TP in the Courts: Lessons from the Nestlé Zambia case

The recent Supreme Court of Zambia judgment in the long-running Nestlé Zambia transfer pricing (TP) dispute has provided valuable insight into how African courts may approach complex TP controversies. The case, which spanned audits beginning in 2010, hearings at the Tax Appeals Tribunal in 2018–2019, and final determinations in 2021–2025, highlights both the challenges facing taxpayers and the evolving expectations of revenue authorities.

In a webinar on 18 September 2025, specialist African TP firm advisory firm Graphene Economics, together with Hepta Advisory Services Limited, a Zambian-based tax and financial advisory firm, unpacked the background to the dispute, the timeline, and the various arguments.

View the full webinar recording or read our summary below.

Background to the dispute

Michael Hewson, Director at Graphene Economics, and Patrick Mawire, Principal and Co-founder at Hepta Advisory, explained that Nestlé Zambia was established in 2010 as a distributor of Nestlé products sourced mainly from South Africa, with additional transactions involving Zimbabwe, Brazil, Switzerland, and Ghana. In its early years the company incurred losses, raising questions at the Zambia Revenue Authority (ZRA). Following a TP audit and successive appeals, the case became one of the few in Africa to be decided at the highest court, with written judgments providing a detailed record of the reasoning.

Patrick outlined the typical TP audit process that the ZRA would follow in Zambia and gave an overview of the timeline.

Michael detailed some of the relevant fact patterns.

For example, he noted that in terms of intercompany transactions, Nestle Zambia commenced operations in 2010, incurred losses from 2010 to 2014, had relatively limited capital (management fees = 2x capital), and had a high level of debt compared to equity (interest not charged). Furthermore, products sold by Nestle Zambia were also imported and distributed by independent retailers and Nestle operated with certain regional roles.

Then the speakers dived into the arguments.

Burden of proof

A central issue was Section 106 of Zambia’s Income Tax Act, which presumes that an assessment issued by the Commissioner is correct unless disproved by the taxpayer. The Tribunal had initially sided with Nestlé, suggesting the ZRA bore responsibility to show the taxpayer’s method was wrong. However, the Supreme Court ultimately upheld ZRA’s view: the burden of proof rests squarely on the taxpayer.

For multinational companies, this creates a high bar, especially in TP, where multiple methods can be defensible. Michael pointed out that this essentially means taxpayers must not only select an appropriate method but be prepared to disprove alternative approaches adopted by the authority. This raises the burden on the taxpayer beyond what is anticipated in the OECD Transfer Pricing Guidelines.

Aggregation versus transaction-by-transaction testing

Nestlé argued that its transactions should be tested individually, in line with Zambian regulations and OECD guidance. The Tribunal agreed, but the Supreme Court then found for the ZRA, ruling that aggregation was permissible when transactions emanate from a “common source” (in this case, related parties across multiple jurisdictions).

This interpretation introduces uncertainty. Traditionally, tax authorities have pressed for transaction-by-transaction testing, but the court’s position opens the door for entity-wide approaches. While it suited ZRA in this case, Patrick noted that the logic could work against authorities in other circumstances. Furthermore, the conclusion by the Supreme Court that aggregation was appropriate where transactions were from a single source (although in this case they were actually from multiple related parties) may also be open to convenient application by taxpayers or revenue authorities.

Documentation obligations

At the time of the audit, Zambia’s 2000 TP regulations did not require local files. Nestlé had provided group-level documentation, but not local reports. The Tribunal accepted this, yet the Supreme Court ruled that taxpayers must comply with any information request from ZRA – even if the specific documentation requirement did not exist when the transaction occurred.

This precedent underscores the need for taxpayers to retain detailed records for up to 10 years (the prescription period in Zambia), regardless of evolving rules. Groups may face difficulties producing historic files if structures, systems, or ownership have since changed. Furthermore, although documentation may not have been required in the past, if the ZRA has requested it, the taxpayer may be required to provide it unless agreement is reached between the parties to provide alternative information.

Characterisation of the distributor

Another dispute concerned whether Nestlé Zambia was a full-fledged or limited-risk distributor. Nestlé emphasised its sales, distribution, and customer-facing functions. The ZRA pointed to lean staffing, reliance on group services, low equity, and external witnesses representing the business. Both the Tribunal and Supreme Court agreed with the authority, concluding that Nestlé Zambia bore limited risk.

For taxpayers, the lesson is clear: characterisation depends not just on contracts and job titles, but may also be evaluated by the courts based on other contextual details such as funding, governance, and practical decision-making authority.

Choice of comparables

The ZRA relied on Western European comparables, which Nestlé challenged as inappropriate given market maturity differences. While the Tribunal favoured the taxpayer, the Supreme Court upheld ZRA’s approach. This raises wider questions: if no local comparables exist, can developed-market data be relied on? Historically there seemed to be a preference for using developing market comparable data but in this case both the ZRA and the Supreme Court endorsed the use of Western European comparables where the data seemed comparable. Unfortunately the court did not indicate the specific features required to conclude that a foreign region is comparable to the Zambian market.

Treatment of losses

Continuous losses from 2010 to 2014 triggered ZRA’s scrutiny. Nestlé argued these reflected normal start-up challenges, competition, and currency volatility. The Tribunal accepted this, but the Supreme Court sided with the ZRA, viewing persistent losses as inconsistent with an independent distributor’s behaviour.

This finding illustrates how authorities may use profitability (or lack thereof) as a red flag in TP audits, even where commercial reasons exist.

Key takeaways for taxpayers

Michael and Patrick suggested that the Nestlé Zambia judgment carries lessons well beyond Zambia, including:

• Prepare for heavy evidentiary burdens: taxpayers must anticipate defending their methods robustly, with comprehensive documentation.
• Expect wider use of aggregation: courts may allow authorities to test results on an entity-wide basis, especially where multiple related-party transactions exist.
• Keep records beyond minimum requirements: even historic transactions may be scrutinised years later.
• Substance matters: decision-making authority, capitalisation, and local control are as important as contractual wording.
• Comparables are contentious: the acceptability of foreign benchmarks remains uncertain, with scope for further disputes.
• Losses will attract attention: long-term unprofitability will likely be challenged unless supported by compelling evidence.

Conclusion

The Nestlé Zambia case is one of the most detailed transfer pricing judgments to emerge from Africa. It highlights the growing focus of both revenue authorities and courts, and the importance for taxpayers of proactive compliance, robust documentation, and careful characterisation of their operations.