CPA A2.3 ADVANCED TAXATION Study Manual
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- Taxpayer concerned
- Deductible items
- Mechanisms
- Summary of Law(s)
- Taxation of Businesses operated by Individuals who are not employees
- Contents
- Chapter 2
- Income Tax on Companies
- Contents
- Chapter 3
- Value Added Tax
- Contents
- A. CHARACTERISTICS AND MECHANISM
- B. CSUMMARY OF LAW(S)
- Concepts
- Any person who is not required to register for VAT can do so voluntarily. The law here aims at any supplier who does not meet any of the two conditions mentioned above. §2. Consequences of the constraint.
- A person who does not need to register and is not registered will invoice his customers with no VAT added; but he cannot reclaim the VAT which his suppliers invoice to him. The advantage of a lower sales price must be offset against the non-recoverab...
- Taxable operations
- D Exempted and Zero rated businesses
- Deductions and restitutions
- Localization of operations
- Determination of VAT
- Introduction and mechanism
- Constraint
- Responsibilities and Obligations
- Exemptions and Operations which are zero rated
- BLANK
- CHAPTER 4
- DECENTRALIZED TAX - FIXED ASSET TAX
- Contents
- CHAPTER 5
- Contents
- The East African Community Customs Management Act, 2004 incorporating all amendments up to 8th December, 2008
- A good example of a bloc with geographic links is the East African Community (EAC) Common Market. Another good example is the European Union (formerly the European Common Market) – which was formed for historical and geographic reasons.
- Generally speaking such blocs evolve over time. They can start with an agreement to simplify trade administration between two or more countries and to reduce tariffs, customs duties etc on goods and services traded between the countries.
- The ultimate aim of such partnerships is to abolish commercial borders between member states, thus pushing the commercial borders to the periphery of a trading bloc. Thus, goods imported into country A of a trading bloc are deemed to be imported into ...
- So, in the case of the EU, when goods are imported into Belgium, they are also deemed to be imported into France. This means if the goods are subsequently sold from Belgium into France, they are not classified as either a Belgian export or a French im...
- B. Double Taxation Agreements
- International Taxation involves taxation which is cross border. It can arise from an individual having taxable income or assets in two countries, or a business operating in two (or more) countries. Due to increased globalisation, the growing level of ...
- To take a simple example. Joe is a citizen of and lives in Country A. He has a home there, and lives there with his wife and family. Thus, in the normal scheme of things, Joe would be taxed on his income in Country A, in common with all other resident...
- However Joe is slightly unusual. Every Tuesday morning Joe flies to Country B, works there until Thursday afternoon and then flies home again. He gets paid in Country B.
- The dilemma however, is – in what country does the tax liability fall, and how is that
- decided? And a further issue that may arise is that if an individual or a business is taxed in
- Country A and in Country B, then that person or entity has effectively been taxed twice on the same income or transaction. If such a situation were to prevail, it could materially inhibit the development of international trade.
- So, for example, Country A will argue that Joe is a citizen and a resident, he lives with his wife and family there, and every citizen is expected to make their contribution to the various public services they enjoy. Thus, they will argue, Joe should ...
- But Country B will argue that Joe should pay his income tax in their country, because the income originated there, and their rules state that anyone earning an income in their country should be taxed there.
- The dilemma for Joe is that he could end up being taxed in both countries on the same income – which is a bit unfair on Joe. The dilemma for both Countries is that they could end up not taxing Joe in either country. And if it is to be only one – which...
- So a system of double taxation agreements has evolved to deal with this type of situation. The taxpayer does not have to be an individual – it could be a company, or a business operating in both countries.
- There are two principal scenarios to be considered:
- (A) Where there is a double taxation agreement in place
- (B) Where there is not
- Scenario (A)
- In scenario (A) (where there is a tax treaty, on avoidance of double tax and prevention of fiscal evasion), between Country A and Country B, the treaty generally will specify in a clear wording that the right to tax is with state Country B, because th...
- Scenario (B)
- In Scenario (B) (where there is no existing tax treaty on avoidance of double tax and prevention of fiscal evasion) country B will to tax Joe on incomes arising from country B, because that is the source of the incomes. When he goes back to country A,...
- Under Rwanda’s income tax law (Law No.16/2005 OF 18/08/2005, On Direct Taxes on Incomes as modified and complemented to date), this is indicated in article 6, regarding foreign tax credit. Note: foreign tax credit provision exists in almost all tax l...
- It is desirable, and indeed necessary, in the field of international taxation, that there are rules agreed between different countries as to which tax jurisdiction takes what portion of tax, and why a given tax jurisdiction should forego in whole or i...
- Various countries have concluded and ratified tax treaties with other countries. Typically these tend to start with a country’s major trading partners. Rwanda has signed and ratified tax treaties with Mauritius, South Africa and Belgium. The East Afri...
- A typical Double Taxation Agreement (DTA) will address key issues. Each agreement may differ depending on the prevailing circumstances, and the participating countries. However, a typical DTA would be likely to include provisions for some or all of th...
- PERSONS COVERED
- TAXES COVERED
- This provision article sets out the taxes to which the treaty will apply. In some cases this may apply only to taxes on income, (personal and corporate); in other cases it may also apply to Capital taxes.
- It is very important that there is clarity around precisely what taxes are included in the treaty, and which are not included.
- RESIDENT
- This provision sets out the rules for determining whether a person is a resident of of one State or a resident of the other State for the purposes of the treaty. Only residents of the Contracting States can claim the benefits of the treaty. A resident...
- The provision can contain tie-breaker provisions to resolve cases where an individual would be regarded as a resident of both Contracting States.
- A treaty will also normally contain a tie-breaker test for corporate entities. Where the entity is a resident of both States it will normally be deemed to be a resident of the State in which it is effectively managed.
- PERMANENT ESTABLISHMENT
- This provision defines the term “permanent establishment”. The concept of a permanent establishment is important generally but is of primary importance for the purposes of Business Profits. Only when an enterprise of one of the Contracting States carr...
- A “permanent establishment” is defined as a fixed place of business through which the business of an enterprise is wholly or partly carried on.
- INCOME FROM IMMOVABLE PROPERTY
- This provision defines the rules relating to taxation of income from immovable property, including income from agriculture or forestry.
- The term “immovable property” is defined by reference to the domestic law of the Contracting State in which the property is situated.
- Under this provision, each Contracting State agrees to rules for the taxation of Business Profits. The rules tend to revolve around whether an enterprise has a permanent establishment in a State. The provision can also set out the rules by which the p...
- .
- This provision deals with transfer pricing.
- Generally such a provision determines that the profits made by an enterprise from dealings with an associated enterprise in the other Contracting State may be increased to the level they would have been if the enterprises had been independent and deal...
- It may also provide for the adjustment of profits of the associated enterprise in the other State as a consequence of an adjustment in the first State.
- DIVIDENDS
- This provision is concerned with the taxation of dividends paid by a distributing company resident in one Contracting State to a shareholder resident in the other State.
- The term “dividends” will be defined in the article.
- INTEREST
- This provision provides rules for the taxation of interest arising in one Contracting State and paid to a resident of the other State.
- The provision will also include a comprehensive definition of the term “interest”.
- ROYALTIES
- This provision provides rules for the taxation of royalties. It may limit the taxation in the source State of royalties paid to a resident of the other State.
- The term “royalties” is defined and can covers payments in respect of copyright of literary, artistic or scientific work as well as patents and trademarks. Some treaties also cover leasing payments – “payments for the use of, or the right to use, indu...
- .
- INCOME FROM EMPLOYMENT
- This provides for the taxation of income from employment.
- It generally provides that remuneration in respect of an employment derived by an individual who is a resident of a Contracting State may be taxed only in that State unless the employment is exercised in the other Contracting State. In that event, the...
- ARTISTES AND SPORTSPERSONS
- PENSIONS and ANNUITIES
- This provides a general rule for the taxation of pensions and annuities.
- It normally provides that a pension arising in a Contracting State and paid in consideration of past employment to a resident of the other Contracting State will be taxed only in that other State. In some treaties, the source country retains the right...
- ,
- ELIMINATION OF DOUBLE TAXATION
- This provision is relevant where both Contracting States retain taxing rights on items of income or gains. Double taxation is relieved in such cases by the State of residence of the taxpayer either exempting the income or gains from further taxation o...
- .
- EXCHANGE OF INFORMATION
- This provides for the exchange of information that is relevant for the carrying out of the provisions of the treaty or of the domestic laws of the Contracting States concerning taxes covered by the treaty. All information so exchanged is to be treated...
- C. Regional Perspective
- In East Africa, the EAC Partner States commenced implementing the EAC Common Market Protocol in July 2009. This means that Rwanda, Uganda, Kenya, Tanzania and Burundi entered into a single market with free movement of factors of production based on th...
- Some of these rights include free movement of goods, persons and labour.
- The EAC citizens also have the rights of establishment (i.e. a Ugandan citizen can set up a business in Rwanda, and vice versa) as well as rights of residence. There is also provision for free movement of services and capital.
- It is important to note that taxes on international trade will remain as is, except for import duty which will be at 0% on imports from the EAC that comply with the rules of origin criteria.
- If a trader for example imports juice or biscuits that are manufactured in Uganda (an EAC member state) and have a valid certificate of origin, the Rwandan Revenue Authorities (RRA) will not collect import duty (a tax levied on goods imported into th...
- In Rwanda, issuance of certificates of origin has been decentralized to the RRA Gikondo Customs department and at all border posts including, Gatuna (Rwanda-Uganda border) and Rusumo (Rwanda-Tanzania border). It is intended that this service will be i...
- While import duty was abolished for such trade, traders will continue to pay other domestic taxes due on goods including Value Added Tax (VAT) of 18 percent, consumption tax (excise duty) as well as withholding tax of 5 percent.
- However, the withholding tax mentioned above is exempt for people who have a tax clearance certificate (Quitus Fiscale).
- Free movement of goods under the Common Market is provided for under the protocol (Article 39).
- On 1st July, 2009, Rwanda commenced the implementation of the EAC Customs Union and started levying zero percent import duty tariff on goods originating from the Partner States, applying the Common External Tariff and the East African Customs Manageme...
- Implementation of the Customs Union is progressive. For example, the internal tariff elimination on intra regional trade took 5 years.
- Removal of VAT, Consumption tax (excise duty) and Withholding tax will be implemented when a fully fledged customs union is established.
- Such a union will also include the following:
- •Shifting of borders between Partner States to the peripheral
- •Collection of duties and taxes at the point of entry into the Customs Union Territory
- •Agreeing on the revenue sharing mechanism;
- •Establishment of a regional authority to administer the Customs Union
- •Elimination of rules of origin on intra regional trade. In a fully fledged Customs Union, goods from Nairobi to Kigali will not attract any duties and taxes will be considered just as goods coming from Huye, Southern Province or Musanze, Northern Pro...
- Harmonization of tax policies and laws
- The EAC Common Market Protocol provides that the Partner States will progressively harmonize their tax policies and laws to remove tax distortions. This will be done to facilitate the free movement of goods, services and capital and to promote investm...
- It is important to note that the implementation of the EAC Common Market has not changed the existing fiscal regime and the anticipated changes will progressively be realized as Rwanda enters into a fully fledged Customs Union and the harmonization o...
- Harmonization of domestic taxes is being handled under EAC Framework by the Fiscal Affairs Committee(Technical Committee on tax harmonization) and Fiscal Affairs Committee has established Technical Working Groups on Value Added Tax, Excise Tax and Inc...
- It should also be noted that the double taxation and the prevention of fiscal evasion with respect to taxes on income (DTA) was agreed upon by the Partner States and is awaiting legal input from the Attorney Generals Before approval by Council.
- This will all take time to achieve. It may be further complicated by the admission of new member states to the Common Market. And it is possible that there may be a deeper strengthening of trade ties. For example in the EU, the arrangements have moved...
- Countries can also involve themselves in wider, but looser associations for international cooperation. Such an example is COMESA (the Common Market for Eastern and Southern Africa). The benefits of COMESA are:
- 1. A wider, harmonised and more competitive market
- 2. Greater industrial productivity and competitiveness
- 3. Increased agricultural production and food security
- 4. A more rational exploitation of natural resources
- 5. More harmonised monetary, banking and financial policies
- 6. More reliable transport and communications infrastructure
- 19 countries – including Rwanda - are members of COMESA, and the agreed activities cover more than just taxation issues.
- D. Most Favoured Nation
- Most Favoured Nation (MFN) is a status or level of treatment accorded by one state to another in international trade. This means that the country which is the recipient of this treatment must, nominally, receive equal trade advantages as the "most fav...
- Such advantages would include such things as low tariffs or high import quotas. It effectively means that a country that has been accorded MFN status may not be treated less advantageously than any other country with MFN status by the country grantin...
- MFN status is accorded by members of the World Trade Organization (WTO) to each other.
- Preferential treatment of developing countries, regional free trade areas and customs unions is permitted by exception.
- Some of the benefits conferred by MFN status are:
- As a consequence of MFN, smaller countries can participate in the advantages that larger countries often grant to each other. In the absence of an MFN, smaller countries would often not be powerful enough to negotiate such advantages by themselves.
- MFN provides domestic benefits: Administration is simplified. By having one set of tariffs for all countries the rules are simplified and made more transparent. It also lessens the frustrating problem of having to establish rules of origin to determine w<
- MFN restrains domestic special interests from obtaining protectionist measures. For example, butter producers in country A may not be able to lobby for high tariffs on butter to prevent cheap imports from developing country B, because, as the higher tari<
- As MFN clauses promote non-discrimination among countries, they also tend to promote the objective of free trade in general.
- There is, however, a recognition that the MFN rule should be relaxed to accommodate the needs of developing countries.
- The emergence of powerful trade blocs (e.g the EU, or the North American Free trade Agreement (NAFTA) has presented challenges to the MFN concept. In these blocs, tarriffs have been lowered or eliminated among the members while maintaining tariff wall...
- E. Withholding Tax Provisions
- Withholding tax, also called retention tax, is where a government requires the payer of an item of income to withhold or deduct tax from the payment, and pay that tax directly to the government.
- In most jurisdictions, withholding tax applies to employment income. Thus employers deduct the appropriate tax, pay the employee the net amount, and pay the balance (i.e. tax) over to the government.
- Rwanda operates a PAYE (pay as you earn) withholding tax system:
- Rwandan tax law requires that when an employer makes available employment income to an employee the employer must withhold, declare, and pay the PAYE tax to the Rwanda Revenue Authority within 15 days following the end of the month for which the tax w...
- In the case of engaging a casual labourer for less than 30 days during a particular tax year, the employer shall withhold 15% of the taxable employment income of the casual labourer.
- The employer is personally responsible for the correct withholding, declaration and the timely payment to the Rwanda Revenue Authority.
- The employer is personally responsible for keeping proper books of account to prove that the tax has been correctly withheld, paid, and accounted for. Under those circumstances where, the employer is not required to withhold and pay the tax, the emplo...
- Many jurisdictions also require withholding tax on payments of interest or dividends. In most jurisdictions, there are additional withholding tax obligations if the recipient of the income is resident in a different jurisdiction, and in those circumst...
- Withholding Tax on other payments in Rwanda
- A withholding tax of 15% is levied on the following payments made by resident individuals or resident entities including tax-exempt entities:
- Dividends, except those governed by Article 45 of this law; Interest payments; Royalties; Service fees including management and technical service fees; Performance payments made to an artist, a musician or an athlete irrespective of whether paid direc...
- Withholding Tax on Imports and Public Tenders
- A withholding tax of five percent (5%) of the value of goods imported for commercial use shall be paid at custom on the CIF (cost insurance and freight value) value before the goods are released by customs.
- A withholding tax of three percent (3%) on the sum of invoice, excluding the value added tax, is retained on payments Or by public institutions to those who supply goods and services based on public tenders.
- Typically the withholding tax is treated as a payment on account of the recipient's final tax liability. It may be refunded if it is determined, when a tax return is filed, that the recipient's tax liability to the government which received the withho...
- The amount of withholding tax on income payments other than employment income is usually a fixed percentage. In the case of employment income the amount of withholding tax is often based on an estimate of the employee's final tax liability, determined...
- Some governments have written laws which require taxes to be paid before the money can be spent for any other purpose. This ensures the taxes will be paid first, and will be paid on time as the government needs the funding to meet its obligations.
- Most countries require that payers of certain amounts, especially interest, dividends, and royalties, to foreign payees withhold income tax from such payment and pay it to the government. Payments of rent may be subject to withholding tax or may be ta...
- Some countries require withholding by the purchaser of real property.
- Taxes withheld may be eligible for a foreign tax credit in the payee's home country.
- F Transfer Pricing
- Other issues may also arise in international taxation – and a key issue is the issue of transfer pricing.
- Take for example, the case of Business A being headquartered in Country A, and has a subsidiary in Country B. It makes widgets in Country B which it exports back to its parent in Country A. Let us assume that Country A has a corporate tax rate of, s...
- Business B makes 500,000 widgets, at a unit cost of 1 franc. It decides it needs a gross profit of a further 1 franc, and so decides to sell the widgets at 2 francs each back to its own business in Country A.
- Therefore;
- Sales: (To country A) 1,000,000
- Cost of sales 500,000
- Profit 500,000
- Taxed @ 35% 175,000
- The business in Country A sells the widgets locally, for 4f each. They incur distribution costs of 1f each.
- Therefore
- Sales (In Country A) 2,000,000
- Cost of goods sold (1,000,000)
- Distribution costs ( 500,000)
- Profit 500,000
- Taxed @ 15% 75,000
- Therefore total tax
- In country B 175,000
- In country A 75,000
- Total 250,000
- However, to reduce the tax liability, the company could decide to make no profit in Country B, and all the profit in Country A.
- Thus, if the sales are all to their own business in Country A, the company could decide to charge their own company Rwf 1 per unit. The following therefore would be the case:
- Country B
- Sales: (To country A) 500,000
- Cost of sales 500,000
- Profit 0
- Taxed @ 35% 0
- Country A
- Sales 2,000,000
- Cost of goods (500,000)
- Distribution costs (500,000)
- Profit 1,000,000
- Tax @ 15% 150,000
- Therefore we can see that the overall tax liabilities are reduced from 250,000 to 150,000. This has been achieved by the simple mechanism of transferring the original profits from Country B to Country A, where there is a lower tax rate.
- This in turn has been achieved by reducing the price of the goods sold into Country A. Thus no profits are made in Country B, and all the profits are made in Country A. The pricing mechanism used between different parts of the same business is known a...
- Double taxation agreements are increasingly concerned with this issue and seek to mitigate the effects of artificially created pricing structures.
- Transfer pricing refers to:
- the setting,
- analysis,
- documentation,
- and adjustment
- of charges made between related parties for goods, services, or use of property. Transfer prices among components of an enterprise may be used to reflect allocation of resources among such components, or for other purposes.
- OECD Transfer Pricing Guidelines state,
- “Transfer prices are significant for both taxpayers and tax administrations because they determine in large part the income and expenses, and therefore taxable profits, of associated enterprises in different tax jurisdictions.”
- Over 60 governments have adopted transfer pricing rules.
- Transfer pricing rules in most countries are based on what is referred to as the “arm’s length principle” – that is to establish transfer prices based on analysis of pricing in comparable transactions between two or more unrelated parties dealing at a...
- The rules of nearly all countries permit related parties to set prices in any manner, but permit the tax authorities to adjust those prices where the prices charged are outside an arm's length range. Rules are generally provided for determining what c...
- Prices actually charged are compared to prices or measures of profitability for unrelated transactions and parties. The rules generally require that market level, functions, risks, and terms of sale of unrelated party transactions or activities be rea...
- Most tax treaties and many tax systems provide mechanisms for resolving disputes among taxpayers and governments in a manner designed to reduce the potential for double taxation. Many systems also permit advance agreement between taxpayers and one or ...
- Many systems impose penalties where the tax authority has adjusted related party prices. Some tax systems provide that taxpayers may avoid such penalties by preparing documentation in advance regarding prices charged between the taxpayer and related p...
- The OECD system provides that prices may be set by the component members of an enterprise in any manner, but may be adjusted to conform to an arm's length standard. The system provides for several approved methods of testing prices, and allows the gov...
- Most governments have granted authorization to their tax authorities to adjust prices charged between related parties. Some authorizations, (e.g. the United States, United Kingdom, Canada, and Rwanda – Law 16/2005 DTI), allow domestic as well as inter...
- Nearly all systems require that prices be tested using an "arm's length" standard. Under this approach, a price is considered appropriate if it is within a range of prices that would be charged by independent parties dealing at arm's length. This is g...
- There are clear practical difficulties in implementing the arm's length standard. For items other than goods, there are rarely identical items. Terms of sale may vary from transaction to transaction. Market and other conditions may vary geographically...
- In addition, most systems recognize that an arm's length price may not be a particular price point but rather a range of prices.
- The OECD rules require that reliable adjustments must be made for all differences (if any) between related party items and purported comparatives that could materially affect the condition being examined.
- Transactions not undertaken in the ordinary course of business generally are not considered to be comparable to those taken in the ordinary course of business. Among the factors that must be considered in determining comparability are:
- the nature of the property or services provided between the parties,
- functional analysis of the transactions and parties,
- comparison of contractual terms (whether written, verbal, or implied from conduct of the parties),and
- comparison of significant economic conditions that could affect prices, including the effects of different market levels and geographic markets.
- Comparability is best achieved where identical items are compared. However, in some cases it is possible to make reliable adjustments for differences in the particular items, such as differences in features or quality.
- Buyers and sellers may perform different functions related to the exchange and undertake different risks. For example, a seller of a machine may or may not provide a warranty. The price a buyer would pay will be affected by this difference. Among the ...
- Product development
- Manufacturing and assembly
- Marketing and advertising
- Transportation and warehousing
- Credit risk
- Product obsolescence risk
- Market and entrepreneurial risks
- Collection risk
- Financial and currency risks
- Company- or industry-specific items
- Manner and terms of sale may have a material impact on price. For example, buyers will pay more if they can defer payment and buy in smaller quantities. Terms that may impact price include payment timing, warranty, volume discounts, duration of rights...
- Goods, services, or property may be provided to different levels of buyers or users: producer to wholesaler, wholesaler to wholesaler, wholesaler to retailer, or for ultimate consumption. Market conditions, and thus prices, vary greatly at these level...
- Most systems provide variations of the basic rules for characteristics unique to particular types of transactions. The potentially tested transactions include:
- Sale of goods. Identical or nearly identical goods may be available. Product-related differences are often covered by patents.
- Provision of services. Identical services, other than routine services, often do not exist.
- License of intangibles. The basic nature precludes a claim that another product is identical. However, licenses may be granted to independent licensees for the same product in different markets.
- Use of money. Comparable interest rates may be readily available. Some systems provide safe haven rates based on published indices.
- Use of tangible property. Independent comparatives may or may not exist, but reliable data may not be available.
- Tax authorities generally examine prices actually charged between related parties to determine whether adjustments are appropriate. Such examination is by comparison (testing) of such prices to comparable prices charged among unrelated parties. Such t...
- Most systems consider a third party price for identical goods, services, or property under identical conditions, called a comparable uncontrolled price (CUP), to be the most reliable indicator of an arm's length price. All systems permit testing using...
- Among other methods relying on actual transactions (generally between one tested party and third parties) and not indices, aggregates, or market surveys are:
- Cost plus (C+) method: goods or services provided to unrelated parties are consistently priced at actual cost plus a fixed mark-up. Testing is by comparison of the mark-up percentages.
- Resale price method (RPM): goods are regularly offered by a seller or purchased by a retailer to/from unrelated parties at a standard "list" price less a fixed discount. Testing is by comparison of the discount percentages.
- Gross margin method: similar to resale price method, recognised in a few systems.
- Some methods of testing prices do not rely on actual transactions. Use of these methods may be necessary due to the lack of reliable data for transactional methods. In some cases, non-transactional methods may be more reliable than transactional metho...
- Valuable intangible property tends to be unique. Often there are no comparable items. The value added by use of intangibles may be represented in prices of goods or services, or by payment of fees (royalties) for use of the intangible property. Licens...
- Enterprises may engage related or unrelated parties to provide services they need. Where the required services are available within a multinational group, there may be significant advantages to the enterprise as a whole for components of the group to ...
- There may be tax advantages obtained for the group if one member charges another member for services, even where the member bearing the charge derives no benefit. To combat this, the rules of most systems allow the tax authorities to challenge whether...
- Some jurisdictions impose significant penalties relating to transfer pricing adjustments by tax authorities. These penalties may have thresholds for the basic imposition of penalty, and the penalty may be increased at other thresholds. For example, U....
- The rules of many countries require taxpayers to document that prices charged are within the prices permitted under the transfer pricing rules. Where such documentation is not timely prepared, penalties may be imposed, as above. Documentation may be r...
- Results of the tested party or comparable enterprises may require adjustment to achieve comparability. Such adjustments may include effective interest adjustments for customer financing or debt levels, inventory adjustments, etc.
- Tax authorities of most major countries have entered into unilateral or multilateral agreements between taxpayers and other governments regarding the setting or testing of related party prices. These agreements are referred to as advance pricing agree...
- Contents
- A Avoidance and Evasion
- Evasion of paying tax is a simple breaking of the law whether it be a tax law or any other law.
- Avoidance is a means of reducing one’s tax liabilities but within the law. Transfer pricing whether it be done within a country or as a cross-border exercise has been used as a means of reducing a tax liability.
- Off-shore loans and deposits/bonds are also used as a means of reducing tax. Interest paid on a loan is tax deductible.
- A Ltd a resident of R could borrow money from A2 Ltd which is situated in another country, LLY, where the tax laws are more lenient. The Loan from A2 Ltd attracts interest and the income is taxed in LLY. The interest charged to A in R reduces the tax...
- The RRA and the EAC are developing ways and means or reducing avoidance:
- By encouraging tax payers to be good citizens and help pay their dues for the benefit of Rwanda and ultimately themselves.
- By writing and passing laws to make constructive avoidance illegal. This is where an entity takes positive steps to reduce tax liabilities by means of accounting exercises and using “off-shore” entities and transfer pricing as tools.
- See Appendix II which is an extract from the RRA Business Plan 2010-2012 and details aims and targets regarding progress on taxation.
- RRA see Threats to include
- B Transfer pricing
- Transfer prising has been covered within the Cross-border trading section. But the concept is as valid within a group within one country as it is across borders.
- The following example is Z Ltd who makes hide skins for drums. Z sells to Y Ltd a member of the consortium as well as to other drum manufacturers.
- As with all groups, the internal price is different from the external price. But suppose in example 1 the price is the same. At this price Y Ltd makes a loss of Rwf 150m
- Z pays tax on its profits but Y Ltd pays no tax.
- Suppose Z Ltd were to reduce the price charged to Y Ltd to Rwfk 7 per square metre, Y Ltd’s loss would reduce to Rwfk -150 but Z Ltd sales would drop to Rwfk 2,600 and profits to Rwfk 200,000.
- The tax advantage to the “consortium” would be Rwf 300,000,000
- But the RRA would question the sale to Y Ltd at a price at lower than cost.
- An arm’s length price would be considered to be at least cost plus a % markup.
- Even so a tax advantage can be gained:
- Even at a “reasonable” price, there can be a tax advantage to the joint venture and more for the shareholders in the way of dividends which are paid out of profits after tax
- C Online Taxation
- With the increasing use of the internet, tax returns filing and payment are two activities which lend themselves to automation. The use of online filing and payment is at various stages of development around the world.
- There are advantages for both taxpayers and the revenue authorities in this.
- For the taxpayer the key benefits are:
- 1. Convenience - they can do their tax returns at a time, and in a place that suits them.
- 2. Efficiency – they do not have to write out forms, post them, or take them personally to an office.
- 3. Speed – they can complete their transactions quickly.
- 4. Audit trail – there is always an electronic record of what has been submitted without the need to keep paper files etc
- 5. Errors in transcription or electronic reading of forms is reduced
- For the tax authorities the key benefits are:
- 1. Cost of tax collection is reduced. Once the online system is set up, the staff savings can be considerable, as will the savings on paper, postage etc.
- 2. Compliance Monitoring - with a properly functioning online system the authorities can very quickly focus on non-compliant taxpayers, and with the staff resources freed up from administration can focus more on the high risk areas.
- 3. Efficiency – the streamlining of tax returns and payments will lead to a more efficient operation.
- 4. Probable increased compliance – by making it easier for citizens to file and pay returns it is likely that compliance rates will increase.
- The Rwanda Revenue Authority has rolled out an electronic tax filing and payment system that allows taxpayers to file and pay for their taxes online. The self-declaration service is available for VAT, PAYE, withholding (lto), consumption (lto) and iqp...
- With this new e-tax system, taxpayers no longer need to travel to Rwanda Revenue Authority offices or stand in long queues. A call centre has also been established to provide customer care to taxpayers through telephone enquiries, further reducing the...
- As a result, the processing time for VAT returns, Income Tax returns and PAYE returns has been reduced from 23.5 days to just 1 day. Commercial Banks have also seen the value of this system and are now enrolling to provide e-tax payment services, furt...
- The Investment Climate Facility for Africa has worked with the Rwanda Revenue Authority to develop the e-tax system as part of the drive to modernise Rwanda’s tax administration.
- EAST AFRICAN COMMUNITY
- The East African Community Customs Management Act, 2004
- This Edition of the East African Community Customs Management Act, 2004
- incorporates all amendments up to 8th December, 2008 and is printed under the
- authority of Section 12 of the Acts of the East African Community Act, 2004
- Third schedule (ss. 70, 71, and 72) prohibited and restricted exports generally – a table of prohibited and restricted goods is tabled.
- Fourth schedule (ss. 37 and 122.) Determination of value of imported goods liable to Ad valorem import duty
- TRANSACTION VALUE
- TRANSACTION VALUE OF IDENTICAL GOODS
- TRANSACTION VALUE OF SIMILAR GOODS
- DEDUCTIVE VALUE
- COMPUTED VALUE
- FALL BACK VALUE
- ADJUSTMENTS TO VALUE