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Zambia Publishes New Transfer Pricing Regulations

Zambia published The Income Tax (Transfer Pricing) (Amendment) Regulations, 2018 in the Official Gazette on 6 April 2018. Main aspects of the regulations are summarized as follows:

  • The regulations apply to companies resident in Zambia and permanent establishments in Zambia of nonresidents;
  • In determining transfer prices, the most appropriate method should be applied among the five standard methods of the OECD guidelines, although another method may be applied if none of the five standard methods can be reasonably applied and such other method yields a result consistent with the arm's length principle;
  • Transactions with related persons must generally be documented on a per transaction basis, although transactions that are economically closely linked or form a continuum that cannot be reliably analyzed separately may be combined for the comparability analysis and transfer pricing method selection;
  • Service charges between related persons may only be considered at arm's length if the service is actually rendered, the service is expected to provide economic or commercial value, an independent person would be willing to pay for such service, and the amount charged corresponds to the amount that would be agreed to between independent persons;
  • For low value added services in particular, a charge will only be considered at arm's length if, the amount is based on an allocation to each person that receives a low value added service of the total group cost for providing the services, the allocation is based on an appropriate allocation method, the cost plus method is applied to these costs, and the mark-up is 5%;
  • For transactions involving intangible property, an analysis must consider the perspective of the transferor and the transferee, including special factors such as the expected benefits, commercial alternatives, geographic limitations, right of the transferee to participate in further development, and others;
  • The regulations are to be construed in a manner consistent with the OECD transfer pricing guidelines and the UN transfer pricing manual for developing countries as supplemented and updated;
  • Persons participating in controlled transactions must prepare and maintain contemporaneous transfer pricing documentation on an annual basis that describes, among others:
    • The controlled transactions, including the nature, terms, and price of the transactions, and details of property transferred or services provided;
    • The identity of associated persons involved in the transactions and the relationship with the associated persons;
    • A detailed comparability analysis, including functions performed, risks borne, tangible and intangible assets used, and changes made from prior years;
    • The transfer pricing methods considered, the method selected, and why;
    • Details of adjustment made, if any, to align the transfer pricing with the arm's length price and consequent adjustment to total income for tax purposes;
    • Summarized schedules of relevant financial data used for comparables; and
    • Any other relevant information for the determination of the arm's length price;
  • For the purpose of the transfer pricing documentation, contemporaneous is defined as meaning documentation generated when a person is developing or implementing a controlled transaction;
  • In addition to the general transfer pricing documentation, taxpayers must also maintain additional documentation that must be prepared by the tax return deadline that includes the elements of the Master file and Local file as developed as part of BEPS Action 13;
  • Documentation required under the regulations must be submitted to the tax authority within 30 days of request; and
  • Documentation that is in a language other than English must be translated into English (certified translation).

The regulations do not clearly specify an effective date, although it is expected that the requirements apply from the 2018 financial year.

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