Courts Play Key Role As Transfer Pricing Disputes Escalate

Transfer pricing disputes are escalating worldwide, and the courts are taking center stage. Recent judgments involving Apple in Europe, Glencore in Australia, and Nestlé in Zambia show how tax authorities are becoming more assertive, courts are more willing to uphold their arguments, and multinational enterprises are more exposed to evidentiary and compliance risks than ever before. This article addresses the lessons that MNEs can learn from these cases and the trend of convergence in judicial reasoning across continents.

Over the past five years, transfer pricing professionals surveyed have consistently indicated an expectation that transfer pricing disputes will rise in the following 12 months, driven by expanding audit capacity and increased information-sharing between authorities.

Europe Apple Case: Rise of Functional Analysis

When the Court of Justice of the European Union revived the European Commission’s case against Apple, it signaled more than a procedural correction: The court reaffirmed that substance trumps form.

At issue were Irish tax rulings that had allowed Apple’s local branches to record minimal taxable profits based on the claim that key decisions were taken outside Ireland. The CJEU found that approach inconsistent with the arm’s length principle, emphasizing that taxable profits must be aligned with where value is actually created.

For MNEs, the judgment reinforces that documentation alone won’t suffice. Taxpayers must demonstrate the genuine economic substance behind intra-group allocations of assets, functions and risks. The ruling also reinforced the Commission’s power to challenge tax rulings that create selective advantages — extending transfer pricing scrutiny into the realm of EU state-aid law.

The Apple case shows that functional analysis is no longer a compliance box-tick. It’s an anchor point for how authorities, and courts, now view corporate reality.

Australia Glencore Case: Boundaries of Commercial Judgment

Australia’s federal court weighed similar themes in the Glencore industrial dispute. The case centered on related-party copper concentrate sales, testing whether the pricing reflected arm’s-length market conditions amid extreme commodity-price volatility.

The court ultimately sided with Glencore, accepting that its intercompany arrangements reflected genuine commercial decisions rather than tax manipulation. Yet the key takeaway for MNEs was the court’s detailed analysis of risk allocation and comparability. The court scrutinized the taxpayer’s rationale for deviating from standard benchmarks and demanded contemporaneous evidence of commercial logic.

For African resource-based economies, where commodity prices fluctuate sharply and data for local comparables is scarce, the lesson is that defendable pricing depends on transparent risk analysis. Courts are prepared to accept business judgment, but only when it’s properly documented and can be substantiated.

Africa Nestlé Zambia Case: Increasing Importance of Evidence

In Zambia, one of the continent’s most detailed transfer pricing cases to date has underscored how African courts are evolving. After more than a decade of proceedings, the Supreme Court upheld the Zambia Revenue Authority’s assessments against Nestlé Zambia.

The decision confirmed that the burden of proof lies squarely with the taxpayer, even where multiple methods could be defensible under Organisation for Economic Cooperation and Development guidance. This essentially means taxpayers must not only select an appropriate method but be prepared to disprove alternative approaches adopted by the authority. This raises the burden on the taxpayer beyond what is anticipated in the OECD Transfer Pricing Guidelines.

The court also permitted the ZRA to test results on an aggregated basis (treating all related-party transactions as a single unit of analysis) and upheld the use of European comparables in the absence of local data. This interpretation introduces uncertainty. Traditionally, tax authorities in many countries in Africa have pressed for transaction-by-transaction testing, but the court’s position opens the door for entity-wide approaches (even where information is available to test on a transaction-by-transaction basis).

The court ruled that where a taxpayer is asked for transfer pricing documentation for prior years (even where the legislation had not required such documentation), taxpayers must produce the requested documentation, setting a retrospective compliance precedent across the region. This precedent underscores the need for taxpayers to retain detailed records for up to 10 years (the prescription period in Zambia), regardless of evolving rules. Groups may face difficulties producing historic files if structures, systems, or ownership have since changed, so this can be tricky.

The Nestlé Zambia case is one of the most detailed transfer pricing judgments to emerge from Africa. The case highlights the growing focus of both revenue authorities and courts, and the importance for taxpayers of proactive compliance, robust documentation, and careful characterization of their operations.

A Converging Pattern: Substance, Evidence and Proportionality

Viewed together, these cases reveal a trend of convergence in judicial reasoning across continents:

• Substance over form: Authorities are prioritizing functional reality over contractual language.
• Evidence as the new frontier: Taxpayers must substantiate every assumption, not merely present compliant reports.
• Risk allocation under scrutiny: Courts expect pricing to mirror how risks are actually borne and managed.

The implication for multinationals is that transfer pricing is no longer a technical exercise but a governance issue. Decisions about value chains, intellectual property ownership and distributor characterization must withstand courtroom-level interrogation.

Implications for African MNEs

Revenue authorities are stepping up both capability and collaboration. Data sharing through initiatives such as the OECD’s Inclusive Framework and the African Tax Administration Forum means audits are better informed, while new legislation, from Kenya’s draft transfer pricing Rules to South Africa’s proposed Advance Pricing Agreement regime, reflects a continent-wide refinement of the transfer pricing environment.

For African MNEs, the takeaway is twofold:

1. Compliance must be proactive, not reactive. Local files, contemporaneous documentation, and clear evidence of economic substance are non-negotiable.
2. Characterization matters. Whether a local entity is a full-risk or limited-risk distributor can determine its fate in a dispute, as Nestlé Zambia discovered. This characterization needs to be informed by how key activities are performed, including careful consideration of the party managing and assuming the risks.

A Global Trend Shows No Sign of Abating

Globally, the same theme has emerged: transfer pricing controversies are no longer isolated incidents but part of a global alignment of tax enforcement—a shift from transfer pricing as paperwork to transfer pricing as principle.

Courts are asking whether a multinational’s story of value creation truly matches its numbers. Those that can’t answer convincingly are facing increasing risk, everywhere, including Africa .

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Michael Hewson is the Director of Graphene Economics, an African transfer pricing advisory firm.

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