The Delicate Dance: Enhancing Tax Resilience While Maintaining Taxpayer Confidence

The 2025 National Budget provided a clear mandate, to restore the economy and promote growth in the face of unprecedented external shocks from volatile copper prices to the worst drought the nation has experienced. Tax policy has emerged not just as a revenue tool but as a strategic instrument for resilience.

The Government will continue its quest to achieve economic growth, shield its fiscal position and build a resilient economy through the broadening of the tax base, enhancement of compliance, and alignment of incentives with sustainable growth. For these goals to be realised, a balance between domestic resource mobilisation and the positioning of the country as an attractive investment hub is critical. Tax certainty is the key to ensuring a balance of the various competing interests.

Need for certainty

Businesses require high levels of certainty to significantly invest in the economy. Multinational enterprises (“MNEs”) are the largest investors in traditional industries such as mining and financial services. Groups support their local operations through financing and provision of technical services. These transactions fall under the purview of transfer pricing (“TP”) rules. TP rules mainly cover the pricing of transactions between related parties. There has been an increase in the scrutiny of such transactions by the Zambia Revenue Authority (“ZRA”) in the recent past, as is the case with other revenue authorities across Africa. Owing to the value of such transactions, TP assessments tend to be astronomical in value. TP assessments have the potential to destabilize the operations of MNEs in the country.

The Government can enhance certainty for MNEs involved in related party transactions by examining factors such as the statute of limitation, the amount of information needed to satisfy the required burden of proof, and the ongoing risk of TP cases being reopened owing to the Commissioner General’s power to reassess closed audit periods.

TP statute of limitations

The Income Tax Act empowers the Commissioner General to raise TP assessments for periods of up to ten years following the close of a charge year. This is an inordinately longer period compared to the five to six years applicable to other tax jurisdictions. 

The ten year statute of limitations pose a risk of uncertainty for taxpayers in so far as when they may be audited within the said period. Should an assessment be raised covering the entire ten year period, the value of it may be too large for a business to continue operating. Therefore, government may need to consider a reduction in the time limit for TP purposes.

Additionally, Zambia should consider the adoption of Advance Pricing Agreements (“APAs”) in strategic sectors, providing certainty on arm’s-length pricing and reducing audit disputes. Other African countries such as South Africa and Kenya are early adopters of APAs. The adoption of APAs will provide the much needed certainty leading to investor confidence and subsequently long term investments in the country. The ZRA will also be able to reliably predict expected tax collections from cross-border transactions.

Another challenge brought on by the differences in the statute of limitations between TP and other taxes is the retention of information required for each of the fragments of legislation. Statute of limitations provisions should therefore not be considered in isolation, but rather in conjunction with other relevant laws. The harmonisation of the time frames is likely to ease compliance to the respective fragments of tax laws.

Burden of proof

Collation of evidence to prove that related party transactions are conducted at arm’s length often necessitates collaboration with Group affiliates in different countries. These affiliates may not be obligated to keep certain records for the required ten-year period. This can create a discrepancy between the documentation demanded and what is actually accessible. These complexities impact both taxpayers and the ZRA during the review of supporting evidence, highlighting the need for clear guidance through practice notes on what constitutes adequate documentation in such situations.

The Supreme Court ruling on the Nestle Zambia case supported the position that the Commissioner General can request for “any” information from taxpayers as required. Such discretionary powers remain a bone of contention where the ZRA and the taxpayer’s subjective view of “sufficient” may not always align leading to mismatches between the information maintained by the taxpayer and what the ZRA may consider the most appropriate for assessment purposes. Therefore, there is a need for further guidance from the ZRA regarding the minimum standard of evidence of documentation required for common transactions.

Reassessment of periods

Section 63(2) of the Income Tax Act allows for multiple reassessment of periods (in the event new issues have been determined for the said periods). Although persuasive reasons do exist, such as instances of fraud or wilful default, there is a need to find the balance to ensure a level of certainty can be provided to taxpayers at the conclusion of an audit to support business continuity and foster increased collaboration between taxpayers and the ZRA.

The application of the reassessment provision brings discomfort in areas such as TP where the audit period is already ten-years long. Therefore, the possibility of reassessment gives the impression that audits cannot truly be closed. This may impact taxpayers’ willingness to settle contested tax matters or make voluntary disclosures where the ZRA cannot provide an adequate level of comfort regarding whether periods are closed.

Conclusion
In summary, Zambia’s path to a resilient, growth-oriented economy depends on a tax system that is both robust and predictable. By embracing reforms that enhance certainty through statutory adjustments, clear guidance, and transparent processes, the government can safeguard fiscal interests while nurturing the confidence of current and prospective investors. This balanced approach will be instrumental in ensuring that tax policy continues to serve as a foundation for sustainable economic progress.

Nzovwa Kasanda and Monje Namumba are senior tax consultants at Deloitte Zambia. The views presented are their own and not necessarily those of Deloitte. They can be reached at nkasanda@deloitte.co.zm and mnamumba@deloitte.co.zm respectively.