Mopani Copper Mines PLC v. Zambia Revenue Authority

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Case Information

• Court: Supreme Court of Zambia
• Case No: Appeal No. 24 of 2017
• Applicant: Mopani Copper Mines PLC
• Defendant: Zambia Revenue Authority
• Judgment Date: May 20, 2020

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Judgment Summary

The Supreme Court of Zambia ruled on the appeal by Mopani Copper Mines PLC against the Zambia Revenue Authority (ZRA) regarding tax assessments for the charge years 2006/07, 2007/08, and subsequent years. The dispute centred on the transfer pricing practices between Mopani and its shareholder, Glencore International AG (GIAG). The court upheld the ZRA’s assessments, rejecting Mopani’s arguments that the transactions were at arm’s length and that the ZRA should have relied on an independent transfer pricing report by Deloitte.

Key Points of the Judgment

Background

Mopani Copper Mines PLC, a large-scale mining company in Zambia, was audited by the ZRA in 2009. The audit focused on transfer pricing practices between Mopani and GIAG for the charge years 2006/07, 2007/08, and 2009/10. The ZRA questioned whether the transactions were at arm’s length, given GIAG’s significant shareholding in Mopani.

Core Dispute

The core dispute revolved around whether the related party transactions between Mopani and GIAG were conducted at arm’s length. Mopani argued that the transactions adhered to the London Metal Exchange (LME) prices and were supported by a Deloitte report, which concluded that the transactions were at arm’s length. The ZRA, however, found discrepancies and issued tax assessments based on its findings.

Court Findings

1. Deloitte Report: The court held that the Deloitte report was not binding on the ZRA as it was not formally requested in accordance with section 11 of the Income Tax Act.
2. Transfer Pricing Adjustments: The court agreed with the ZRA’s use of section 95 of the Income Tax Act to make adjustments based on the audit findings, which showed that Mopani’s sales figures to GIAG were lower compared to third-party entities.
3. Hedging Agreement: The court found that the hedging agreement between Mopani and GIAG did not comply with the necessary legal provisions and could not be used to justify the lower prices.

Outcome

The Supreme Court dismissed Mopani’s appeal, affirming the ZRA’s tax assessments for the charge years 2006/07 and 2007/08, totaling ZMW 311,113,798.38. The court also upheld the assessments for the charge years 2008/09 and 2009/10.

Transfer Pricing Method Used

The ZRA applied the Comparable Uncontrolled Price (CUP) method, comparing Mopani’s sales to GIAG with sales to independent third parties. The Deloitte report, which Mopani relied on, also used the CUP method but concluded that the transactions were at arm’s length.

Major Issues or Areas of Contention

1. Binding Nature of the Deloitte Report: Whether the ZRA was bound to accept the Deloitte report’s findings.
2. Application of Section 95: Whether the ZRA had reasonable grounds to invoke section 95 of the Income Tax Act for transfer pricing adjustments.
3. Hedging Agreement Validity: Whether the hedging agreement between Mopani and GIAG could justify the lower prices.

Decision: Expected or Controversial?

The decision was somewhat controversial due to the significant financial implications for Mopani and the broader issue of how developing countries manage tax compliance with multinational corporations. The court’s strict interpretation of the legal requirements for transfer pricing documentation and the hedging agreement added to the controversy.

Significance for Multinationals and Revenue Services

The judgment underscores the importance of robust transfer pricing documentation and compliance with local tax laws. For multinationals, it highlights the risks of relying solely on independent reports without ensuring they meet statutory requirements. For revenue services, the case illustrates the need for thorough audits and the application of local laws to ensure fair tax practices.

Value of Transfer Pricing Expertise

Transfer pricing expertise is invaluable in ensuring compliance with complex international tax laws and mitigating risks. Experts can help multinationals navigate local regulations, prepare compliant documentation, and defend their transfer pricing policies during audits.

Preventative Measures for Better Management

To avoid disputes like this, companies should:

• Implement a Proper Tax Risk Management Process: Establish a robust system to identify and manage tax risks.
• Form a Tax Steering Committee: A dedicated committee can oversee tax compliance, ensure adherence to local laws, and manage relationships with tax authorities.
• Regularly Review Transfer Pricing Policies: Ensure that policies are up-to-date and compliant with both local and international guidelines.
• Engage Independent Auditors Early: Independent reviews should be conducted proactively and in accordance with statutory requirements.