CPA A2.3 ADVANCED TAXATION Revision Guide
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- CONTENTS
- QUESTION 7
- Some entities do not pay tax or if they do the tax is not calculated against business profits - discuss
- SUGGESTED SOLUTION 7
- Firstly, a person who earns Rwf30,000 per month or less, pays no income tax. This is in total. Where a person works for more than one employer, the “first” employer operates PAYE and the other(s) deduct withholding tax at 30% and pay this to the RRA e...
CPA
Certified Public Accountant Examination
Stage: Advanced 2.3
Subject Title: Advanced Taxation
Revision Guide
INSIDE COVER - BLANK
Page 1
CONTENTS
Title
Page
Study Techniques
3
Examination Techniques
4
Assessment Strategy
9
Learning Resources
10
Sample Questions and Solutions
11
Page 2
BLANK
Page 3
STUDY TECHNIQUE
What is the best way to manage my time?
• Identify all available free time between now and the
examinations.
• Prepare a revision timetable with a list of “must do” activities.
• Remember to take a break (approx 10 minutes) after periods of
intense study.
What areas should I revise?
• Rank your competence from Low to Medium to High for each topic.
• Allocate the least amount of time to topics ranked as high.
• Allocate between 25% - 50% of time for medium competence.
• Allocate up to 50% of time for low competence.
How do I prevent myself veering off-track?
• Introduce variety to your revision schedule.
• Change from one subject to another during the course of the day.
• Stick to your revision timetable to avoid spending too much time on one topic.
Are study groups a good idea?
• Yes, great learning happens in groups.
• Organise a study group with 4 – 6 people.
• Invite classmates of different strengths so that you can learn from one another.
• Share your notes to identify any gaps.
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EXAMINATION TECHNIQUES
INTRODUCTION
Solving and dealing with problems is an essential part of learning, thinking and intelligence.
A career in accounting will require you to deal with many problems.
In order to prepare you for this important task, professional accounting bodies are placing
greater emphasis on problem solving as part of their examination process.
In exams, some problems we face are relatively straightforward, and you will be able to deal
with them directly and quickly. However, some issues are more complex and you will need to
work around the problem before you can either solve it or deal with it in some other way.
The purpose of this article is to help students to deal with problems in an exam setting. To
achieve this, the remaining parts of the article contain the following sections:
• Preliminary issues
• An approach to dealing with and solving problems
• Conclusion.
Preliminaries
The first problem that you must deal with is your reaction to exam questions.
When presented with an exam paper, most students will quickly read through the questions
and then many will … PANIC!
Assuming that you have done a reasonable amount of work beforehand, you shouldn’t be
overly concerned about this reaction. It is both natural and essential. It is natural to panic in
stressful situations because that is how the brain is programmed.
Archaeologists have estimated that humans have inhabited earth for over 200,000 years. For
most of this time, we have been hunters, gatherers and protectors.
In order to survive on this planet we had to be good at spotting unusual items, because any
strange occurrence in our immediate vicinity probably meant the presence of danger. The
brain’s natural reaction to sensing any extraordinary item is to prepare the body for ‘fight or
flight’. Unfortunately, neither reaction is appropriate in an exam setting.
The good news is that if you have spotted something unusual in the exam question, you have
completed the first step in dealing with the problem: its identification. Students may wish to
use various relaxation techniques in order to control the effects of the brain’s extreme
reaction to the unforeseen items that will occur in all examination questions.
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However, you should also be reassured that once you have identified the unusual item, you
can now prepare yourself for dealing with this, and other problems, contained in the exam
paper.
A Suggested Approach for Solving and Dealing with Problems in Exams.
The main stages in the suggested approach are:
1. Identify the Problem
2. Define the Problem
3. Find and Implement a Solution
4. Review
1. Identify the Problem
As discussed in the previous section, there is a natural tendency to panic when faced with
unusual items. We suggest the following approach for the preliminary stage of solving and
dealing with problems in exams:
Scan through the exam question
You should expect to find problem areas and that your body will react to these items.
PANIC!!
Remember that this is both natural and essential.
Pause
Take deep breaths or whatever it takes to help your mind and body to calm down.
Try not to exhale too loudly – you will only distract other students!
Do something practical
Look at the question requirements.
Note the items that are essential and are worth the most marks.
Start your solution by neatly putting in the question number and labelling each part of your
answer in accordance with the stated requirements.
Actively reread the question
Underline (or highlight) important items that refer to the question requirements. Tick or
otherwise indicate the issues that you are familiar with. Put a circle around unusual items that
will require further consideration.
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2. Define the Problem
Having dealt with the preliminary issues outlined above, you have already made a good start
by identifying the problem areas. Before you attempt to solve the problem, you should make
sure that the problem is properly defined. This may take only a few seconds, but will be time
well spent. In order to make sure that the problem is properly defined you should refer back
to the question requirements. This is worth repeating: Every year, Examiner Reports note that
students fail to pass exams because they do not answer the question asked. Examiners have a
marking scheme and they can only award marks for solutions that deal with the issues as
stipulated in the question requirements. Anything else is a waste of time. After you have re-
read the question requirements ask yourself these questions in relation to the problem areas
that you have identified:
Is this item essential in order to answer the question?
Remember that occasionally, examiners will put ‘red herrings’ (irrelevant issues) into the
question in order to test your knowledge of a topic.
What’s it worth?
Figure out approximately how many marks the problem item is worth. This will help you to
allocate the appropriate amount of time to this issue.
Can I break it down into smaller parts?
In many cases, significant problems can be broken down into its component parts. Some parts
of the problem might be easy to solve.
Can I ignore this item (at least temporarily)?
Obviously, you don’t want to do this very often, but it can be a useful strategy for problems
that cannot be solved immediately.
Note that if you leave something out, you should leave space in the solution to put in the
answer at a later stage. There are a number of possible advantages to be gained from this
approach:
1) It will allow you to make progress and complete other parts of the question that you are
familiar with. This means that you will gain marks rather than fretting over something
that your mind is not ready to deal with yet.
2) As you are working on the tasks that you are familiar with, your mind will relax and you
may remember how to deal with the problem area.
3) When you complete parts of the answer, it may become apparent how to fill in the
missing pieces of information. Many accounting questions are like jigsaw puzzles: when
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you put in some of the parts that fit together, it is easier to see where the missing pieces
should go and what they look like.
3. Find and Implement a Solution
In many cases, after identifying and defining the problem, it will be easy to deal with the
issue and to move on to the next part of the question. However, for complex problems that
are worth significant marks, you will have to spend more time working on the issue in order
to deal with the problem. When this happens, you should follow these steps:
Map out the problem
Depending on your preferred learning style, you can do this in a variety of ways including
diagrams, tables, pictures, sentences, bullet points or any combination of methods. It is best
to do this in a working on a separate page (not on the exam paper) because some of this work
will earn marks. Neat and clearly referenced workings will illustrate to the examiner that you
have a systematic approach to answering the question.
Summarise what you know about the problem
Make sure that this is brief and that it relates to the question requirements. Put this
information into the working where you have mapped out the problem. Be succinct and
relevant. The information can be based on data contained in the question and your own
knowledge and experience. Don’t spend too long at this stage, but complete your workings as
neatly as possible because this will maximise the marks you will be awarded.
Consider alternative solutions
Review your workings and compare this information to the question requirements. Complete
as much of the solution as you can. Make sure it is in the format as stipulated in the question
requirements. Consider different ways of solving the problem and try to eliminate at least one
alternative.
Implement a solution
Go with your instinct and write in your solution. Leave extra space on the page for a change
of mind and/or supplementary information. Make sure the solution refers to your workings
that have been numbered.
4. Review
After dealing with each problem and question, you should spend a short while reviewing your
solution. The temptation is to rush onto the next question, but a few moments spent in
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reviewing your solution can help you to gain many marks. There are three questions to ask
yourself here:
Have I met the question requirements?
Yes, we have mentioned this already. Examiner Reports over the years advise that failure to
follow the instructions provided in the question requirements is a significant factor in causing
students to lose marks. For instance, easy marks can be gained by putting your answer in the
correct format. This could be in the form of a report or memo or whatever is asked in the
question. Likewise, look carefully at the time period requested. The standard accounting
period is 12 months, but occasionally examiners will specify a different accounting period.
Is my solution reasonable?
Look at the figures in your solution. How do they compare relative to the size of the figures
provided in the question?
For example, if Revenue were 750,000 and your Net Profit figure was more than 1 million,
then clearly this is worth checking.
If there were some extraordinary events it is possible for this to be correct, but more than
likely, you have misread a figure from your calculator. Likewise, the depreciation expense
should be a fraction of the value of the fixed assets.
What have I learned?
Very often in exams, different parts of the solution are interlinked. An answer from one of
your workings can frequently be used in another part of the solution. The method used to
figure out an answer may also be applicable to other parts of your solution.
Conclusion
In order to pass your exams you will have to solve many problems. The first problem to
overcome is your reaction to unusual items. You must expect problems to arise in exams and
be prepared to deal with them in a systematic manner. John Foster Dulles, a former US
Secretary of State noted that: The measure of success is not whether you have a tough
problem to deal with, but whether it is the same problem you had last year. We hope that, by
applying the principles outlined in this article, you will be successful in your examinations
and that you can move on to solve and deal with new problems.
Page 9
Stage: ADVANCED LEVEL 2
Subject Title: A2.3Advanced Taxation
CPA Syllabus 2012: Advanced n
Examination Duration: 3.5 hours (Open Book)
Assessment Strategy
Examination Approach
This subject should be approached on the basis that it is the final subject in taxation and is
mandatory for those students wishing to satisfy the requirements to obtain a practising
certificate, post qualification. The examination paper is equally balanced between tax
planning and tax computation. Marks are awarded for structured and rationally based
conclusions. Students are expected to select and integrate relevant syllabus material from
Advanced Taxation and other subjects where this is appropriate to the analysis and solution
of the case study.
Students are required to analyse complex tax issues and integrate their learning across
different tax heads. They should apply that learning to provide the optimal tax planning
guidance within the legal and ethical frameworks. Overall, students are expected to
demonstrate a high level of intellectual, technical, personal and communications skils
including analytical, numeracy, ethical sensitivity, and report writing competencies.
Examination Format
The examination is open book and 3.5 hours’ duration. It consists of one compulsory 40
mark case study, and four questions of 20 marks each, three of which must be answered.
Marks Allocation Marks
Question 1 case-study 40
(Compulsory)
Questions 2 to 5 60
(Answer any three)
Total 100
Page 10
Learning Resources
Core Texts
Tax Guide / Bloomsbury / 2011 /
ISBN 9781847667304
Global Tax Revolution – Chris Edwards and Daniel J Mitchell
Sell Globally Tax Locally – Michael S Greve
Fundamentals of International Tax Planning – Chris J Finnerty, Paulus Merks, Mario
Petriccione, Raffaele Russo.
Manuals
A2.3 Advanced Taxation – Institute of Certified Public Accountants of Rwanda
Useful Websites
(as at date of publication)
www.icparwanda.com
http://www.rra.gov.rw/
http://www.rse.rw/
http://org.rdb.rw/
http://www.minicom.gov.rw/spip.php?article38
http://www.amategeko.net/display_rubrique.php?ActDo=ShowArt&Information_ID=871&P
arent_ID=3069954&type=public&Langue_ID=An&rubID=3069955
Page 11
REVISION QUESTIONS AND
SOLUTIONS
Stage: Advanced 2.3
Subject Title: Advanced Taxation
Page 12
QUESTION 1
Case Study
You are the accountant for a small business Tables and Chairs Ltd which manufactures tables
and chairs. The year-end SoCI and SoFP are complete to PBIT. The Finance Director has
asked you to prepare the Tax declaration and to calculate the income tax due.
The firm employees 450 Rwandans. Of these 300 are full time and are paid more than
Rwf450,000 each per year.
Also Tables and Chairs Ltd invested Rwf 45m in a new CNC lathe at the beginning of the
year.
During the year, the business spent on entertainment Rwf1,500,000
and the directors were awarded bonuses of Rwf37,000,000
2 years ago the company won an order from the local authority which had been put out to
public tender. The contract value was Rwf75,000,000. In the year just ended, the value
invoiced was Rwf25 million. The contract is priced on an item basis – so much per table or
chair delivered and accepted.
In the previous year PBIT was Rwf16,240,000 and the quarterly prepayments were based on
this figure.
1) You are required to calculate the Corporate tax due for the year just ended.
2) If Tables and Chairs Limited had become a Registered Investor what effect could this
have had on the corporation tax ?
A summary of the fixed assets at the start and end of the year – Rwf ‘000s
Open
WDV
Acq Disposal
Book Value
to depreciate
Dep'n
Charged
Rate
%
Closing
NBV
Assets
age
Land
100,000
100,000
Factory
5
40,000
50,000
2,500
5%
37,500
Offices
4
17,000
20,000
1,000
5%
16,000
Lathes and factory m/cy
61,000
45,000
100
105,900
26,475
25%
34,525
IT
56,500
7,500
250
63,750
31,875
50%
24,625
Office furniture etc
15,000
3,500
800
17,700
4,425
25%
10,575
289,500
66,275
223,225
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Tables and Chairs Ltd
Statement of Financial Position at 31 December
Rwf ‘000s
Fixed assets
223,225
Investments
100,000
Debtors
370,000
cash at bank
40,320
Creditors
(225,350)
Loan at 10%
(150,000)
358,195
Shares
300,000
Reserves
58,195
358,195
Tables and Chairs Ltd
Statement of Comprehensive Income for year ended 31 December
Rwf ‘000s
Rwf ‘000s
Sales
3,540,000
VAT
540,000
Turnover
3,000,000
Cost of sales
(1,750,000
)
1,250,000
Expenses - admin etc.
1,150,000
Dep'n
66,275
(1,216,275)
Loan interest
10,000
(10,000)
Investment income net of 10% costs
9,000
PBIT
32,725
Page 14
SUGGESTION SOLUTION 1
a)
The CIT Real Regime Calculator is used.
As per Article 41 of DTI, all vales are rounded to nearest thousand.
Business income
1
3,000,000
Cost of goods sold
1,750,000
Gross Profit
1,250,000
1,250,000
Expenses
1,150,000
Depreciation
66,275
Total expenses and depreciation
1,216,275
1,216,275
Net operating income
33,725
Investment income grossed up
2
10,000
Non-operating & Extraordinary income
Total income
43,725
43,725
Non-operating & extraordinary expenses
Investment expenses
2
1,000
Net income
42,725
42,725
Reintegration of non-deductible expenses
3
38,500
Depreciation adjustment
Loss of carried forward from previous five tax periods
Taxable income
81,225
Corporate income tax
24,368
Tax discounts
Foreign tax credit
Corporate income tax payable
24,368
Quarterly prepayments
4
12,180
Withholding on imports
Withholding on public tenders
5
750
Withholding on other payments
Total credits
12,930
12,930
Overpayment from previous periods
0
Net tax due/credit
11,438
Refund claimed
Balance
Notes
1. The Business turnover to use is the one excluding VAT
2. The Investment income must be grossed Rwf 9,000 / 90%
and the costs (Rwf1,000) taken to Investment expenses.
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3. In SICI all the expenses have been taken into consideration. But the non-deductible
items have to be added back. They are Entertainment and Directors’ fees and
bonuses. The notes make no reference to fees and so they are assumed to be nil.
4. The quarterly prepayments are ¼ of the previous year’s profits for each of the 3
quarters ending 30 June, 30 Sept and 31 Dec. This return must be submitted by 31
March of this year and be accompanied by the corporation tax due. ¾ x Rwf16,240 =
Rwf12,180
5. Withholding on the invoiced value of public tender contracts with certain bodies,
notably decentralised authorities, are subject to 3% withholding tax. 3% of
Rwf25,000,000 is Rwf750,000 (30 Marks)
b)
If Tables and Chairs had become a Registered Investor, The investment in the new lathe
could have been depreciated in year 1 at 40% as opposed to 25%.
The advantage would have been an increase in deductible expense of Rwf 6,750.
This sum would have been brought in at Line 75 and corporate income tax would have been
reduced to Rwf4,688,000
Also being a large employer, the tax would have been discounted
by 2% for 100 to 200 employees
By 5% for 201 to 400 employees.
Tables and Chairs employs 300 full time staff and assuming they had all been employed for
at least 6 months and they all were subject to PAYE deductions – that they were each earning
more than Rwf30,000 per month – the corporate tax would have been reduced from
Rwf11,438,000 by 5% (Rwf571,500) to Rwf10,866,100
It is noted that the public tender contract extends more than 12 months and initially might be
considered to be a long term contract. However it is on a “by item” basis and the costs can
easily be identified with the sales on each delivery/invoice. It does not meet the IAS11
criteria. (10 Marks)
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QUESTION 2
a) Taxable profits are income less “deductible expenses”. Some items are defined as non-
deductible. Describe these non-deductible expenses.
b) Depreciation is a deductible expense. Detail how the appropriate acts and modifications
require depreciation to be treated.
SUGGESTED SOLUTION 2
a) Deductible items
Firstly, expenditure which may be offset against taxable income or business profits is defined
in Article 21 of Law 16/2005 Direct Taxes on Income
• Such expenditure must be committed for the direct need and the normal requirements of
the company;
• They must be supported by appropriate documentation to confirm that they have been
incurred;
• They must involve a reduction of the net assets of the company;
• They must be included for tax purposes in the expenditure of the period during which
they are committed.
But some types of expense are not “tax-deductible”. These include in particular:
The following expenses are not deductible from taxable profits:
• cash bonuses, attendance fees and other similar payments made to the members of the
Board of Directors;
• dividends declared and paid-out profit shares;
• interest paid on loans denominated in a currency other than the Rwandan Franc in excess
of the London Inter-Bank Offered Rate (LIBOR) at the beginning of a tax period with an
increment of one percent (1 %);
• reserve allowances, savings and other special purpose funds, unless otherwise provided
for by this Law;
• fines and similar penalties;
• donations and gifts exceeding one per cent (1%) of turnover as well as donations given to
profit making persons;
• income tax paid in accordance with this law or paid abroad on business profit and
recoverable Value Added tax;
• personal consumption expenses;
• entertainment expenses.
In the case of a taxpayer other than an individual, interest paid on loans and advances from
related entities is not deductible to the extent that the total amount of the loans and/or
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advances in respect of which the interest is paid exceeds on average during the tax period
four (4) times the amount of equity (excluding provisions and reserves) according to the
balance sheet, which is drawn up in accordance with the National Accounting Plan.” This
paragraph does not apply to commercial banks and insurance companies».
Tax paid abroad in respect of foreign business activities constitutes a foreign tax credit.
Even where Rwanda does not have a double taxation agreement with a particular country, the
tax paid abroad is taken into consideration. All income earned by businesses and persons
who are resident in Rwanda is taxable in Rwanda; but where foreign earnings are taxed
abroad, the tax paid is taken into account.
a) Depreciation is an important deductible expense.
It is an annual charge against the profits of a company to take account of the reduction in
value resulting from the use of fixed assets belonging to the organisation. A business may in
its own accounting records depreciate assets over a useful life span and use a straight-line
basis.
However, the Rwandan Revenue Authority has through DTI Article 24 stipulated what types
of assets may be subjected to depreciation and by how much each year. This is difference is
also compounded by investment allowances available to registered businesses who invest
certain sums.
Category 1 – Assets not allowable to deductible depreciation are land and works of art,
jewellery, gold bullion etc. These items are not subject to wear and tear or obsolescence so
are not depreciated.
Category 2 - The cost of acquisition or construction and the cost of refurbishing or
reconstruction of buildings, equipment and heavy machinery fixed in walls are depreciated
annually on the basis of the rate of depreciation which is equivalent to five per cent (5%) of
the cost price. Each item is depreciated separately – see categories 4 and 5
Examples: of such assets include industrial buildings themselves plus equipment which forms
part of the building such as elevators, light fittings, air-conditioning and conveyors where
these are built into the fabric;
Category 3 - Development or costs of acquisition or improvement of the intangible assets,
including goodwill acquired from a third party. Annual rate of depreciation is 10% of the cost
price. The assets thus will be entirely depreciated in ten (10) years.
Examples are goodwill, concessions, patents, licences, etc.;
Category 4 – IT equipment including software. This comprises computers and their
accessories, information systems.
Annual rate of depreciation: 50% of the written down value or the balance carried forward
from the previous fiscal period.
For instance, an IT system costing Rwf 100,000,000 new will be written down to
Rwf50,000,000 at the end of year 1. In year 2 the depreciation charged to business profits
will be Rwf25,000,000 = 50% of Rwf50m at start year 2.
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Category 5 - Other assets of the company: 25% of the carried forward balance of the asset
net of depreciation. Examples: machine tools, work benches, seed cleaners, motor vehicles,
furniture, etc. As for Cat. 4 these assets are depreciated on a reducing balance basis
Assets in categories 2 and 3 are treated individually, whereas assets in categories 4 and 5 are
pooled.
For all categories, due allowance must be made where due to abnormal occurrences, assets
are damaged or otherwise devalued.
However, for the four (4) categories of allowable assets, when a used and depreciated asset
(either completely or partially depreciated) forms part of a business acquired by a taxpayer,
then annual depreciation is calculated on the price at acquisition (if in categories 2 and 3) or
on the depreciated value (‘net book value’) of the asset at the date of acquisition if in the last
two categories.
It is important to categorise the assets correctly and ensure that the depreciation is correctly
calculated.
It should be noted that if the depreciated value of the assets at the beginning of a year (the
depreciation base) does not exceed 500,000 Rwf, the full amount constitutes a deductible
running cost (art.25 of the DTI).
Finally, if the net book value is negative (as would be the case for example if the selling price
of certain assets of the category are higher than the cost price of all the assets in the category
of costs), this net amount is treated as a gain and is added to profits and the assets base
valuation amount becomes nil (art 25 al.2 DTI).
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QUESTION 3
Businesses employ and pay people to work for them.
The Act for Direct Taxes on Income together with subsequent laws and orders modifying this
act detail a number of rules and regulations regarding employers’ responsibilities and
obligations towards their employees.
Describe these and also give the consequences of not obeying the act.
SUGGESTED SOLUTION 3
Employment Income. This is covered by Section 2, Article 13 and following.
Employment income includes all payments paid to an employee in cash or in kind such as:
• wages, salary, leave pay, sick pay and medical allowance, payment in lieu of leave, fees,
commissions, bonuses including gratuity and incentives;
• allowances, including any cost of living, subsistence, rent, and entertainment or travel
allowance;
• any discharge or reimbursement of expenses incurred by the employee;
• payments to the employee for his or her acceptance to work in any conditions of
employment;
• payments for redundancy or termination of employment;
• pension payments ;
• other payments made in respect of current, previous or future employment.
The employer must operate PAYE – Article 48.
But where a person works for more than one employer, it is the responsibility of that person
to inform the employers which one is “the first” or in other words, the one who pays the
most.
The “first” employer will operate PAYE – see below – and the others will operate
withholding tax procedures.
The following persons are obliged to withhold and pay tax on employment income:
• an individual or an entity that pays its employees in cash or benefits in kind;
• an entity that pays out pensions excluding pensions paid according to procedures of the
State Social Security;
An employer that is subject to withholding tax in accordance with paragraph one of this
Article must, within fifteen (15) days following the end of each month:
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file a tax declaration through procedures specified by the Commissioner General and
transmit the tax withheld to the tax administration; and
transmit to the employee a statement indicating his/her name, the amount and type of
income and the amount of tax withheld and paid.
An employer who is not the first employer of a taxpayer is required to withhold tax at the top
marginal rate in accordance with Article 50 of this law.
If the employee receives the same employment income from more than one employer, he or
she may choose which employer shall be his or her first employer.
Article 50: Pay as you earn rate or PAYE
Monthly employment income which includes amounts paid to an employee on an extra
ordinary basis and bonuses and the benefits he or she receives in kind is subject to tax in
accordance with the rate as shown in the table below:
Monthly earnings
Band
Rate
1 – 30,000
30,000
0%
30,001 – 100,000
70,000
20%
More than 100,000
100,001 and up
30%
Income to a casual labourer is subject to tax at a special rate of fifteen percent (15%).
However, in computing a casual labourer’s tax, an income not exceeding thirty thousand
(30,000 Rwf) per month is rated at zero percent (0%).
As it is a duty for everybody who earns income, so it is the responsibility of the casual
labourer to declare income to the RRA and the responsibility of the employer is deduct 15%
and to declare the same to RRA
Benefits in kind Article 15
Benefits in kind are treated as income and are subject to PAYE as ordinary income.
These are:
1) For the availability and use of a motor vehicle to an employee during a tax period, valued
at ten percent (10%) of the employment income excluding benefits in kind;
2) For use, or availability for use, of premises including or excluding any household
equipment of other contents by an employer for residential occupation by an employee
during a tax period, valued at twenty percent (20%) of the employment income excluding
benefits in kind;
3) income on a loan including advance on a salary exceeding a three (3) months’ salary
given to an employee is valued at a difference between:
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a) the interest on loan, which would have been paid by the employee during the month in
which the loan was received, calculated at a rate of interest offered to commercial
banks by the National Bank of Rwanda and
b) the actual interest paid by the employee in that month;
4) Benefits provided by an employer to a person related to an employee when there is no
service rendered, are treated as if provided to the employee;
Fines and penalties
A person mentioned in paragraph one of this Article and paying employment income as
mentioned in Article 13 of this law, bears responsibility for withholding tax and paying the
tax to the Tax Administration. If he or she fails to do so, he or she is obliged to pay the tax in
addition to fines and penalties thereof.
Tax-exempt income is exempt from withholding tax.
When:
An employer who has to operate withholding tax procedures must, within fifteen (15) days
following the end of each month:
• file a tax declaration through procedures specified by the Commissioner General and
• transmit the tax withheld to the tax administration; and
• Give the employee a statement indicating his/her name, the amount and type of
income and the amount of tax withheld and paid.
For taxpayers whose annual turnover is equal or less than Rwf200,000,000 the PAYE
submission shall be quarterly and together with the tax and CSR due be paid within 15 days
after the end of the quarter to which the Pay As You Earn is referred – Article 3 of Law
01/2012.
Such a business may opt for a monthly declaration.
An employer who is not the first employer (see above) of a taxpayer is required to withhold
tax at the top marginal rate in accordance i.e. currently at 30%.
If the employee receives the same employment income from more than one employer, he or
she may choose which employer shall be his or her first employer.
It is also beholden on the employer to deduct the 3% CSR/RSSF contribution from the
employee’s pay and to add the 5% employer’s contribution and pay this together with the
PAYE withholding tax.
Failure to pay by the due date attracts penalties and fines.
1) Fixed amount fines
A taxpayer or any person is subject to a fine in case of failure to:
i) file a tax declaration on time;
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ii) file a withholding declaration on time;
iii) withhold tax;
iv) provide proofs required by the Tax Administration;
v) cooperate with a tax audit;
vi) comply with any requirements provided for in the tax laws governing:
A) personal income tax;
B) withholding taxes;
C) and other activities which are not of this question
The following table shows the fines that apply:
Fine
Taxpayer’s annual turnover
100,000 Rwf
≤ 20,000,000 Rwf
300,000 Rwf
> 20,000,000 Rwf
500,000 Rwf
“large taxpayer”
If the same violation is committed twice within 5 years, the fine is double the original. If the
same violation is committed again within this 5 year period, the fine is four times the original.
2) Late payment fine
If the amount of tax shown on a tax declaration or the amount of tax which is the result of an
adjusted assessment by the Tax Administration is not paid on time, the taxpayer is subject to
a fine that is 10% of the tax payable. The taxpayer is not subject to this fine if an extension
for filing the tax declaration has been granted. The late payment penalty applies to the
principal tax payment only (it does not apply to any administrative fines and interest
payments).
3) Understatement fines
The following table summarizes understatement fines.
Fine
Understatement %
5% of the understated amount
Where understatement ≥ 5% but < 10 % of the tax
liability
10% of the understated amount
understatement ≥ 10% but < 20 % of the tax liability
20% of the understated amount
understatement ≥ 20% but < 50 % of the tax liability
50% of the understated amount
understatement = 50% or more
A taxpayer who rectifies the tax declaration before being given notice of an imminent
control procedure, is not subject to the understatement fines.
Interest will also be due to cover the lateness of the due payment:
The interest rate is fixed at the interbank offered rate of the National Bank of Rwanda.
Interest is calculated on a monthly basis. Every part-month involved will count as a complete
month
There are certain types of payment to employees which are exempt deductions meaning they
are not subject to income tax –they are described in Article of DTI
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The following payments are excluded from taxable income resulting from employment:
1) the discharge or reimbursement of expenses incurred by the employee:
a) wholly and exclusively for business activities of the employer;
b) those that are deducted or would be deductible in calculating the employee’s income
from all his or her business activities;
2) retirement contributions made by the employer on behalf of the employee to the state
social security fund;
3) pension payments made under the state social security system;
4) retirement contributions made by the employer on behalf of the employee and or
contributions made by the employee to a qualified pension fund to a maximum of ten per
cent (10%) of the employee’s employment income or one million and two hundred
thousand (1,200,000) Rwandan francs per year, whichever is the lowest;
5) employment income received by an employee who is not a citizen of Rwanda from a
foreign government or a non-governmental organization under an agreement signed by
the Government of Rwanda and when the income is received for the performance of aid
services in Rwanda;
6) employment income received from an employer who is not a resident in Rwanda by a
non-resident individual for the performance of services in Rwanda, unless such services
are related to a permanent establishment of the employer in Rwanda.
Persons that are exempted from employment income in Rwanda as provided for by
International Agreements due to services rendered in the exercise of their official duties are
the following:
1) any foreigner who represents his or her country in Rwanda;
2) any other individual employed in any Embassy, Legation, Consulate or Mission of a
foreign state performing state affairs, who is a national of that state and who owns a
diplomatic passport;
3) any non-citizen individual employed by an international organization that has signed an
agreement with the Government of Rwanda in accordance with Rwandan law.
Page 24
QUESTION 4
Calculating a tax liability entails offsetting deductible expenses against the revenue earned.
What are these deductible expenses and detail 3 examples.
SUGGESTED SOLUTION 4
Select 3 of the following:
a. General
Any expenditure which complies with Art 21 of the DTI may be offset against taxable
income or business profits:
Such expenditure must be committed for the direct need and the normal requirements of
the company;
They must be supported by appropriate documentation to confirm that they have been
incurred;
They must involve a reduction of the net assets of the company;
They must be included for tax purposes in the expenditure of the period during which
they are committed.
b. Depreciation
Depreciation is an annual charge against the profits of a company to take account of the
reduction in value resulting from the use of fixed assets belonging to the organisation. It
therefore forms deductible expenditure for the fiscal year under consideration. However,
some assets that are not subject to physical deterioration and associated depreciation in the
same way are not allowable. These include in particular land, the works of art and heritage
assets (art 24 paragraph 2 DTI).
The law outlines four (4) categories of acceptable charges relating to depreciation (article 24
para. 3, 4 and 5 DTI) which have their own specific allowable rates as follows:
1. Construction of, or the costs of acquisition of, costs of improvement, restoration or
rebuilding of tangible assets. The annual allowable rate of depreciation is 5% of the
cost price. Examples: of such assets include industrial buildings themselves plus
equipment which forms part of the building such as elevators, light fittings, air-
conditioning and conveyors where these are built into the fabric;
2. Development or costs of acquisition, costs of improvement, restoration or rebuilding of
the intangible assets, which includes goodwill acquired from a third party. Annual rate
of depreciation is 10% of the cost price. The assets thus will be entirely depreciated in
ten (10) years. Example: Goodwill, concessions, patents, licences, etc.;
3. Computers and their accessories, information systems and communication. Annual rate
of depreciation: 50% of the carried forward balance of the asset net of depreciation
4. Other assets of the company: 25% of the carried forward balance of the asset net of
depreciation. Examples: machine tools, work benches, seed cleaners etc motor
vehicles, furniture, etc. That is the assets are depreciated on a reducing balance basis
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However, depreciation is calculated in two different ways according to whether the asset falls
into the first two, or the last two, categories described above:
• For the first two categories (depreciation of 5% and 10% of the cost price), depreciation is
calculated individually, asset by asset, and is based on the original cost i.e. straight-line
basis. Additions are simply treated at cost and sales are set against the relevant individual
asset.
• For the second two categories (50% and 25% rates of depreciation), depreciation is not
calculated by individual asset, but by total pool category (article 24 of DTI); And the
depreciation is calculated on the depreciated value at the beginning of the year (NBV –
net book value or WDV – written down value) brought forward i.e. on a Reducing
Balance basis.
• For the “pooled” assets, additions are added to or sales are subtracted from the pool value
at the beginning of the year – Art 25 DTI).
• For all categories, due allowance must be made where due to abnormal occurrences,
assets are damaged or devalued.
However, for the four (4) categories of allowable assets, when a used and depreciated asset
(either completely or partially depreciated) forms part of a business acquired by a taxpayer,
then annual instalments of depreciation are calculated on the price at acquisition (if in the
first two categories) or on the depreciated value (‘net book value’) of the asset at the date of
acquisition if in the last two categories.
It is important to categorise the assets correctly and ensure that the depreciation is correctly
calculated.
It should be noted that if the depreciated value of the assets at the beginning of a year (the
depreciation base) does not exceed 500,000 Rwf, the full amount constitutes a deductible
running cost (art.25 of the DTI).
Finally, if the net book value is negative (as would be the case for example if the selling price
of certain assets of the category are higher than the cost price of all the assets in the category
of costs), this net amount is treated as a gain and is added to profits and the assets base
valuation amount becomes nil (art 25 al.2 DTI).
c. Expenses for training and research
Art. 27 DTI prescribes that expenses of training and research during a fiscal year are
deductible expenses.
All Training and Research expenses incurred which promote business activities during a tax
period are considered as deductible from taxable profits in accordance with provisions of
Article 21 of this law.
These expenses in relation to the purchase of land, of houses, of buildings and other
immovable properties including refurbishment and reconstruction as well as exploration
expenses and other assets. – these costs are generally considered as part of the capital cost
Page 26
and will be added to the cost of the asset. Such costs will be “deductible” through
deprecation.
d. Bad debts
The deduction of bad debts is allowed for tax purposes but a bad debt is regarded as
irrecoverable only if the loss has acquired a final and irreversible nature during the taxable
period. The loss of the debt should not be simply probable. Exactly when a bad debt becomes
irrecoverable is an issue of fact and the final decision lies with the tax department.
To be considered irrecoverable the bad debt must meet certain conditions in order to be
fiscally deductible (article 28DTI):
• This bad debt has been previously included before in the income of the taxpayer;
• The bad debt has then been cancelled for accountancy purposes;
• The taxpayer has taken all reasonable steps to recover the debt and has conclusive
evidence confirming the insolvency of their debtor.
e. Recoverable losses
As its name indicates, income tax relates to profits earned by a taxpayer. However a taxpayer
may not generate profits during a fiscal year. He/she can also incur losses. In this case, not
only does the taxpayer avoid a tax liability during the fiscal year, he/she also has the right to
carry forward this loss to the next year, so that profits in year 2 can be reduced by the loss
incurred in the year before – up to five years before.
Article 29: Loss Carried Forward
If the determination of business profit results in a loss in a tax period, the loss may be
deducted from the business profit in the next five (5) tax periods, earlier losses being
deducted before later losses.
However: per Article 20 of Law 16/2005 (DTI) “A loss in tax period in which a long-term
contract is completed may be carried back and offset against previously taxed business profit
from that contract to the extent it cannot be absorbed by business profit in the tax period of
completion
However, losses incurred overseas cannot be offset against any profits of Rwandan origin
during the same fiscal year, or against any future or previous profits of Rwandan origin.
Article 29 Para 3 (DTI) If during a tax period, the direct and indirect ownership of the share
capital or the voting rights of a company, whose shares are not traded on a recognized stock
exchange changes more than twenty five per cent (25%) by value or by number, paragraph
one of this Article ceases to apply to losses incurred by that company in the tax period and
previous tax periods.
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QUESTION 5
The costs associated with long term contracts are deductible, but are subject to slightly
different accounting and tax rules.
Discuss
SUGGESTED SOLUTION 5
A long term contract is one which from the outset was considered to last more than one fiscal
period.
The timing of inclusion in and deduction from business profit relating to a long-term contract
is accounted for on the basis of the percentage of the contract completed during any tax
period.
The percentage of completion is determined by comparing the total expenses allocated to the
contract and incurred before the end of the tax period with the estimated total contract
expenses including any variations of fluctuations.
Within the meaning of the law, a long-term contract is a contract for manufacture, installation
or construction, or the provision of services relating to these activities, which is not
completed during the fiscal year in which it begins. This excludes any contracts whose
completion was at the outset envisaged to be within twelve (12) months of commencement
(art.20 DTI).
For these contracts, the following rules apply:
• Business profit relating to a long-term contract is accounted for on the basis of the
percentage of the contract completed during any tax period. As per ISA standard
IAS 11, the percentage of profit is calculated from the percentage of completed
and takes into account estimation future costs. Effectively, if the estimated final
cost is expected to be greater than the sale value, then 100% of the loss to date is
taken to the Statement of Comprehensive Income (SoCI).
• Para 3 allows that where a long term contract subsequently makes a loss where
previously a profit was anticipated and duly assessed, the realised loss can be
offset against the previously taxed profit of that contract. Where the overall
business profit is insufficient to cover the loss, the loss can be set against the
profits attributed to that contract in previous years.
A is performing a long-term contract which started in Jan 2010 and expected to last until
2012. At the end of 2010, completion so far was calculated as 25% and the final sale at
Rwf1,000,000,000 and expected profit was 10%, Rwf100,000,000. 25% or Rwf25,000,000
would be assessed at 30% payable to RRA.
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At the end of 2011 the valuations were 70% complete and profit was expected to be 7.5% of
the sale value which was now 1,200,000,000.
Profit assessable for tax = 7.5% x 1,200,000,000 x 70% = 63,000,000
at 30% = 18,900,000 less 30% x 25,000,000 charged in 2010.
If in 2012 the contract is completed as forecast in 2011, the tax charge for 2012 would be:
7.5% x 1,200m x 30% = Rwf27m less tax charged in 2010 and 2011
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QUESTION 6
In the last few years certain government responsibilities have been decentralised to districts.
To finance these activities, Decentralised taxes have been created.
1 Briefly describe these. (5 marks)
2 Of these Fixed Asset Tax is probably the most important. (15 marks)
Against what is it levied?
When is it paid?
What are the clauses in case of default.
SUGGESTED SOLUTION 6
1. The Rwandan Government has decentralised certain functions to District Authorities.
These organs of government are funded by the collection of “decentralised” taxes.
They are
Tax on immovables or Fixed Asset tax - c
Trading Licence Tax – a
Rental Income Tax – b
a) Trading Licence tax is payable by VAT registered profit oriented activities and is
calculated as a percentage of annual turnover.
Turnover
Tax due in Rwf
From Rwf 1 to Rwf 40,000,000
60,000
From Rwf 40,000,001 to Rwf 60,000,000
90,000
From 60,000,001 to Rwf 150,000,000
150,000
Above Rwf 150,000,000
250,000
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For other registered businesses whose aim is to make a profit, pay tax according to location
and type of business:
Type of Activity
Rural area
Rwf
Towns
Rwf
City of Kigali
Rwf
A) Vendors without shops, small scale
technicians who do not use machines
4,000
6,000
8,000
B)Transporters of people and goods on
motorcycles
4,000
6,000
8,000
C) Traders and technicians who use
machines
20,000
30,000
40,000
D) All other vehicles besides bicycles
40,000 on each
vehicle
40,000 on each
vehicle
40,000 on each
vehicle
E) For transport activities by motor boat
20,000 on each boat
20,000 on each
boat
20,000 on each
boat
F) Others profit-oriented activities
20,000
30,000
40,000
The tax year starts on 1st January and end on 31st December of the same year.
If taxable activities start in January, the trading licence tax must be paid for a whole year.
If however the activities start after January, the trading licence tax is the year times the
number of months remaining.
For VAT registered business, the declaration must be made and paid before 31st March.
For self-assessed businesses, the tax must be declared and paid before 31 January. Trading
without a trading Licence is illegal.
The basis for the calculation of trading licence tax for VAT registered businesses is the
turnover of the previous year approved by Rwanda Revenue Authority (RRA). Every year,
not later than 31st January, the Rwanda Revenue Authority shall submit the necessary data to
the concerned decentralized entity.
The Trading Licence Certificate must be displayed at the entrance of the business’ premises.
Where a business has several branches or locations, a trading licence must be applied at all
locations.
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b) Rental Income tax: Like the Trading Licence tax, this is based on turnover or
rental income per year. But an allowance of 50% is made for expenses. The tax is
assessed on the balance and like the traders licence, it is progressive.
The income from Rwf 1 – 180,000 is 0%
from Rwf 180,001 to 1,000,000 is 20%
and above Rwf1,000,000 is 30%.
The Rental Income tax is paid on or before 31st March of the following taxable year and is to
be accompanied by a proper declaration.
c) Fixed Asset Tax.
Again this is a self-assessed tax and is also covered by Law 59/2011.
Fixed asset tax shall be levied on the following:
i. the market value of parcels of land – developed or undeveloped;
ii. the market value of buildings and all improvements thereto registered with the Land
Registration Centre and for which the owner has obtained a title deed from the time the
building is inhabited or used for other activities;
i. the value of land exploited for quarry purposes;
ii. the market value of a usufruct with a title deed.
The date of valuation is January 1st of the first income taxable year in a four (4) -yearly
assessment cycle and all fixed assets must be valued and, may be reassessed before the end of
the duration of the relevant assessment cycle, with reference to that date.
Per Article 7: Obligations for taxpayers, the fixed asset tax shall be assessed and paid by the
owner or deemed owner.
The following persons shall be deemed to be owners:
1) the holder of a fixed asset where the title deed has not yet been registered in the name of
the owner;
2) a person who occupies or deals with an asset for a period of at least two (2) years as if
he/she is the owner and as long as the identity of the legally recognized owner of such
asset is not known;
3) a proxy who represents an owner who lives abroad;
4) a usufructuary.
The owner of a fixed asset who lives abroad may have a proxy in Rwanda. The proxy shall
have to fulfil all obligations this Law requires from the owner. Misrepresentation by a proxy
is deemed to be a misrepresentation by the owner.
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Tax liability shall not be terminated or deferred by the disappearance of an owner of a fixed
asset, where that owner has disappeared without leaving behind a proxy or other person to
manage that asset on his or her behalf. If, after all reasonable steps have been taken to locate
the owner, a competent court has ruled that the owner of that fixed asset cannot be found, the
asset shall be forfeited to the decentralized entity where it is located in accordance with the
law relating to management of abandoned property.
When a fixed asset is owned by more than one (1) co-owner, the co-owners shall appoint and
authorize one of them or any other person as a proxy to represent them collectively as a
group.
When co-owners have not appointed a co-owner or a proxy to represent them collectively as
a group, the decentralized entity shall reserve the right to select any of them as a proxy for all
the co-owners as a group.
Valuation
The valuation of the asset is subject to valuation at the expense of the tax payer. This
valuation must be carried out professionally and every 4 years
Every taxpayer must, not later than March 31st in the first tax year, shall file a tax declaration
to the decentralized entity where the asset is located by using the official form provided by
that decentralized entity.
The declaration forms must be available by 31 January each year, but the non-receipt of a
fixed asset tax declaration form shall not relieve the taxpayer of his/her obligation to pay the
tax.
Article 12: Late submission, or incomplete or misleading tax declaration
Apart from collecting the actual amount of the tax due, the decentralized entity shall levy a
fine not exceeding 40% of the tax due where:
1) the fixed asset tax declaration form is not submitted;
2) the fixed asset tax declaration form is submitted late;
3) the fixed asset tax declaration form is substantially incomplete;
4) the fixed asset tax declaration form contains incorrect or fraudulent information with
an intent to evade tax.
The tax assessment notice (Article 14) shall contain at least the following details:
1) tax base calculation outline;
2) calculation of the market value of the concerned fixed asset;
3) calculation of the tax in Rwandan francs;
4) names of the owner or his/her proxy;
5) address of the owner, the proxy or the usufructuary;
6) the due date for the tax payment;
7) mode of payment;
8) consequences of late payment or non-payment;
9) a reference to the taxpayer’s right to complain and appeal.
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Certain assets are subject to Tax exemption (Article 18)
The following fixed assets shall be exempted from the fixed asset tax:
1) fixed assets used exclusively for medical purposes, or caring for vulnerable groups,
and those meant for educational and sporting activities, where no profit-making
activity takes place;
2) fixed assets exclusively intended for research activities which are not meant for
profit-making;
3) fixed assets belonging to the Government, Provinces, decentralized entities, as well as
public institutions except where they are used for profit-making activities;
4) fixed assets used primarily for religious activities in accordance with the laws with
exception of those fixed assets used for profit-making activities;
5) fixed assets used primarily for charitable activities as determined by the Minister in
charge Social Affairs;
6) fixed assets belonging to foreign diplomatic missions in Rwanda if their countries do
not levy tax on fixed assets of Rwanda’s Diplomatic Missions;
7) land in use for agriculture, livestock or forestry, if the taxpayer owns less than two (2)
hectares. If he/she owns more than two (2) hectares, the first two (2) hectares shall be
exempt and tax shall be levied only on the excess land;
8) fixed assets and usufructs used primarily for residential purposes, if the assessed value
does not exceed three million (3,000,000) Rwandan francs. If the assessed value
exceeds such an amount, only the excess value shall be taxed.
The tax rate is fixed at a thousandth (1/1000) of the taxable value per year.
The tax rate for lands exploited for quarry purposes is fixed at a thousandth (1/1000) of the
taxable value per year.
The tax, as assessed by the taxpayer must be paid to the decentralized entity where the fixed
asset is located not later than March 31st of the tax year. As long as there is no general
revision or an assessment notice issued by the concerned decentralized entity, the same
amount shall be paid annually by the taxpayer for four (4) consecutive tax years.
The self-assessed tax must be paid not later than March 31st, even if the revision of fixed
asset tax or fixed asset tax declaration has not yet been concluded.
The tax, as assessed by the taxpayer must be paid to the decentralized entity where the fixed
asset is located not later than March 31st of the tax year. As long as there is no general
revision or an assessment notice issued by the concerned decentralized entity, the same
amount shall be paid annually by the taxpayer for four (4) consecutive tax years.
The self-assessed tax must be paid not later than March 31st, even if the revision of fixed
asset tax or fixed asset tax declaration has not yet been concluded.
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Interest and surcharge for late tax payments
A tax not paid when it is due shall bear interest. The interest rate is fixed at one point five
percent (1.5 %). Interest is calculated on a monthly basis, non-compounding, counting from
the first day after the tax should have been paid until the day of payment, which is included.
Every month started will count for a complete month.
Apart from the interest payable, a surcharge equivalent to ten percent (10 %) of the tax due
must be paid. However, such a surcharge shall not exceed an amount of one hundred
thousand (100,000) Rwandan francs.
Deferral or payment by instalments:
If, due to special circumstances the taxpayer is temporarily unable to pay the tax due, the
Council of the concerned decentralized entity may, upon request by the taxpayer or his/her
proxy, grant a deferral of payment for up to six (6) months without any fine. In this case,
interest shall be paid as described in Article 25 of this Law.
The taxpayer must request a deferral of tax payment in writing at least one (1) month before
the due date, after tax review or tax re-assessment. The Council of the decentralized entity
must respond to the request of the taxpayer before the due date.
Or a taxpayer may request the concerned decentralized entity to authorize him/her to pay tax
in instalments. The payment in instalments shall not exceed a period of twelve (12) months.
The taxpayer must submit to the concerned decentralized entity a tax instalment payment
plan which indicates an immediate payment of at least 25% of the tax due. The failure by the
taxpayer to pay under the conditions of the tax instalment payment plan shall result in an
immediate obligation to pay the total remaining amount of tax due.
Failure to comply with the law or a general failure to pay may lead to destraints by the
decentralised authority. These may take the form of
• attachment of rent,
• seizure and sale of moveable fixed assets
• Access to money owed to or held by third parties on behalf of the taxpayer. Upon a
written official request by the concerned decentralized entity, those who hold money
on behalf of the taxpayer, such as employers, bailiffs, tenants, bankers, proxies and
others may be required to pay on behalf of the taxpayer all taxes due with the money
entrusted to or retained by them.
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QUESTION 7
Some entities do not pay tax or if they do the tax is not calculated against business profits -
discuss
SUGGESTED SOLUTION 7
Firstly, a person who earns Rwf30,000 per month or less, pays no income tax. This is in total.
Where a person works for more than one employer, the “first” employer operates PAYE and
the other(s) deduct withholding tax at 30% and pay this to the RRA each quarter or month.
Secondly, in recognition of the prevalence and importance to the Rwandan economy of
subsistence farming, where the turnover of an agricultural and animal breeding activity does
not exceed twelve million (12.000.000 Rwf) Rwandan francs during a fiscal year (Article 18
DTI), the entity
This measure is intended to take into account the significance of these activities in the
Rwandan economy reality where more than 90% of the population relies on subsistence
agriculture with the sale to local markets of any surplus from their harvests. However, when
the value of such sales exceeds the amount indicated, the law takes the view that the related
agricultural activity is no longer one of subsistence. Therefore, the income of these activities
will be taxed.
If the business profits are less than 20,000,000 francs i.e. the business is “small” (Article 2 of
DTI) then the tax assessed could be a lump sum of 4% of turnover.
In general where a business falls within the category described in Article 2 - 6 DTI and the
annual turnover is less than 20,000,000 francs, business tax can be levied at 4% of turnover
(Article 11 – 2 of DTI). It also applies to other taxpayers who may have elected to adopt this
mode of taxation.
However, these small businesses can choose to be taxed on their actual profits according to a
simplified accounting method (Article 17 DTI).
Suppose that your turnover is 19,000,000, and you elected not to prepare accounts or
complete a tax return you would declare and pay tax at 4% of Rwf19 million. This would be
Rwf760,000
If you were a farmer and you sold millet, tomatoes and milk in the local market, you would
not pay tax if the value of the sales did not exceed Rwf12 million in any one fiscal year. If
your sales were Rwf18 million in a year you would be assessed to tax at 4% of Rwf 6million.
However it is important to remember the decentralised taxes which must be paid by all
traders and those in receipt of rental income. - see Solution 6
Page 36
QUESTION 8
There are times when the RRA or Tax authorities can themselves assess a business for tax.
When might these occasions occur?
SUGGESTED SOLUTION 8
The Tax authorities (RRA) can make an assessment if the circumstances meet the criteria as
per Article 26 of Law 25/2005. This Law is a modification to laws concerning VAT, Personal
Income tax and others.
When the Tax Administration discovers a miscalculation, an omission, a misrepresentation,
an understatement of income or any other error in the tax declaration or an assessment, it has
the right to issue an adjusted assessment.
In case the tax declaration form is rectified, the Tax Administration sends a rectification note
to the taxpayer – Article 27.
The note should contain a draft of the adjusted assessment and all the elements leading to the
adjusted assessment. The rectification note contains fines determined by the Tax
administration in case of non-compliance with the tax laws.
The taxpayer has the right to give his or her written opinion on the rectification note within
30 days. The taxpayer may also send additional evidence or information to indicate that the
adjusted assessment is incorrect. The taxpayer has the right to a hearing provided this was
requested for it in his or her reply.
The rectification note may be issued in a period of three (3) years, starting from the day of the
filing of the tax declaration. A rectification note has to be issued at least on the last day of the
three year period. The prescription mentioned in this paragraph is interrupted if the taxpayer
has been informed to be audited by the Tax Administration, when there has been an affidavit
thereof or by other deeds of acknowledgement by the taxpayer concerning the tax liabilities
and all other provisions provided in the other laws.
A rectification note is definitive after:
• a period of thirty (30) days, in case the taxpayer has not replied to the rectification
note;
• the Tax Administration has sent a notification to the taxpayer declaring that none or a
part of the observations or remarks of the taxpayer are upheld;
• the hearing of the taxpayer as mentioned under paragraph 2, followed by a written
notification by the
• Tax Administration to the taxpayer declaring that none or just part of the observations
or remarks of the taxpayer are upheld.
Any rectification note which does not respect the provisions of this article is void.
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In addition to the foregoing, the tax authorities have the right of starting an assessment
procedure without notice (Article 28) when:
• no tax declaration has been made;
• a tax declaration was filed after the day mentioned in the Law on Taxes and there was
no proof given of “force majeure” justifying the delay in filing;
• the tax declaration was not signed by a competent person;
• the tax declaration was not accompanied by all necessary documents;
• the taxpayer was unwilling to cooperate with a tax audit officers or did not provide
the information requested;
• books and records were not kept as provided by law; or
• there are serious indications of tax fraud.
In the event of the “assessment procedure without notice”, the Tax Administration sends a
note to the taxpayer. The note contains all reasons why the assessment procedure without
notice was conducted. It may also contain fines in case of non-compliance with the tax law.
The taxpayer has the right to give written observations and remarks to the note of an
assessment without notice in a period of 30 days. He or she may also send additional
evidence to the Tax administration to prove that the assessment procedure without notice was
not effectively conducted. The taxpayer has the right to a hearing if he or she requested it in
his or her reply.
The assessment procedure without notice may be conducted in a period of five (5) years,
starting from 1st January, following the tax period. A notice of assessment procedure without
notice has to be issued at least on the last day of five (5) year period.
If there are serious indications of tax fraud, the Tax Administration can issue an immediate
assessment without notice, disregarding previous provisions of this article 29
An assessment without notice is definitive:
• after 30 days, if the taxpayer does not reply to the assessment procedure without
notice;
• after the Tax Administration has sent a notification to the taxpayer declaring that none
or part of the observations or remarks of the taxpayer is upheld;
• after written or verbal explanations of the taxpayer mentioned under paragraph two
(2) of this article of which the tax administration notified the taxpayer that none or
part of the observations or remarks of the taxpayer are upheld;
• after the conduct of an immediate assessment without notice as described in paragraph
four of this article.
An assessment procedure without notice which does not respect provisions of this article (29)
is void.
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QUESTION 9
The Tax Administration is authorised to carry out audits from time to time. What are the
legal constraints?
What other means are available to the RRA where tax irregularities are suspected?
SUGGESTED SOLUTION 9
The Law 25/2005 on Tax Procedures. covers audits and investigations.
This law modifies laws concerning VAT, Income tax and other tax matters.
Audit and investigation is to be found in Articles 20 ff
Conditions in auditing and investigation
In case of audit, the Tax Administration is required to inform in writing, the taxpayer the
following:
• that he or she will be audited at least seven (7) days before the audit is conducted;
• the place where the audit is to be conducted and the possible duration of the audit;
• any specific document the tax administration wants to see or any specific information
it requires.
In case of audit, the taxpayer is required to work effectively with the tax audit team and to do
the following:
• to provide the team with suitable premises;
• to give the team books and records which show:
• tax liability;
• the obligation to withhold tax;
• the obligation to file a declaration of a tax withheld.
With exceptions of provisions of paragraph one of this article, any person who has an annual
turnover exceeding twenty million Rwandan Francs (20,000,000 RWF) is obliged to keep the
following additional documents:
• a record showing business assets and liabilities;
• records showing daily income and expenses related to the business activity he or she
operates;
• records showing purchases and sales of goods and services related to the business he
or she operates;
• records showing trading stock at the end of the tax period.
Books and records of account are kept and made available to the Tax Administration for a
period of 10 years commencing 1 January of the year following the date of the transaction.
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Thus a transaction dated 30 June 2011 must be held on file until 31 December2022. In other
words it is advisable to keep records for at least 10 years plus current.
It is important to note that a VAT invoice must show at least the following:
1. names of the taxpayer,
2. the client,
3. the taxpayer’s trade name, if different from the personal name;
4. taxpayer’s identification number and the purchaser’s if necessary;
5. number and date of the value added tax registration certificate;
6. description of goods sold or services rendered;
7. value of taxable goods or services;
8. sum of Value Added Tax due on the given taxable transaction;
9. date on which the Value Added Tax invoice was issued;
10. the serial number of the Value Added Tax invoice.
In addition, any business which has an annual turnover exceeding Rwf 20,000,00 is obliged
to keep the following additional documents:
• record showing business assets and liabilities;
• records showing daily income and expenses related to the business activity he or she
operates;
• records showing purchases and sales of goods and services related to the business he
or she operates;
• records showing trading stock at the end of the tax period.
And the accounting records must employ double entry system.
Other aspects of the law of which the taxpayer should be aware:
Article 43 Law 25/2005 – tax procedures.
When the Tax Administration establishes that a taxpayer shows signs and indications of
prosperity in a certain fiscal year, and the taxpayer cannot give an explanation for this
apparent prosperity, the Tax Administration may add the value of these signs and indications
to the taxable income of the taxpayer and use this as a method of proof.
The burden of proof lies with the Tax Administration
Article 46 et se concern the non- or late payment of tax.
If tax is not paid by the 15th day of the relevant month, the authority can issue a warning letter
and if within 15 days of its delivery ( see the first part of the law) the RRA can distrain
movable assets or attach them and sell them to pay the tax due (article 48)
The RRA can also require debtors of the taxpayer to pay the RRA the debt owed to the
taxpayer.
In addition to these actions, Fines, penalties and interest will be levied.
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QUESTION 10
You are a subsistence farmer who joins a group of farms and one business entity is formed.
The new group now has sufficient equipment and is starting an agricultural and general
contracting business. It is also planned that the new business will move into processing some
of the agricultural output.
You are the administrative officer or company secretary. What are your next steps after the
agreement is signed making special reference to the tax laws and what must you be aware of.
SUGGESTED SOLUTION 10
The first step must be to register the business with the Office of Registrar General – ORG.
If the new entity is a company limited by shares, a memorandum of association must be
lodged with ORG.
It is important that the Rwandan Revenue Authority (RRA) is informed and that the business
entity registers. Article 10 of Law 25/2005 says that the entity must register within 7 days.
On registration, the tax administration assigns a taxpayer identification number to be used for
all correspondence. The procedure for issuance of a taxpayer identification number is
determined by the instructions of the Commissioner General.
The new business must ask itself certain questions. The answers are important as to which
tax route should be followed:
Does or will the annual turnover exceed Rwf 20 million, or the quarterly turnover exceed
Rwf 5 million?
The law states: Any person who carries out taxable activities exceeding twenty million
Rwanda Francs (20,000,000 RWF) in the previous fiscal year, or five million Rwanda Francs
(5,000,000 RWF) in the preceding calendar quarter is required to register for VAT with the
tax administration within a period of seven (7) days from the end of the year or from the end
of the quarter mentioned above.
Are there any employees? – if so how many and for how many and for whom is the new
business the “first” employer – PAYE must be operated for these employees, not just
withhold tax deductions at 30%
All companies and business entities who’s annual turnover exceeds Rwf1.2 million must
keep proper books of account.
Article 13 of Law 25/2005 tax procedures details the books and records to be kept
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Any person who is required to keep books and records under the provisions of article 12 of
this law is obliged to prepare, establish and keep all books and records of transactions which
show:
• tax liability;
• the obligation to withhold tax;
• the obligation to file a declaration of a tax withheld.
Additionally any person who has an annual turnover exceeding Rwf20 million is obliged to
keep the following additional documents:
• a record showing business assets and liabilities;
• records showing daily income and expenses related to the business activity he or she
operates;
• records showing purchases and sales of goods and services related to the business he
or she operates;
• records showing trading stock at the end of the tax period.
Books and records mentioned under paragraph one and two of this article, are preserved for
any time they may be required by the tax administration at least in a period of ten (10) years
starting from January 1st, following the tax year in which it was carried out.
VAT – but “All Agricultural and Livestock products, except for those processed, are
exempted from VAT. However, the milk which is processed in local industries is exempted
from this tax”.
ii) Agricultural inputs and equipments.
This implies that the services of an agricultural contractor are exempt.
And the law states that Taxable Entities must register. The business whose supplies are
exempt does not charge VAT (output VAT) nor can it recover input VAT.
The new business (from the question) is going to process the output of the new farming
group. Processed output is taxable.
As soon as the threshold turnover is reached, the business will have to register for VAT.
Where the inputs can be clearly linked to output and so to sales invoices, this input vat can be
reclaimed. Where no clear link or allocation can be made, agreement must be sought with the
RRA as how apportionment is to be made, so that taxable supplies can be properly accounted
for both in the company records and on the monthly VAT declaration.
This must be submitted to the RRA by the 15th day of the month following. If the annual
turnover is less than Rwf 200million, the declaration may be made quarterly.
Per Article 154 of Law 25/2005 a Value Added Tax invoice must be prepared in the form
prescribed by the Tax Administration and show the following information:
1. names of the taxpayer and the client, and the taxpayer’s trade name, if different from
the personal name;
2. taxpayer identification number and the purchaser’s if necessary;
3. number and date of the value added tax registration certificate;
4. description of goods sold or services rendered;
5. value of taxable goods or services;
6. sum of Value Added Tax due on the given taxable transaction;
7. date on which the Value Added Tax invoice was issued;
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8. serial number of the Value Added Tax invoice.
If the new business were to retail direct to the final consumer as might happen in a “farm-
shop”, then the final sales invoice could simply be a receipt determined by the Tax
Administration may be issued instead of a value added tax invoice. This receipt should show
the TIN, name of supplier and the total value and it should also shop the VAT amount and
VAT %
PAYE : By the 15th day following each month, a PAYE and withholding tax declaration
must be made to RRA with tax deducted from each employee’s salary/wage and with the
employer’s and employee’s CSR contribution (5% and 3% of an employee’s wage/salary
respectively)
