Zambia Revenue Authority Vs Nestle Zambia Trading Limited (2025): Limitations of The Source Principle Amid Functional Characterizations of Group Entities in Zambia

Abstract

This research discusses the limitations of the source principle of taxation in its current form and to what extent it guides the recharacterisation of group entities, while maintaining its normative role. The source principle forms the foundation of taxation in Zambia and aims to define what income is from a Zambian source. The research is motivated by the fact that the source principle has not been exhaustively defined under Section 14(1) of the Income Tax Act, to address issues of recharacterisation of group entities. While Section 18 of the Act has attempted to extend the source principle beyond the Zambian borders by deeming certain categories of income as Zambian sourced, challenges are particularly evident under transfer pricing arrangements that go beyond the scope covered. This has led to uncertainty and unpredictability in the manner in which transfer pricing assessments may be carried out. Consequently, it undermines equity and neutrality. This knowledge gap, which this paper aims to cover, is the lack of an exhaustive definition of the source principle to shape the recharacterisation of group entities under transfer pricing arrangements. This study uses statutory law, case law, international instruments such as the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines and the United Nations Practical Manual on Transfer Pricing and secondary data to carry out the research. Overall, the research found that the source principle does not fully shape recharacterisation of group entities during transfer pricing assessments due to its limited scope. As a result, there is no consistent manner in which income under transfer pricing arrangements can be attributed to Zambia because it is shaped by the circumstances of the case. This has negative implications on the principles of certainty, equity and neutrality, resulting in injustice on the part of the taxpayer, and consequently altering the taxpayer's behaviour. Therefore, the study recommends that the law be amended to ensure certainty and predictability, which will eventually encourage equity and neutrality. Additionally, the courts must harmonise the source principle and recharacterisation of group entities through statutory interpretation. Aside from the doctrinal aspect, there is a need for capacity building on the part of the tax administration to equip tax officers with the necessary tools to enforce tax laws effectively. vii