Western Europe, it held that such differences do not automatically invalidate foreign comparables, provided the authority evaluates economic conditions carefully. This reinforces the practical reality that African tax administrations often have limited access to local benchmarking data.
- LRD characterization affirmed: The Court upheld the Tribunal’s finding that Nestlé Zambia operated as a limited-risk distributor. The level of control, oversight, and support from related entities, combined with the functions performed and risks borne locally, supported this classification. This determination directly influenced both the pricing methodology and the ultimate tax adjustment.
- Documentation power affirmed: The Court concluded that the ZRA is entitled to request transfer pricing documentation for earlier periods, even if regulations were introduced only later. This effectively creates a retroactive expectation of documentation, meaning taxpayers should retain detailed records for up to 10 years, the statutory limitation period. For multinational groups with historical restructuring or system changes, complying with such requests may be challenging.
Implications for African MNEs
This judgment represents a significant moment in the evolution of transfer pricing enforcement across Africa. It signals a clear shift toward deeper audits, stronger evidentiary demands, and increased judicial scrutiny.
Key takeaways for multinational groups include:
- Persistent losses in routine or distribution entities will attract sustained attention.
- Aggregated testing is no longer exceptional and may be used when appropriate.
- Foreign comparables may be accepted, even across regions, where local data is scarce.
- Functional profiles must align with actual conduct, not just contractual labels.
- Historical documentation gaps can create present-day exposure.
With enhanced information exchange through the OECD Inclusive Framework and the African Tax Administration Forum (ATAF), tax authorities across the continent are becoming more coordinated and sophisticated. At the same time, regulatory reforms continue. Kenya has proposed new transfer pricing regulations, South Africa is progressing its Advance Pricing Agreement (APA) program, and multiple jurisdictions are modernizing their legislation to align more closely with international standards.
A Broader Global Trend
The Nestlé Zambia decision fits squarely within a wider international pattern. Transfer pricing disputes are increasingly focused on economic substance, coherence of the value chain narrative and the credibility of profit outcomes.
Three themes are becoming dominant:
- Substance over form: Actual conduct prevails over contractual arrangements.
- Evidence over assertions: Assumptions must be supported by robust data.
- Risk alignment: Profit allocation must reflect where risks are genuinely controlled and managed.
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