As Zambia’s tax authority gets tough on not just its copper mines but all sectors of industry, including manufacturing, retail and service sectors, there is a more pressing need than ever for businesses operating there to have what KPMG Zambia’s Michael Phiri refers to as a ‘tax health check’.

Zambia is a country which doesn’t usually make global headlines, and for good reason. The landlocked sub-Saharan African country has been stable since independence in 1964 and – despite some economic ups and downs – is now flourishing, especially since economically it began diversifying away from its traditional copper mining industry.

As such, it offers a potential easy foothold for investors new to the region. At the same time, the country’s central location and improving road network hint at the very real possibility of future regional expansion for ambitious investors.

Zambian copper mines coming under tax scrutiny

Zambia, however, is hardly immune from global and regional trends, and similarly it is not alone in facing budgetary pressures, especially given that the global copper price has fallen in recent years. The blame for this has lain mainly at the door of the Chinese economy. This budgetary pressure, coupled with broader political and social concerns about the role of MNEs in the Zambian economy has meant that the Zambia Revenue Authority (ZRA) has increasingly taken a proactive and aggressive stance towards taxpayers, especially MNEs.

As the economies of sub-Saharan Africa develop, there is an increasing level of sophistication among tax authorities, often driven by increased training from donors. In Zambia’s case, this support comes from the Norwegian tax authorities, the IMF and the World Bank, among others. Indeed, in some instances mining companies’ tax audits have been conducted jointly with the ZRA and with the Norwegian tax authorities, which has given the ZRA a unique opportunity to learn practical skills.

This increased sophistication and specialization are especially evident in areas such as Transfer Pricing (TP). This is the method used to determine the rate at which MNEs charge for goods and services across borders. In this regard, the ZRA is pulling together a specialist team for dealing with the transfer pricing issues of MNEs operating in Zambia. Increased scrutiny will be the result.

More tax scrutiny for cross-border transfers

But it’s not only in Zambia that tax authorities are stepping up the pressure. The ZRA is working increasingly closely with other African tax administrators, partly as a result of their membership of the African Tax Administration Forum (ATAF).

This means that businesses operating across national borders within African need to pay increasing attention to their cross-border affairs – including transfer pricing – as they can expect tax authorities in both jurisdictions to exchange information about such MNEs.

Donors, consumers and NGOs are all keen to ensure that developing economies are seen to get their fair share of tax revenue. This support gives tax authorities more confidence when it comes to challenging MNEs. It also echoes a trend in developed economies, where concerns about the tax affairs of US multinationals such as Google, Amazon and Starbucks have meant that tax (and how much is paid) has often hit the headlines.

From a Zambian perspective, political pressure regarding the tax affairs of MNEs has come from the top. In April 2015, the Zambian cabinet announced a strengthening of the penalties for tax offenders. This was coupled with more stringent enforcement powers for the ZRA. Although this was in the context of mining tax, KPMG has also seen an increase in activity from the ZRA in all sectors of industry, as well as a more aggressive attitude being adopted towards certain taxpayers (possibly as a result of the training received from the Norwegian tax authorities).

Michael Phiri, tax partner at KPMG Zambia, explains: “We have observed greater co-operation between African tax authorities and use of tax experts from Norway on audits conducted by the ZRA.

“The Authority is particularly challenging related party transactions for multinational entities and making transfer pricing adjustments based on OECD guidelines. At KPMG, we believe in ‘tax morality and responsible tax practices’ and, therefore, we encourage our clients to adopt OECD based transfer pricing policies on their transactions with related parties. This will ensure they avoid future ZRA adjustments, penalties and interest.”

Zambia reintroduces Tax Appeals Tribunals

Meanwhile, as an indicator that it means business, the country has reintroduced its Tax Appeals Tribunal system. This enables a company looking to challenge the findings of the ZRA to do so in court under a judge. Questioning a tax bill can be expensive, however, as well as time-consuming. Still, it’s a legitimate means of challenging what has become an increasingly enthusiastic tax authority.

For businesses operating in Zambia, this change in attitude from the country’s tax authorities gives rise to increased uncertainty over their future – especially given that the tax authorities can go back six years when auditing a company.

The potential penalties due for any failures to comply with the tax or social security regimes can be significant, and often several times higher than the original tax at stake. When multinationals initially set up in Zambia, they are often more concerned about ensuring that the business is successful commercially, rather than focusing on the minutiae of tax matters. Whilst understandable, this attitude can mean that there are unrecognized tax liabilities which could be very expensive, if not dealt with in a timely fashion.

Obviously, it would be best to ensure that systems and controls are in place such that tax issues don’t arise in the first place. However, the pace of change of Zambian tax legislation and practice can make this difficult, especially if a company is experiencing a restructuring or staff changes within its finance team.

The necessity of a tax health check

Michael Phiri worked with the ZRA for more than 11 years and this, he insists, gives him a unique insight into the Authority’s mindset and operations. As a result, he always recommends companies consider a ‘tax health check’ every few years. These days, however, its importance is even more acute given the current attitude of the ZRA.

He added: “The benefit of a tax health check is that it allows a company to understand any past exposure. This can then be dealt with, generally by way of making a voluntary disclosure which, in turn, often allows for reduced penalties to be charged.

“A tax health check should also pick up on any ongoing issues and allow changes to be made to processes and procedures to ensure that such issues are prevented in the future.”

Phiri said he understood why some companies simply relied on their statutory auditors to pick up significant tax issues, but he cautioned against it.

“Whilst this can be effective, it often means that only issues which are material to the financial statements in question are identified. The beauty of a tax health check is that it provides a broader and far more proactive approach. As a result, the business is left with practical steps to take going forward, in order to allow them to manage any issues which have come up in the check.”

Meanwhile, the country’s media sits awaiting that first Tribunal case.