CPA A2.3 ADVANCED TAXATION Study Manual

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INSTITUTE OF
CERTIFIED PUBLIC ACCOUNTANTS
OF
RWANDA
Advanced 2
A2.3 TAXATION
First Edition 2012
This study manual has been fully revised and updated
in accordance with the current syllabus.
It has been developed in consultation with experienced lecturers.
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2
Contents
Chapter
Title
Page
1
TAXATION OF BUSINESSES OPERATED BY INDIVIDUALS
WHO ARE NOT EMPLOYEES
5
Taxpayer concerned 6
Deductible items 6
Assessment of tax
14
Import duties and Withholding tax 16
Tax on Investment income
17
Submissions and Payment of Tax
18
2
INCOME TAX ON COMPANIES
19
Tax payers concerned
20
Tax base
21
Assessment and Allowances
22
3
VALUE ADDED TAX
25
Mechanisms
26
Summary of Law(s)
27
Responsibilities and Obligations
30
Exempted and Zero rated businesses
31
4
DECENTRALIZED TAX – FIXED ASSET TAX
39
5
TAXATION OF CROSS-BORDER ACTIVITIES
49
Distinction between trading in and with a country
50
Double Taxation Agreements
51
Regional perspective
56
“Most Favoured Nation”
58
Withholding Taxes
59
6
EMERGING TRENDS
69
Avoidance and Evasion
70
Transfer pricing
70
Online Taxation
73
7
THE EAST AFFRICAN COMMUNITY
75
Tax and EAC
75
Free movement of goods under the Common Market rules
75
Harmonization of tax policies and laws
76
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Appendix I Extract from The East African Community Customs
Management Act, 2004
77
Appendix II
Extract from Rwanda revenue Authority Business Plan
2011-2012
83
Appendix III a– CIT Real Regime Calculator form
88
Appendix III b – PIT Real Regime Calculator form
89
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4
BLANK
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5
Chapter 1
Taxation of Businesses operated by Individuals who are not
employees
Contents
A. Who are the tax payers
B. Deductible Items
C Assessment
D Import duties and withholding tax
E Investment Income
F Submissions and Payment of Tax
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A Taxpayers concerned
1) Individuals who are not employees: There are taxpayers required to pay income tax
on business benefits who are physical people and who carry on activities involving financial
remuneration on a purely personal basis. In other words, such taxpayers are not employees
contracted to an employer or a corporate or business entity. These latter situations are
assessed for employment or corporate income tax respectively.
Examples of the former taxpayers would include generally tradesmen or ‘liberal professions’
such as lawyers, doctors and consultants.
Like “employees”, these taxpayers are assessed according to Chapter II of Law 16/2005 of
18/08/2005 on Direct Taxes on Income … (the DTI)
2) Corporate or business entities are covered by Chapter III of the DTI.
But much in Chapter II of DTI also applies to businesses which fall into the categories
covered by Chapter III
Taxes are assessed on the profits made by a business. As covered in the first course, profits
are Income less expenses. But not all items of expenditure can be deducted from profits for
tax purposes.
B Deductible items
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.
But some types of expense are not “tax-deductible”. These include in particular:
• Cash bonuses, attendance fees and other similar payments allocated to the members of
the Board of directors;
• Declared dividends and participations in profits;
• The surplus of interest paid on loans made out in a foreign currency, compared to the
interbank rate offered in London or "London Inter-Bank Offered Rate " (LIBOR) at
the beginning of the fiscal year increased by one percent (1%); (Law No. 73/2008
Article 2 para 3)
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• Contributions to reserves, provisions and other funds with specific purposes, others
than those envisaged by the tax law.
• Fines and other penalties;
• The proportion of any gift (donations in cash or the equivalent value of gifts in kind)
which exceeds one percent (1%) of sales turnover. However if these gifts are granted
by persons or entities carrying on a gainful employment, the gifts will not be entirely
non-deductible;
• Income tax of businesses that is paid abroad and value-added tax (VAT);
Indeed, tax paid abroad is not deductible from the tax base under consideration - it instead
constitutes a foreign tax credit. Also the VAT cannot be deductible expenditure since it is
offset against output VAT. However, all other taxes are deductible from the tax base,
as the law only specifically prohibits the deduction of the two taxes discussed above;
• Personal consumer expenditure and any entertainment expenditure provided that this
expenditure was not already included on income tax of employment (EIT).
Special attention should be given to Art 22 DTI but see also Law No. 73/2008 of 31/12/2008
which modifies the DTI.
Those reserves, provisions and funds which are mentioned by the tax law, and which
consequently are accepted as deductible, include in particular qualifying pension funds
(art.14 4º DTI) and investment provisions (Article 26 DTI);
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, 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. An
IT system costing Rwf20m will be valued at 2% of its cost price by year 6
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
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vehicles, furniture, etc. That is the assets are depreciated on a reducing balance basis;
by year 9 the WDV will be 2.5% of cost – cf IT equipment
Not only is depreciation is calculated in two different ways according to whether the asset
falls into the first two, or the last two, categories described but:
• 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).
Example:
Joe starts a business manufacturing chairs. The factory cost Rwf 270 million, the 2 lathes cost
Rwf45 million each and are supported by a Computer Aided Design (CAD) computer which
cost Rwf50,000,000 including cabling and equipment to link the CAD computer to the
Computer Numerically Controlled (CNC) lathes.
The rest of the factory equipment – benches and other tools - cost 45,000,000 and there is a
small admin team and their computers and printer cost 50,000,000 including software and
their office furniture cost 20,000,000.
Total investment cost Rwf 525 m
Company policy is to depreciate an asset over its useful life using the straight-line method:
Factory – 20 years
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Lathes – 10 years
Computers and associated equipment - CAD and office – 3 years
Benches and all other tools - 10 years
Office furniture – 10 years
Factory Lathes CAD
Office
Computers
Office
furniture
Cost Rwf '000
270,000
90,000
50,000
50,000
20,000
Life years
20
10
3
3
10
Annual Depreciation per company
Straight line basis
13,500 9,000 16,667
4,500
16,667
2,000
Rate % per RRA
0.05
0.25
0.5
0.5
0.25
Depreciation in first year
13,500
22,500
25,000
25,000
5,000
Value to which Depreciation is to be applied next year
Per company policy straight-line basis uses
270,000
90,000
50,000
50,000
20,000
Per RRA Cat 1 Dep'n based on Cost
270,000
Cat 2 - computer equipment WDV
25,000
25,000
Cat 3 all other tools and equipment WDV
81,000
18,000
Difference RRA minus Company policy
0
13,500
8,333
8,333
3,000
Adjustment to be deducted from Business Profits 39,917
The total business depreciation in year 1 is Rwf62,333 thousands, whereas the RRA would
calculate taxable profits where depreciation summed to Rwf102,250 thousands. The
adjustment to Line 75 of CIT Real Regime Calculator (see Appendix 1) would be
+39,917,000
For the pooled assets, the RRA method uses the WDV approach and so the life of an asset is
not fixed as the straight-line method is. 10% per year straight-line = 10 years
25% per year of WDV means that pooled assets costing 2,000,000 new are written down to
1,500,000 at the start of year 2 and Rwf1,125,000 at the start of year 3 and so on. In fact in
year 6 the opening valuation is less than Rwf500,000 and so the whole pool would be
expensed to SoCI
c. Investment allowance
Where the business is a registered investor and is able to take advantage of the investment
allowance, the profits in year 1 would be dramatically different. But this is also the year when
start-up costs are expected to be greatest and so the chances of profits slimmer.
According to paragraph 26 of the DTI, an investment allowance of forty percent (40%) of the
amount invested in new or used assets may be depreciated excluding motor vehicles that
carry less than eight (8) persons, except those exclusively used in a tourist business. This
amount is deductible for a registered investor in the first tax period following the purchase
and/or of use of such assets if:
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1. the amount of business assets invested is equal to thirty million (30,000,000)
Rwandan francs; and
2. the business assets are retained for at least three (3) tax periods after the tax period in
which the investment allowance was taken into consideration.
The investment allowance becomes fifty per cent (50%) if the registered business is located
outside Kigali or falls within the priority sectors as described by the Investment Code of
Rwanda.
The investment allowance effectively increases the depreciation charge to business profits
and for pooled assets, reduces the value of these assets carried in subsequent years. – next
year’s depreciation for pooled assets is calculated against the written down value as at the 1st
of the period plus the cost of any acquisitions made in the period.
If the business asset that is granted an investment allowance is disposed of before the end of
the period mentioned in the above point 2, the reduction of income tax stemming from the
investment allowance must be paid back to the Tax Administration unless such an asset is
destroyed by natural calamities or other involuntary conversion. The repayment amount is
calculated back to the acquisition date of the relevant asset.
To be eligible for the Investment Allowance, the following conditions must be fulfilled:
• It is necessary to be a recognised and registered investor;
• The acquired asset cannot be a vehicle capable of transporting less than eight (8)
passengers unless it is used solely for tourist business;
• The amount invested must be at least 30 million francs;
• The assets must be held for at least three (3) fiscal years from the time that the
provision for investment was taken into account;
For ease of book-keeping and to make year-end work much easier perhaps the entity should
adopt the RRA depreciation rates and then there would be no need to make adjustments.
But, and this is a big BUT, the business profits for management Account purposes in any one
period could be markedly affected and thus the ratios such as Return on Capital Employed,
RoI, ratios which are most important for the investor, would be affected. Calculations such
as WACC could become invalid and these inaccuracies could in turn lead to incorrect
investment decisions.
When making decisions to select asset lives and how to depreciate assets, the implications
must be carefully assessed before going ahead. Once a specific accounting policy has been
properly adopted, changes in later years can affect the accounts and reports for “prior” years.
d. Expenses for training and research
Art. 27 DTI prescribes that expenses of training and research during a fiscal year are
deductible expenses.
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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.
Such expenses, when they are incurred as part of process to purchase of land, buildings and
other immovable properties including renovation or reconstruction as well as exploration
expenses and other assets, are considered as part of the capital cost and will be added to the
cost of the asset.
To understand this concept more clearly, it is necessary to refer to relevant "International
Accounting Standards” (IAS). In IAS 9 regarding "activities of research and development"
(August 1991), the IAS established a distinction between:
• Research: this relates to original research undertaken in order to acquire original
scientific and technical knowledge;
• Development: this relates to the translation of the results of research into a plan of
production of materials, apparatus, products, processes, systems and services new or
substantially new before the commencement of production or commercial
exploitation.
Commentators have opined that, by expenses of research, the law wanted also to include the
expenses of development because the two expenditures are often part of the same aim or
project. See IAS on R&D and the way these costs are treated in the books of accounts
e. 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 fiscal
period. Exactly when a bad debt becomes irrecoverable is an issue of fact and the final
decision lies with the tax department, but the business must have good evidence that the debt
is not recoverable.
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 or other proof of inability to pay.
f. 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.
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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.
Article 20: Long-term contract
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.
a. Long-term contracts
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 began. 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 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
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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. Rwf25,000,000 would
have been assessed at 30% payable to RRA.
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
But suppose the contract finally made a loss of Rwf20,000,000 and the remaining business
profits were not sufficient to cover this sum, the profits of the previous years could be
adjusted by readjusting the profit of the long-term contract from Rwf63m to Rwf 43m. In
this way tax due in respect of the previous year could be adjusted downwards and a refund
added to the calculation for the current year.
Readjusted tax for 2011: 30% of Rwf43m = Rwf12.9.
Tax paid in 2011 was Rwf 11.4 m. Tax refund = Rwf1.5m
b. Agricultural and breeding activities
The tax law exempts from tax the income arising from agricultural and breeding activities if
annual turnover does not exceed twelve million (12.000.000 Rwf) Rwandan francs during a
fiscal year (Article 18 DTI).
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.
The law is not specific regarding produce taken from the farm into the home, but the
wording refers to turnover and so it might be assumed that the turnover is that portion of
output which is sold in a market and not used in the home.
C Assessment of tax
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1. Business size = i.e. Turnover
Where a business falls within the category described in Article 2 section 6º 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 determined by Ministerial decree (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
Grossed up at 30% this would be equivalent to a taxable profit of Rwf2,533,333 or a profits
to sales ratio of 13.3%
If your profits were say 10% it might pay to do the accounting:
Example:
Fred runs a business. He is the sole “employee”:
SoCI
SoCI
SoCI
Rwf
Rwf
Rwf
Sales (T/O)
19,500,000
19,500,000
19,500,000
Cost of sales
17,550,000
16,900,000
15,000,000
Profit assessable to tax
1,950,000
2,600,000
4,500,000
Tax at 30%
585,000
780,000
1,350,000
Profits available for distribution
1,365,000
1,820,000
3,150,000
Profit % sales
10.00
13.33
23.08
Tax at 4% of turnover
780,000
780,000
780,000
Advantage of 4% tax
(195,000)
-
570,000
i.e. + means more to spend
A profit of 13.3% of sales is the point at which the 4% on T/O is the same as 30% on profits.
A return on sales of less than this means that doing the accounts and preparing a proper return
might pay off – how much will be spent doing the accounts?
On the other hand, greater profits would make the 4% turnover tax more attractive.
In the example above, Fred’s business at 4% would attract tax of Rwf780,000 and this is
much lower the 30% tax bill if his assessable profits were Rwf4,500,000
If a business is profitable, and the turnover is less than Rwf20 million per year, it is unlikely
that the 4% tax on turnover would be disadvantageous.
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An after tax profit of Rwf780,000 is really not very much for a business and not one to aim
for simply to justify preparing accounts to reduce one’s tax bill.
Also, you have to bear in mind that the business is operated by Fred alone and if he paid
himself a salary of Rwf 8,000,000 (included in the costs above) then PAYE income tax
would be payable:
Rwf
0 – 360,000 Nil
next 840,000 20% 168,000
balance 6,800,000 30% 2,040,000
2,208,000
So in the end, Fred has 8,942,000 to spend in the year assuming PBIT
of Rwf 4,500,000
and he has paid a combined tax bill of 3,556,500 or tax at 18% of turnover.
2. Tax on actual profits
This type of taxation automatically applies to taxpayers whose annual sales turnover is equal
to, or higher than, 20 million Rwandan francs per fiscal year. The taxable amount is not in
this instance the sales turnover but the profit earned.
As is the case for income tax on employment, the assessed income is rounded down to the
nearest thousand RwF (Article 41 DTI). Whilst Article 11 says “rounded to the nearest
thousand”, Article 41 says “rounded down to the nearest thousand”
Declaration and payment of tax
Whilst an annual return must be completed and filed with the tax authorities before the 30th
day of the March after the end of a fiscal period (or the 30th day of the 3rd month where the
fiscal period does not end 31 December) it is also important to remember that a business
either as an individual or company must pay each quarter a 25% portion of what was paid in
tax for the previous year. This will become the prepayment for the current year.
If the taxpayer began his activities during the preceding fiscal year, the quarterly instalment is
equal to twenty five percent (25%) of the amount of the tax due arising in the preceding fiscal
year, adjusted by dividing by the number of months during which the taxpayer undertook his
activities during this preceding period and multiplying by twelve (12).
Suppose Fred’s business is being considered:
He made taxable income from his business of Rwf4,500,000 last year and so his quarterly
payments this year will be ¼ of 30% of Rwf1,350,000 i.e.Rwf337,500.
His salary was Rwf8m and suppose the business pays him the same this year, his monthly
salary will be Rwf666,667 and he will pay by the 15th of the month following the tax due plus
the CSR(RSSB) payments.
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16
Monthly salary
666,667
PAYE income tax
184,000
CSR - employer's contribution at 5%
33,333
CSR employee's contribution at 3%
20,000
Salary
Tax due
Taxed at nil
30,000
-
Taxed at 20%
70,000
14,000
Taxed at 30% - all above 100,000
566,667
170,000
666,667
184,000
By the 15th day of each month Fred’s business will remit to RRA, Rwf237,333
being the tax due plus both the CSR contributions.
Of course the net monthly salary that Fred actual receives will be after tax and the CSR 3%
deduction namely Rwf462,667. The 5% contribution is an expense to the business.
D. Import Duties and withholding tax
The table from RRA shows:
Product
Rwanda
EAC
Raw Materials
0%
0%
Capital
0%
0%
Intermediate
15%
10%
Finished
30%
25%
The RRA Customs tariff also states that some food product intermediaries are variable at 0%
or 5%. The EAC tariff is not yet finalised. Certain items are subject to
Vehicles are subject to more specific rates depending on engine size, and certain beverages
and other items such as tobacco ready for consumption are subject to consumption tax as
well.
Certain importations require that the importing agent in Rwanda pay to RRA 15% of the
value of the item before it is released to the buyer. In addition to the above, certain operations
are the subject to a deduction at source – withholding tax. These are imports and payments by
public institutions in relation to public tender/service contracts. (Article 52 para. 1 and 2
DTI):
• An advance calculated as five percent (5%) of the cost of the imported goods, including Cost
Insurance and Freight (known as CIF) when regular commercial practices are applied to
transactions involving these goods. A withholding tax of three percent (3%) on the sum
of invoice, excluding value added tax, is retained on payments by public institutions
to the winner of public tenders
.
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17
However such deductions at source do not apply to the taxpayers who are in one of the two
(2) following categories (article 52 para. 3 DTI):
• Taxpayers whose business profits are exempt from taxation;
• The taxpayers who have a tax clearance certificate and this is granted annually by the
Commissioner General of the RRA. This final tax scheme applies only to "good
taxpayers" i.e. those with a good tax track record such as timely submission of tax
declarations, prompt payments of tax liabilities and those who do not have tax arrears.
E Tax on investment incomes
Tax base
As far as investment income is concerned, the tax law aims to tax any payment received in
cash or in kind by an individual in the form of interest, dividends, royalties or rent and which
was not taxed as a business profit (art.32 DTI – Income from Investments). In other words,
any income from investments received by commercial companies will not be subject to
withholding tax if the quarterly tax calculations include this income. (Section 3 Article 31
DTI).
Income in the form of interest includes any income arising from loans, deposits, guarantees
and current accounts. It also includes income from government securities, income from
bonds, and negotiable securities issued by public and private companies and income from
cash bonds
Dividend income, as mentioned in the Law No 16/2005 on Direct Taxes on Income, is
subject to a flat tax of fifteen percent (15%).
If dividend distribution was subjected to withholding tax as stipulated in the law, the taxpayer
does not pay tax on income.
Dividend income includes income from shares and similar income distributed by companies
and other entities.
In the determination of business profits of a resident company, dividends and other profit-
shares received from a resident entity are exempt.
The profits which pay dividends have been taxed at 30% before the dividend is deducted.
One could thus argue that the dividends have already been subjected to tax.
Income in the form of dividends includes income arising from shares and participation in the
profits in any type of company as well as similar incomes distributed by any entity
enumerated by article 38 of the law. Withholding tax is 15%
The term "royalty income’ includes all payments of any kind received as a payment for the
use of, or the right to use, any copyright of literary, craftsmanship or scientific work
including cinematograph films, films, or tapes used for radio or television broadcasting. The
term also includes any payment received from using a trademark, design or model, computer
application secret formula or process. It also includes the price of using, or of the right to use,
industrial, commercial or scientific equipment or for information concerning industrial,
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18
commercial or scientific knowledge. Royalty income also includes payments for natural
resource payments. Again tax is 15% flat rate
Rental income: All revenues derived from rent of machinery and other equipment and land
including livestock in Rwanda, are included in taxable income, reduced by:
a) ten per cent (10%) of gross revenue as deemed expense;
b) interest paid on loans;
c) depreciation expenses as determined according to Article 24of the DTI. Income
derived from the rent of buildings or houses incorporated as assets mentioned in
Article 38 of this law is subject to corporate income tax and is exempted from rental
income tax.
Rental incomes arising from houses and buildings incorporate as assets of qualifying entities
(Art 38) are subject to corporation income tax and are exempted from rental income tax.
(Article 36 DTI).
Finally, it should be noted that some incomes can be compared to investment income as they
are deducted at source using a rate identical to that used on investment income. These
incomes include any profits from the lottery or any another games of chance (art. 51 DTI).
And yet more finally, lottery and gambling winnings are also subject to withholding tax at
15% and this deducted at source.
All withholding tax agents must complete returns and payments within 15 days of the period
end,.
F Payment of tax
The rate of income tax applied to investments is not applied on a progressive basis as is the
case for the majority of income tax payments described above. They are instead applied using
a proportional rate which is fixed at fifteen percent (15%) of the assessed incomes (Article 33
parag.1 DTI).
“A withholding tax of fifteen percent (15%) is levied on the following payments made by
resident individuals or resident entities including tax-exempt entities:
These incomes are any dividends, except those paid between companies, any interest paid on
deposits, royalties, payments for performance by musicians, artist sportsperson and the profits
of lotteries and other games of chance which have a monetary value (Article 51 DTI). The
payments are subject to tax even when paid by or through an entity not resident in Rwanda
For other investment incomes (interest other than that paid on money deposits, or rental
incomes, other than those on houses and buildings and received by physical persons) the
recipient will have to submit an annual declaration and to pay tax at a proportional rate of
15% by, at the latest, the 30th day of the sixth month of the following fiscal year (Article 12
DTI).
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Chapter 2
Income Tax on Companies
Contents
A. Tax payers concerned
B. Tax base
C. Payment
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20
A. TAXPAYERS CONCERNED
The tax law which applies to Business Entities and individuals who are not employees also
applies to companies. But companies and similar organisations as described in Article 38 DTI
are subject to additional regulations.:
According to article 38, the following entities shall be subject to corporate income tax:
1. Companies established in accordance with Rwandan or foreign law;
2. Cooperative societies and their branches;
3. Public business enterprises;
4. Partnerships;
5. Entities established by Districts and the City of Kigali, to the extent that these entities
are involved in business activities;
6. De facto companies or associations and any other entities that perform business
activities, and are established for the purpose of making profits.
.
But much of what applies to companies is also defined in Articles 1 to 36 which apply to
companies as well as individuals who are tradesmen or members of the professions.
Articles 37 et seq apply to businesses registered as companies or who are covered by Article
38 – referred above
Tax residence
Unless specifically stated otherwise (see above), a commercial company is taxable in Rwanda
only if it has a tax residence here. Such an entity is regarded as resident in Rwanda if, during
a fiscal year (Article 3 para. 3 DTI):
• If it is established in accordance with Rwandan legislation even if the company does
not have its effective management in Rwanda;
• The entity is effectively directed from Rwanda at any time during the fiscal year even
if it is established in accordance with foreign legislation;
• The entity is a state-owned Rwandan company.
However, commercial companies which do not meet these conditions will be liable to tax
only on their profits arising from a permanent establishment in Rwanda (Article 40 para. 2
DTI). A double taxation situation is avoided by a system of tax credits and double taxation
relief agreements (see above). It is important to remember that even where an official Double
Taxation Agreement does not exist, tax paid in another country should be taken into account
when assessing tax due in Rwanda. Where tax paid in the other country is higher than paid in
Rwanda does not mean that an allowance will be given iN Rwanda. The same would happen
to a Rwandan business operating in the UK.
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B. TAX BASE
Principles
All income less deductible expenses is subject to Corporate Income Tax.
Article 37 establishes the Corporate income tax and Article 41 of DTI establishes the rate to
be 30%.
Exemptions
Dividends paid between companies
Art. 45 DTI exempts taxable profits, any dividends or participations in the received profits of
a resident company. The reason for this measure is that, as far as the company making the
distribution is concerned, dividends have already been taxed in the form of income tax
collected from the entity as they are not deductible expenses.
Gains arising on the reorganizations of companies
As far as a reorganization is concerned, the law aims to address several situations (Article 46
DTI):
• The amalgamation of at least two resident companies;
• The acquisition of at least fifty percent (50%) of the shares or voting rights, by
number or value, of a resident company, in exchange for shares in the acquiring
company;
• The division (“scission”) of a resident company into at least two resident companies.
In case of reorganization of companies, the transferring company is exempt from tax in
respect of capital gains or losses realized on reorganization. The receiving company values
the assets and liabilities involved at their book value as stated by the transferring company at
the time of reorganization. The receiving company depreciates the business assets according
to the rules that would have applied to the transferring company as if the reorganization had
not taken place.
In case of reorganization, the receiving company is entitled to carry over the reserves and
provisions in the books of the transferring company, subject to the conditions that would have
applied to the transferring company as if the reorganization had not taken place. The
receiving company assumes the rights and obligations of the transferring company in respect
of such reserves and provisions.
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C. ASSESSMENT AND ALLOWANCES
1. Principle
Once the taxable profit is established by the taxpayer, it must be rounded down to the nearest
thousand Rwf (Article 41 DTI).
The rate of the tax is fixed at thirty percent (30%) of taxable profit.
2. Reduction of the rate of the tax through investment promotion and incentives.
a) Companies with large numbers of employees
In order to promote investment and to encourage the companies to engage employees, the tax
law has outlined tax incentives but only for approved investors. In practice, this takes the
form of a discount of the rate of tax applied as the number of employees increases (Article 41
para. 3 DTI).
• If the company employs between one hundred (100) and two hundred (200)
Rwandans, the rate of tax will be reduced by two percent (2%);
• If the company employs between two hundred and one (201) and four hundred (400)
Rwandans, the rate of tax will be reduced by five percent (5%);
• If the company employs between four hundred and one (401) and nine hundred (900)
Rwandans, the rate of tax will be reduced by six percent (6%);
• If the company employs beyond nine hundred (900) Rwandans, the rate of tax will be
reduced by seven percent (7%).
However, the employees to be taken into account are those where:
• the business is their prime employer – i.e. the tax deducted is not simply 30% withholding
tax which would happen where the person works for several employers (see Articles 48 and
50 DTI)
• the employees are paying income tax – their pay is greater than Rwf 30,000 per month
• the employees are employed for at least 6 months during the fiscal year (art. 41 in fine DTI).
This provision obviously aims at encouraging companies to hire better-paid Rwandan
employees.
b) Exporting companies
A discount in the rate of the tax is also in place for companies which operate in export fields
in order to encourage them to continue to play a positive role for the growth and development
of the Rwandan economy. This exemption is based on sales turnover generated by export
activities (art.42 para. 1 and 2 DTI):
• If export activities generate between three million US dollars ($3,000,000) and five
million dollars ($5,000,000) for Rwanda, the rate of the tax will be discounted by
three percent (3%);
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23
• If export activities generate more than five million dollars (5 000 000 $) for Rwanda,
the rate of tax discount will be five percent (5%).
At an exchange rate of Rwf 600 to 1 USD, 3 million USD are the same as Rwf1.8 billion
It should be noted that the reductions in the rate of tax for exports cumulate with the
reductions of the rate of tax for occupation of workers.
c) Declaration and payment of the tax
Art. 43 DTI which regulates the tax declaration and the modes of payment of the tax on the
profits of companies are almost identical to article 12DTI, its counterpart for income tax.
Therefore, the applicable rules for the declaration and the payment of the income tax apply
mutatis-mutandis for the declaration and the payment of the income tax of companies.
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BLANK
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25
Chapter 3
Value Added Tax
Contents
A. Introduction and mechanism
B. Constraint
C. Responsibilities and Obligations
D. Exemptions and Operations which are zero rated
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26
A. CHARACTERISTICS AND MECHANISM
Characteristics of VAT
The characteristics of VAT are as follows:
• VAT is a tax on Sales which constitutes a tax on the expenditure paid by the ultimate
consumer since it concerns a general tax on products and services. Value Added Tax
is calculated on the costs excluding VAT (input VAT). The “added” element comes
from the fact that a purchaser who also sells, pays to the RRA the tax invoiced out
(output tax) less the input tax. I.e he pays only VAT which relates to the difference
between the sales less the goods purchased to start with.
• VAT is a tax collected by split payments which is received each time a chargeable
commercial transaction is made. It is not a tax on production which would be due
from just one intermediary in the chain;
• VAT is a neutral tax. Except in some rare cases, a person who is not the ultimate
consumer recovers the whole of the VAT which has been invoiced to him by
suppliers. The tax is consequently not an element of the cost price and the length of
the chain of production does not impact on the amount of the tax due. This tax is
supported entirely by the ultimate consumer;
• VAT is a transparent tax. It is possible, at each stage of the marketing of a product,
to determine the amount excluding VAT and the amount of the VAT included.
Indeed, if one knows the price excluding VAT of a good or of a service (PEVAT) one
can calculate the amount of the VAT included as well as the VAT inclusive price
(PVATI) by the following formula: PVATI = PEVAT + (PEVAT x VAT rate).
• VAT is embodied in the Law No. 06/2001 of 20/01/2001 and in referred to here as
LVAT
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27
Mechanisms of VAT
The taxable person, unless exempted (for this concept, see above), effectively plays the role
of tax collector, i.e. they invoice the tax to their customer and they pay it to the tax
administration after deduction of the VAT which is paid by them to their own suppliers.
Example: Working hypothesis: single rate of VAT with 10%.
Operations
PHTVA
VAT
VAT paid to the RRA
A producer sells
sugar to a wholesaler
100
100x10% = 10
10
The wholesaler
resells them with a
local wholesale
dealer.
200
200 X 10% = 20
20-10 = 10
The local wholesale
dealer resells sugar
with a retailer
300
300 X 10% = 30
30-20=10
The retailer sells to a
consumer
400 plus VAT
400X10%=40
40-30=10
TOTAL VAT PAID
40
Let us take again an example with the same producer price (100) and the same price to the
end consumer (400 plus VAT) but with fewer intermediaries:
Operations
PHTVA
VAT
VAT paid to RRA
A producer sells
sugar to a wholesaler
100
100x10% = 10
10
The wholesaler
resells them with a
retailer
300
300 X 10% = 30
30-10=20
The retailer sells to a
consumer
400 plus VAT
400 X 10% = 40
40-30=10
TOTAL VAT PAID
40
It will be noted that the number of transactions has no impact on the amount of tax finally
paid to the Tax Administration since in the two examples, the VAT to be paid to RRA (40)
corresponds exactly to the rate of the VAT (10%) applied on the price paid by the ultimate
consumer (400), even though the number of intermediaries is different in each case.
B. CSUMMARY OF LAW(S)
Concepts
Art 12. 1 of Law Number 06/2001 (dated 20th January 2001) relating to the introduction of
VAT states that supplies of goods and provisions of services carried out subject to payment
by a taxable person acting in that capacity are regarded as being chargeable.
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This article was supplemented by the provisions of article 10 of the Ministerial Order
Number 001 (dated 13th January 2003), relating to procedures concerning the imposition of
VAT. These specify that a taxable person is: "anybody who carries on a chargeable activity
in Rwanda…".
However, it is necessary to distinguish two (2) categories of taxable people (art.10 of Law
Number 25/2005 (dated 4th December 2005) which deals with the creation of tax procedures,
namely;
Any person who undertook a chargeable activity in the preceding fiscal year exceeding
twenty million francs (20.000.000 RwF), or five million Rwandan francs (5.000.000 RwF)
in the previous quarter, is required to register and submit a VAT return to the Tax authorities
within seven (7) days of the end of the period.
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-recoverable input tax.
Example - All sellers are registered
Sugar producer
Processor
Wholesaler
Retailer
Inputs = Costs of production
50
118
236
354
Recoverable Input VAT
18
36
54
Margin
50
100
100
100
Sale
100
200
300
400
VAT %
18%
18%
18%
18%
Output VAT
18
36
54
72
Total invoice
118
236
354
472
Paid to RRA
18
18
18
18
Margin
50
100
100
100
The final consumer pays Rwf472 and unless he sells on and is registered he cannot reclaim
the “input” VAT.
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29
Example - All sellers are registered except the final
Not registered
Inputs = Costs of production
50
118
236
354
Recoverable Input VAT
18
36
Margin
50
100
100
100
Sale
100
200
300
454
VAT %
18%
18%
18%
Output VAT
18
36
54
-
Total invoice
118
236
354
454
Paid to RRA
18
18
18
Margin
50
100
100
100
The final consumer pays Rwf454
To obtain the same margin as in the example (1) where all the businesses are registered, the
last in the chain in example 2 has to charge not quite as much as the final registered supplier,
but considerably more than the Rwf400 before VAT.
Example - The final supply is zero rated - supply to in-flight stores or export
Food producer Processor Wholesaler
/
Distributor
Supplier to
Airline /
Overseas
customer
Inputs = Costs of production
50
118
236
354
Recoverable Input VAT
18
36
54
Margin
50
100
100
100
Sale
100
200
300
400
VAT %
18%
18%
18%
0%
Output VAT
18
36
54
-
Total invoice
118
236
354
400
Paid to / (Reclaimed from ) RRA
18
18
18
(54)
Margin
50
100
100
100
Note that as the final supply is zero rated, the Input VAT can be reclaimed, but there is no
Output VAT.
In the situation where some supplies are exempt and some subject to VAT, the supplier must
relate input VAT to one or other category. Input VAT related to exempt supplies cannot be
offset against any output VAT.
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Suppose the registered business is selling transport and only a proportion of the services
involve public transport in “bus or coach licensed …and having a seating capacity for
fourteen or more adult persons” (Article 86 5 (b) LVAT). These are exempt supplies and the
supply invoice carries no VAT where the inputs may well carry VAT., The other transport
services will be subject to VAT.
Only the input VAT relating to non-exempt supplies can be reclaimed from RRA.
In circumstances of mixed supply and where the inputs cannot be easily allocated to either
exempt or non-exempt outputs, the un-attributable supply is apportioned usually on the basis
of sales of exempt supply as a percentage of total supplies. It is important that any such
apportionment should be agreed with Commissioner General of RRA – see Article 42 (b)
LVAT
C Responsibilities and obligations
Any registered person who carries out deliveries of goods or provisions of services must
invoice the price with the VAT added and showing the VAT. And insofar as its operations
are subject to VAT, the taxable person can deduct from the payment to the RRA the VAT for
which they have been invoiced. Moreover, it is required to pay the tax charged to the public
treasury.
In addition the taxable person also has a series of obligations concerning accounting for
VAT: these include rules on bookkeeping, retention of invoices etc. (Article 14 25/2005 on
Tax procedures ).
LVAT refers to Law 06/2001 of 20/01/2001 on the code of Value Added tax
Taxable operations
1. Supply of goods
"Consideration" in relation to a supply or import, means the total amount in money or its
equivalent paid or payable for the supply or import by any person, directly or indirectly. It
includes any duties, levies, fees, or charges paid or payable on, or by reason of, the supply or
import, other than value added tax, reduced by any price discounts or rebates for prompt
payment, allowed and accounted for at the time of supply or import (Article 85.6 LVAT).
"Goods" means tangible movable property, buildings and other real property developments,
and items treated as goods under this Law, but does not include money; (art 85.8 LVAT).
For purposes of the application of the VAT, intangible goods such as a service, gas or
electricity are treated in the same way as tangible or movable property.
2. Provision of services
Provisions of services may be defined as all the operations which do not require a transfer of
property but which are made with a counterpart including leases, hire or the transfer of a right
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or interest. It should nevertheless be specified that the provisions of services made by an
employed person or a government official are not taxable operations as far as VAT is
concerned.
3. Imports
Imports can be either a supply of goods or a provision of services. The import of goods refers
to goods coming into Rwanda from a foreign country. It relates to a provision of services if it
is carried out under one of the following two (2) conditions (Article 85.10 of the LVAT):
• The service provider is a non-resident;
• The person receiving benefits of the services is a resident in the ordinary sense of a
business carried on outside Rwanda but the services are supplied for use or
consumption in Rwanda.
D Exempted and Zero rated businesses
VAT Exemption
Art. 86 of the LVAT describes a series of operations which are exempted from VAT. These
operations give place neither to VAT invoicing, nor VAT declaration or recording for the
taxable people who carry them out. However, by the same token they do not have the right to
deduct any VAT that they pay on the goods and services that they purchase.
As modified and completed by article one of Law Number 29/2010 (dated 30th June 2010),
“Notwithstanding the powers vested in the Minister by the provisions of Article 15 of this
Law, the following goods and services are exempted from Value Added Tax”:
1 Water supply services:
a) the main supply of clean water;
b) sewerage treatment services to protect the environment for non-profit motives.
2 Goods and services for health purposes:
a) the supply of health and medical services;
b) articles designed for persons with disabilities;
c) the supply of equipment and drugs to hospitals and health centres;
d) the supply or importation of drugs and medical equipment made by authorized
persons for medical use, to patients and persons with disabilities
Bodies eligible for exemption under point 2 (b) shall be those recognised by the laws of
Rwanda as public institutions, social organisations and any other form of voluntary or
charitable institution.
3 Educational materials and services:
a) educational services provided to pre-primary, primary and secondary students;
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32
b) educational services provided by social organizations to students and other
youths, with the aim of promoting the social, intellectual and spiritual
development of the members for non-profit purposes;
c) educational services provided to vocational and other higher learning
institutions;
d) educational materials supplied directly to learning institutions.
Eligible bodies for the purposes of this exemption shall be those recognised by the laws as
public institutions, not for profit social organisations and any other form of voluntary or
charitable institutions.
4 Books, newspapers, journals and other electronic equipment used as educational
materials.
5 Transport services:
a) transportation of persons by road in busses and coaches licensed under the law
governing the transport vehicles with a seating capacity for fourteen (14) persons
or more;
b) transportation of persons by air;
c) transportation of persons by railway;
d) transportation of persons or goods by boat;
e) transport of goods by road.
6 Lending, lease and sale :
a) the sale or lease of an interest in land;
b) the sale of a building or part of a building, flat or tenement meant for residential
purposes;
c) the renting of, or other grant of the right to use, accommodation in a building used-
predominantly as a place of residence of any person and his family, if the period of
accommodation for a continuous term exceeds 90 days, unless the building is
meant for accommodation.
7 Financial and Insurance Services:
a) the premiums charged on the provision of life and medical insurance
services;
b) fees charged on the operation of current accounts;
c) transfer of shares;
d) capital market transactions for listed securities.
8 Precious metals
a) The supply of gold to a Bank in bullion form.
9 Funeral services:
a) The supply of any goods or services in the course of a person's burial or
cremation, including the provision of any connected licence or certificate.
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33
10 Energy supplies:
a) energy saving lamps;
b) solar water-heaters;
c) wind energy systems;
d) liquefied petroleum gas, cylinders and invertors;
e) equipment used in the supply of biogas energy;
f) kerosene intended for domestic use, premium and gasoil.
11 Trade Union subscriptions.
12 Leasing of exempted goods.
13 All Agricultural and Livestock products, except for those which are subsequently
processed, are exempted from VAT. However, milk which is processed by local
industries is exempted from this tax.
14 Agricultural inputs and equipment.
15 The following goods and services imported by persons with the appropriate investment
certificates are exempted from Value Added Tax:
a) machinery for industries;
b) raw materials for industries;
c) building and finishing materials imported by an investor fulfilling the
requirements determined by an order of the Minister in charge of finance;
d) refrigerating vehicles, tourist vehicles, ambulances, fire-extinguishing
vehicles, hearses;
e) vehicles and movable property and equipment for foreign and Rwandan
diaspora investors and their expatriate staff;
f) equipment for tourism and the hotel industry and relaxation sites defined on
the list determined by the Minister in charge of finance;
g) goods and services meant for free economic zones;
h) medical equipment, medicinal products, agricultural, livestock, fishing
equipment and agricultural inputs;
i) equipment in education field;
j) tourist chartered aeroplanes.
The exemptions referred to under points a), h) and i) concern all investors, even those
not possessing the investment certificate.
16 Equipment for information, communication and technology as they appear on the
annex to this law are exempted from the value added tax.
17 Mobile handsets and the subscriber identification module (SIM card) connected to
them.
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34
The Minister of Finance has prepared a list of the exempted products which was annexed to
the LVAT.
Operations imposed at a zero rate
In contrast to VAT-exempt transactions, the input tax for zero rated supplies is reclaimable.
Therefore, the taxable person must be record, invoice and declare VAT. The chargeable
operations which are treated as zero rate are exports and certain operations undertaken by
various categories of people (Article 87 of the LVAT). They include in particular the
following situations:
• Goods imported by a diplomatic mission accredited in Rwanda for uses inherent to
the mission but subject to reciprocity in the country concerned in the country
concerned;
• Goods or services provided under a convention between the Rwandan Government
and of financial backers within the framework of finances projects.
A Ministerial order determines the conditions and the procedures concerning taxation at zero
rate for these categories.
Deductions and restitutions
1. Notions of the deduction
The mechanism of deductions plays an essential role in the adoption of VAT, because it is
this that allows the system to be “neutral and transparent”.
In VAT, the deduction is made “tax from tax”: the taxable person deducts the tax it can
deduct from expenditure that it has made from the tax that it owes to the Treasury. The
mechanism is significantly different from direct taxation where the deduction is made “base
to base”; i.e. where deductible expenditure is offset against the taxable amount.
2. Characteristics of the deduction
As regards VAT, the deduction has the following characteristics:
• The deduction is immediate in the sense that the taxable person is not required to
immediately make payments of the price of his supplies to his supplier or sell or use
all the stock;
• The deduction is total, i.e. the tax paid to a supplier is deductible for the taxpayer’s
total amount due and also the fact that the tax on a supply is deducted at once,
whatever its value or its lifespan;
• The deduction is inclusive, in the sense that all the deductions relating to one
declaration period (usually annual) is added together in the declaration.
3. Conditions of deduction
Basic conditions
The principles of deduction are defined in art. 41 of the LVAT.
Three (3) conditions must be necessarily met in order to be able to profit from the right of
deduction:
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35
• It is necessary to be a registered taxable person. The right of deduction is not
available either to consumers nor to taxpayers carrying out exempted operations;
• The operations must be chargeable, whether it is at the normal rate of the VAT or the
zero rate;
• The tax must be due. VAT is due at the moment that the goods are delivered or at the
moment when the supply of the services is made (Article 20 of the LVAT). The issue
of when payments are actually made to the supplier therefore does not impact on the
right to deduction. The tax nevertheless must be legally due. Just because tax is
mentioned on the invoice, it does not necessarily mean that this is the case. This is
particularly important as far as tax evasion is concerned.
2. Formal requirements
From Law No, 25 of 04/12/2005 on Tax procedures
Article 14: Value Added Tax invoice
A Value Added Tax invoice is an accounting document prepared in the form determined by
the Tax Administration and which shows 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;
8. serial number of the Value Added Tax invoice.
In case the sale of goods or services is carried out at retail to clients who are not value added
tax registered taxpayers, a simplified cash receipt determined by the Tax Administration may
be issued instead of a value added tax invoice.
b. Periodical declarations
In order to be able to reclaim a refund for the input tax, the registered person must submit a
declaration in the office of the RRA (Article 37 LVAT). This Declaration must be deposited
within fifteen (15) days following the accounting period concerned. If the declaration is not
made within this time, the taxpayer may be required to pay interest.
According to art. 38 LVAT, the first accounting period corresponds to the month which
follows that of registration. From then on, the accountable period will equate to one month
except when amended by the Commissioner General of the RRA who can determine another
accounting period (generally three months) in its place.
c. Repayments
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When the periodic declaration of the taxable person reveals a balance in his favour, the
Commissioner General may repay to the taxpayer the amount that remains in credit due to the
surplus. This should be repaid within thirty (30) day from either the end of the period relating
to the declaration or from the receipt of the last declaration of tax due.
Localization of operations
It is important to locate the chargeable operations involved because, under the terms of the
principle of the territoriality VAT, they are taxable in Rwanda only if they took place in
Rwanda. But in theory, the place of delivery of goods is regarded as the place where the
goods involved are placed at the disposal of the purchaser. If this location is in Rwanda, then
the delivery of the goods is presumed to take place in Rwanda.
With regard to the character of the provision of services, the criteria used to locate them will
be, by necessity, more abstract than for the deliveries of the goods. The system outlines a
series of presumptions, which gives guidance as to where the service is deemed to have taken
place.
According to article 9 LVAT, services shall be regarded as supplied in Rwanda if the supplier
of the services:
a) has a place of business in Rwanda and no place of business elsewhere;
b) has no place of business in Rwanda or elsewhere but his usual place of residence is in
Rwanda,
c) has places of business in Rwanda and elsewhere but the place of business most directly
concerned with the supply of the services in question is the one in Rwanda; or
d)has no place of business in Rwanda and has place of business elsewhere but the recipient of
the services uses or obtains the benefit of the services in Rwanda
Determination of VAT
1. Base of the VAT
In theory, the tax due is based on payments received or those paid to obtain goods or services
(Article 16 LVAT). This may be in monetary or non-monetary terms. When the payment is in
a monetary form, the taxable amount is the price paid for the transaction. In this case, any
discounts and the rebates are taken into account unless the payment is carried out in
instalments (art.19 LVAT).
However, in cases where part of the payment is in non-monetary terms or when the price is
below what would normally be expected for the goods and services concerned, the open
market value is taken into account. This measure is introduced to guard against tax evasion or
tax avoidance which would occur if the taxable amount below that normally obtainable on the
open market, or by fixing part of the silver price and the other in delivered well or service
rendered. What would be not easily appraisable for the tax department?
The open market value is defined as the price for which the goods and the services concerned
could be delivered or rendered in the ordinary course of businesses to a person independent
of the supplier or the person receiving the benefits (Article 17 LVAT).
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2. Rate of VAT
The rate of the VAT is applied at a proportional rate currently fixed at eighteen percent (18%)
of the taxable amount (Article 34 LVAT). Rwanda does not have reduced rates on some
items as exists in some other countries. However, Rwandan legislation provides that certain
supplies of goods or provisions of services either are exempt from VAT or taxed at a zero
rate, as discussed above.
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BLANK
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CHAPTER 4
DECENTRALIZED TAX - FIXED ASSET TAX
Contents
A. Purpose of the Law
B. Fixed Asset Tax
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A. Purpose of the Law 59/2001 of 31/12/2011 Establishing the sources of
Revenue and property of decentralized entities and governing their
management
Article One : Purpose of this Law
The purpose of this Law is to describe and establish the sources of revenue and property of
decentralized entities in Rwanda and to govern their management.
In this Law (Article 2), the following terms shall have the following meanings:
1. “market value”: amount of money for which a property should be sold on the date of its
valuation in the open market by a willing buyer;
2. “market value of an usufruct right”: amount of money paid to acquire such an usufruct
right;
3. “improvements”: immovable structures or amenities that are not buildings but increase
the actual value of a parcel of land or a building;
4. “title deed”: a written legal document confirming a person’s right to a property, which is
delivered according to the law by the competent authority;
5. “assessment cycle”: a period of four (4) years that commences on January 1st of the first
year after the commencement of this Law as well as each period of four (4) consecutive
years thereafter;
6. “parcel of land”: a plot of land with clear boundaries which is wholly owned by one
person or several persons in divisible shares;
7. “public institution”: an legal personality managed in accordance with laws governing
public service, to which the State allocates funds in order for it to carry out specialized
activities for public;
8. “building”: an immovable and stable construction which protects humans and properties,
animals or machineries permanently, or in the long term, from the disaster. Buildings
include also houses;
9. “decentralized entities”: local administrative entities with legal personality and
administrative and financial autonomy;
10. “date of valuation”: the date of reference for an assessment of value conducted during
an assessment cycle;
11. “owner”: a person who is registered as a holder of a property or who is deemed to be the
holder thereof in accordance with Rwandan law;
12. “tax prescription period”: a period after which an administration has no right to recover
tax due from the taxpayer;
13. “person”: an individual, a legal entity or an association of individuals;
14. “taxpayer”: any person who is subject to tax in accordance with this Law;
15. “fixed asset tax”: a tax levied on immovable property;
16. “ rental income tax” : a tax imposed on individuals who earn income from rented
immovable property;
17. “trading license tax” is a tax levied on profit-oriented activities;
18. “residential property”: a building exclusively intended for being occupied as a
residence without any profit-oriented activity being carried out therein or in the plot of
land on which it is erected;
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19. “fixed asset”: a property that has a fixed location and cannot be moved elsewhere and
includes parcels of land, buildings and improvements thereto.
Article 3: Income taxable year
The income taxable year starts on January 1st and ends on December 31st of the same year
except for rental income tax
Article 4: Revenue and property of decentralized entities
The revenue and property of decentralized entities shall come from the following sources:
1. taxes and fees paid in accordance with this Law;
2. funds obtained from issuance of certificates by decentralized entities and their extension;
3. profits from investment by decentralized entities and interests from their own shares and
income-generating activities;
4. fines;
5. loans;
6. Government subsidies;
7. donations and bequests;
8. fees from the value of immovable property sold by auction;
9. funds obtained from rent and sale of land of decentralized entities;
10. all other fees and penalties that may be collected by decentralized entities according to
any other Rwandan law.
All revenue projections of decentralized entities shall be included in their annual budget.
Article 5: Local taxes
Taxes which are assessed and collected by decentralized entities are the following:
1° Fixed asset tax;
2° Trading licence tax;
3° Rental income tax.
This chapter deals in detail with Fixed Tax. F2.4 covers the other decentralised taxes.
B. Fixed Asset Tax
Fixed asset tax base - Article 6
Fixed asset tax shall be levied on the following:
1. the market value of parcels of land;
2. 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;
3. the value of land exploited for quarry purposes;
4. the market value of a usufruct with a title deed.
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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.
Obligations for taxpayers
The fixed asset tax shall be assessed and paid by the owner or deemed owner.
The local decentralised entity is not responsible in the first place for valuing the property. The owner
will obtain valuation from the purchase price if it a new acquisition – (see Article 17) or by
employing the expert assistance of a valuer.
Effectively, this is Self-Assessment.
For the purposes of the application of this Law, 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.
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.
Usufruct
When a person has a usufruct on a parcel of land, a building or improvements thereto, the holder of
such a right shall be deemed to be the owner. The tax liability for the usufructuary shall start from the
date of commencement of the usufruct.
A usufruct is where a person does not own the property but has the use of it as if he/she did
Co-ownership of fixed asset
When a fixed asset is owned by more than one person, 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 who will then act for
the group.
Self-assessment
Every taxpayer must, not later than March 31st in the first tax year, file a tax declaration to the
decentralized entity where the asset is located .
Fixed asset tax declaration
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Decentralized entities shall make available tax declaration forms no later than the January 31st of
every year and on January 31st of the years which follow general revisions as provided for in Article
15 of this Law.
The tax declaration shall be signed personally by the taxpayer, his/her proxy or the usufructuary and
thereafter transmitted to the decentralized entity where the asset is located.
Non-receipt of a fixed asset tax declaration form shall not relieve the taxpayer of his/her obligation to
pay the tax.
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.
Review and re-assessment of tax by the decentralized entity
The tax declaration shall be reviewed by the decentralized entity within a period of six (6) months
starting from April 1st of the year the tax declaration was filed. If the tax declaration was filed late, the
six (6) months period shall start on the date the concerned decentralized entity receives it. The review
shall be based on the nature and general state of the fixed asset, its location and its actual or zoned
use.
Tax assessment notice – Art.14
The tax assessment notice 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. reference to the taxpayer’s right to complain and appeal.
Article 15: Assessment cycles and general revision
The assessment cycle is every 4 years. At the commencement of each cycle, a new general revision
of market value shall take place in accordance with Articles 10, 11, 12, 13 and 14 of the Law 59/2011.
A new fixed asset tax declaration shall be filed by not later than March 31st of the first year of each
tax assessment cycle.
The new self-assessed tax amount must be paid for four (4) consecutive years without filing a new tax
declaration or assessment notice.
Appreciation and depreciation
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If, due to changes to a fixed asset, the value of that asset increases or decreases by more than twenty
percent (20%) within an assessment cycle, the taxpayer shall submit a new tax declaration with all
details within a period of one (1) month after the value has so changed.
Upon receipt of the tax declaration, the decentralized entity shall review the new tax declaration, and
where applicable, issue a new assessment as provided for in Article 13 of this Law.
Reasons for an increase in value shall include the upgrading of a building or the adding of additional
floors to a building, general renovation or extension or improvement of a building. Reasons for a
decrease in value shall include the demolition of a building, in whole or in part, after a natural
disaster. A global fluctuation of the market value between two general revisions shall not be a reason
for a new assessment.
Article 17: Valuation of fixed asset
It is the responsibility for the owner (or deemed owner) to value the asset or have the property valued.
Undeveloped land: If the fixed asset constitutes a parcel of land that has not been developed or built
upon, the market value shall constitute a per square metre value times the size of that parcel of land.
Developed property: Where the fixed asset consists of a parcel of land and a building and
improvements, the aggregate value of the land, the building and improvements constitute the market
value of such fixed asset.
In the first instance, unless it is patently clear that the purchase price is below the market value, the
purchase price will be the valuation of the property. The taxable value should be rounded up to the
next full one thousand Rwandan francs.
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.
Article 19: Tax rate
The tax rate is fixed at a thousandth (1/1000 or 0.1%) of the taxable value per year.
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The tax rate for lands exploited for quarry purposes is fixed at a thousandth (1/1000) of the taxable
value per year.
Objection to a calculated value
Objections must be filed with the local entity within one (1) month after receipt of the assessment. For
an objection to be considered, it must be in writing, justified, clear and signed by the taxpayer,
his/her proxy or the usufructuary.
Within a period of two (2) months after receiving the letter of objection, the concerned decentralized
entity must notify its decision. If it is satisfied that the objection was justified, the concerned
decentralized entity must pay back the overpaid tax with interest in accordance with the provision of
Article 23 of this Law within one (1) month after notifying the decision. If the decentralized entity
does not notify its decision within two (2) months, the objection of the taxpayer shall be deemed to be
founded.
Appeal before a competent court
If the taxpayer is not satisfied with the decision of the decentralized entity, he/she can lodge an appeal
with the competent court.
If the court finds that the appeal of the taxpayer is justified and the decision was unfairly imposed
against him/her, the concerned decentralized entity must pay back the overpaid tax within one (1)
month after the decision has been taken. Interests accrued thereon must be paid to the taxpayer in
accordance with the provisions of Article 23 of this Law.
Tax payment
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.
Article 23: Due date for tax payment
The tax payment must be paid not later than March 31st of the tax year. Additional tax resulting from
a tax assessment notice of the concerned decentralized entity shall be paid within one (1) month from
the day the tax assessment notice is issued to the taxpayer.
When the owner of a fixed asset, his/her proxy or usufructuary has disappeared without having
appointed a proxy, tax collection documents shall be sent through the post office for a period of at
least three (3) months and shall be posted in all administrative buildings within the decentralized
entity where the fixed asset is located. If the tax due is not paid within the prescribed period, the
concerned decentralized entity shall apply procedures provided under this Law.
The objection or appeal against the assessed tax shall not relieve the taxpayer of his/her obligation to
pay the tax assessed. When the taxpayer exercises his/her right to object or appeal, the total amount of
assessed tax must be paid by the due date provided under Paragraph One of this Article. If the
taxpayer’s objection is justified, the overpaid tax must be refunded within one (1) month after the
decision is made. In this case, the concerned decentralized entity must pay to the taxpayer interests
accruing on the overpaid tax in accordance with this Law.
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Change of ownership of fixed asset and payment of tax
When fixed assets already exist or are purchased between January 1st to March 31st, the fixed asset tax
shall be paid by the (new) owner thereof in a single instalment for the entire year.
Where the fixed assets change ownership after March 31st, the former owner must pay the tax as
should have been done (as provided under the Law). When the person who sells the asset fails to meet
his/her obligations as a taxpayer, fines and late interests shall be calculated and paid by him.
No transfer of ownership of fixed asset shall take place without a tax clearance certificate issued by
the concerned decentralized entity.
Fines 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 of tax payment
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.
Tax payment in instalments
The 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.
Article 28 of Law 59/2011 forbids any one should interfere with the activities and responsibilities of
the decentralized entity. Anybody who does so alone or conspires with others to do so can be fined
an administrative fine of twenty thousand (20,000) but not exceeding one hundred thousand
(100,000) Rwandan francs without prejudice to other penalties provided under criminal law.
Procedures for the enforcement of this Law
Articles 29 -
If by the due date, the taxpayer has not yet filed a tax declaration, and paid the tax or has not applied
for tax deferral, or the tax deferral was not granted, the concerned decentralized entity shall have the
right to start procedures to identify and recover unpaid taxes.
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Before starting the tax recovery procedures, a written warning must be sent to the owner(s) with all
the details of the unpaid taxes and actions planned to enforce the law. The taxpayer shall be afforded
the opportunity to pay the taxes but with interest.
If the tax is not paid within one (1) month of dispatch of the warning letter, the concerned
decentralized entity has the right to start enforcement procedures.
Fixed asset tax which remains unpaid is a debt which can be claimed before competent courts.
The decentralized entity where the fixed asset is located shall have the right to attach:
1. rent owed by a tenant to the taxpayer up to the amount of rent owed Article 32,
2. money owed to or held on behalf of the taxpayer by third parties – Article 33,
3. movable assets belonging to the taxpayer, - Article 35
4. fixed assets belonging to the taxpayer – Article 35 .
Also part of article 33- Once the official request for the payment of taxes has been sent, no money
shall be used by the third parties without authorization by the concerned decentralized entity. If the
third parties did not notify the substantive reason for non-payment within thirty (30) days as from the
date the notification in writing was received, they are assumed fully liable for the debt to the
concerned decentralized entity in the amount equal to the amount of money they owe the defaulting
taxpayer.
In respect of unpaid taxes, precedence shall be given to the payment of fixed asset tax debt – Article
34.
In case of conflict of interests over this right between the Central Government and decentralized
entities or between decentralized entities themselves, such right shall be reserved to the Government
entity that has first initiated proceedings against the taxpayer in respect of his/her fixed assets.
As for all other creditors of the taxpayer, the right of the Central Government and decentralized
entities shall still have precedence.
Seizure and sale of movable and fixed assets
In respect of the seizure and sale of movable and fixed assets, the decentralized entities must comply
with the law on civil and commercial procedures. Seized assets shall only be sold by public auction.
In respect of fixed assets, a public auction must be arranged and directed by the public notary or by a
competent bailiff.
The right to seize and sell the taxable fixed asset by public auction shall only be exercised after other
enforcement mechanisms have been reasonably exhausted and not before a period of three (3) years
from the due date of payment has lapsed.
The local decentralised entity can postpone an auction but can do this only once – Article 36.
The proceeds from the public auction shall first be used to set off the tax, interests accruing thereto,
surcharges and penalties owed to the concerned decentralized entity.
The remaining amount shall be returned to the taxpayer.
In the case of the taxpayer’s absence, the remaining amount shall be kept in the state treasury for a
period not exceeding five (5) years. If the taxpayer has not claimed this amount within this period, the
law relating to management of abandoned property shall be applicable.
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Insolvency and bankruptcy
In case of insolvency or bankruptcy, the decentralized entity where the taxable asset is located has the
right to start a forced sale of the concerned asset according to the specific law on public auction.
Amount of tax
Taxes on undeveloped sites are fixed by District Councils but must be within the limits
determined by the law (art 17 LFD):
1. In the town of Kigali, the tax must be between 20 and 50 RwF per m²;
2. In other urban districts, the tax must be between 10 and 20 RwF per m²;
3. In trade centres, the tax must be between 1 and 10 RwF per m²;
4. In rural areas, the tax on undeveloped sites must not be more than 1000 RwF per
hectare. When the area is more than twenty hectares (20ha), the tax on the area
above the first 20 hectares must be between one thousand and one (1001) RwF
and two thousand (2000 ) RwF per hectare.
If the sites without construction are touristic locations, the tax is increased by ten percent
(10%) of the ordinary annual tax. For the purposes of calculating the tax, fractions of square
metres (m²) and fractions of hectares are ignored.
In conclusion, art 28 LFD, as modified by the law of 1st October 2003, provides that the tax
due must, at the latest, be declared and paid to the receiver of the taxes of the district by
March 31st of the following fiscal year.
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CHAPTER 5
TAXATION OF CROSS BORDER ACTIVITIES
Contents
A. Distinction between trading in and with a country
B. Double Taxation Agreements
C. Regional perspective
D. “Most Favoured Nation”
E. Withholding Taxes
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A. Distinction between trading in and trading with a country
When an individual, or a business, is trading there are two possibilities:
Either the trade is carried out within their own country:
i.e. both supplier and customer are in the same country – “domestic” trade
Or the trade is carried out with another country:
i.e. the supplier is in one country, and the customer is in another – “international”
trade.
When the goods or services are supplied to a customer in another country, the supplier
exports to that country. When goods or services are bought from a supplier in another
country, the customer imports from that country.
Both goods and services can be exported and imported. Goods are self-evident – food,
minerals, raw materials etc. Examples of the export of services are a designer in country A
producing designs for a customer in country B, or an accountant in one country advising a
client in another.
Every trading transaction gives rise to tax issues, but the tax issues will differ depending on
whether the trade is domestic or international.
A key feature of international trade is import taxes. This is where a country decides to impose
import taxes (also known as custom duties) on various products on arrival into a country. The
duties will vary depending on the actual product. So, for example, a country which has a
vibrant steel business may impose relatively high import duties on steel in order to protect the
domestic steel industry from cheap imports.
The duties will also depend on the origin of the imports. Thus imports from Country A may
carry higher import duties than those from Country B.
In Appendix I is an extract from the East African Community legislation –
The East African Community Customs Management Act, 2004 incorporating all amendments
up to 8th December, 2008
An additional feature of international trade is the emergence of trading blocs of countries
such as the EAC.
These typically involve groups of countries coming together and agreeing to cooperate
closely on trade. The degree of cooperation can vary, and the countries involved are usually
ones that have close links with each other for geographic, historical or cultural reasons.
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 all the countries.
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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 import. Neither are there
any tariffs, duties etc. payable. Such a transaction is in essence a trading bloc domestic
transaction, and is known formally as “intra-community trade”.
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 businesses trading
internationally around the globe, and increased personal mobility, international taxation is
becoming more and more prevalent. Travel restrictions are less onerous, and it is no longer
difficult for people to move from one state to another to carry out businesses or to seek
employment opportunities. Capital is more mobile and with advances in e commerce and e
banking it moves more swiftly than ever before. Such activities are all likely to attract tax
liabilities.
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 residents and citizens who live
there, and who use the roads, sanitation systems and other public services there.
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 be taxed on his income in
Country A, according to the rules that prevail there.
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
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up not taxing Joe in either country. And if it is to be only one – which one, and how is that
decided?
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 this is the country in which the
income arises – i.e. the “source” country. Country A, which taxes on worldwide incomes, i.e.
income arising from Country A and Country B, will then compute tax payable. Country A
will provide credit for the tax paid to Country B i.e. the country where the incomes were
sourced. It is thus, through this arrangement that double taxation is avoided.
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, country A may
give Joe credit for the tax paid in country B. However, country A may only do this on a
unilateral basis, and is not obliged to do so. Thus the certainty created for Joe, and other
taxpayers in Scenario a is absent here.
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 laws(Acts).
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 in part what it considers to be its
revenues. Having such agreements creates taxation certainty for businesses and individuals
who operate internationally. Also, such agreements can include provision for cooperation and
sharing of information which can assist in tackling tax evasion.
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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 African Tax Treaty on
Avoidance of Double Tax and Prevention of Fiscal Evasion, is also on the horizon and it is
likely that, in time Rwanda will adopt and ratify this. Key to all such treaties is that the
business community (and other taxpayers) will be provided with certainty in cross border
taxation issues.
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 the following:
PERSONS COVERED
This provision defines who the treaty will apply to, and specifically if it will apply to persons
who are residents of either State or both. This is a central concept in all double taxation
treaties. Benefits are only extended by one State to “residents” of the other State.
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.
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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 of a Contracting State is a
person who is subject to comprehensive taxation in that State.
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 carries on business
through a permanent establishment in the other State is its presence regarded as sufficiently
substantial to allow that State to tax the business profits attributable to the permanent
establishment.
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.
BUSINESS PROFITS
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 profits of a permanent
establishment are to be attributed.
.
ASSOCIATED ENTERPRISES
This provision deals with transfer pricing.
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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 dealing at arms-length. This is
known as the “arm’s length” principle.
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 normally provides that the interest may be taxed in the State in which it arises
but if the beneficial owner of the interest is a resident of the other State the rate of tax is
limited to a specified percentage of the gross interest payment. This will normally be lower
than the tax rate that would otherwise apply.
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, industrial, commercial or scientific
equipment” – which would otherwise normally come under Business Profits.
.
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 other State may tax
the remuneration derived from the exercise of the employment in it.
ARTISTES AND SPORTSPERSONS
This deals with the taxation of entertainers and sportspersons resident in one of the
Contracting States and performing services in the other State.
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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 to tax pensions.
,
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 or granting credit for the
tax paid in the other State.
.
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 as secret and disclosed
only to persons concerned with the administration of the taxes to which the treaty applies.
There is no obligation to act or supply information other than in accordance with domestic
law or normal administrative practice, or to supply information which would disclose trade
secrets or would be contrary to public policy.
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 the
principles of non discrimination, most favoured nation and transparency.
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 the country) on such
goods as long as it is proved the goods are originating from the region.
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
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Rusumo (Rwanda-Tanzania border). It is intended that this service will be introduced at the
Rwanda-Burundi border.
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 Management Act and
Regulations.
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
Province.
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 investment within the
Community.
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 of tax policies and
laws finalized.
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
Income Tax develop a harmonized legal framework on tax laws and a roadmap for the
harmonization process.
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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 on from
being a pure trading bloc to a group of countries who have some common laws, and in some
cases a common currency.
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 favoured nation" by
the country granting such treatment.
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 granting MFN status.
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.
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• 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
which country a product (that may contain parts from all over the world) must be
attributed to for customs purposes.
• 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
tariffs would apply to every country, the interests of A's principal ally C might get
impaired.
• 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 walls between
member nations and the rest of the world.
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 was due.
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 employee is responsible for
registering, declaring, accounting, and paying the tax.
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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 circumstances withholding tax sometimes
applies to royalties, rent or sale of property. Withholding tax enables Governments to combat
tax evasion, and sometimes impose additional withholding tax requirements if the recipient
has been delinquent in filing tax returns, or in industries where tax evasion is perceived to be
common.
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
directly or through an entity that is not resident in Rwanda;
Lottery and other gambling proceeds.
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 withholding tax is less than the tax
withheld, or additional tax may be due if it is determined that the recipient's tax liability is
more than the withholding tax. In some cases the withholding tax is treated as discharging the
recipient's tax liability, and no tax return or additional tax is required.
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 either by the
employee or by the government.
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 taxed as business
income. The amounts may vary by type of income. A few jurisdictions treat fees paid for
technical consulting services as royalties subject to withholding of tax. Tax treaties may
reduce the amount of tax for particular types of income paid from one country to residents of
the other country.
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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, say 15%, and Country
B has a corporate tax rate of say 35%.
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
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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 as “transfer pricing”,
and as can be seen from the above examples can be used to manipulate the profits in various
countries. Because this means that the tax can also be manipulated the authorities in various
countries are very interested in this.
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
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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 arm’s length. The OECD has
published guidelines based on the arm's length principle, which are followed, in whole or in
part, by many of its member countries in adopting rules. The United States and Canadian
rules are similar in many respects to the OECD guidelines, with certain points of material
difference. A few countries, such as Brazil and Kazakhstan, follow rules that are materially
different overall.
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 constitutes such arm's length prices.
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 reasonably comparable to such
items with respect to the related party transactions or profitability being tested.
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 more
governments regarding mechanisms for setting related party prices.
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 parties.
Some systems require that such documentation be prepared in advance in all cases.
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 government to
adjust prices to the midpoint of an arm's length range. Both systems provide for standards for
comparing third party transactions or other measures to tested prices, based on comparability
and reliability criteria. Significant exceptions are noted below.
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 international
adjustments. Some authorizations apply only internationally. Most, if not all, governments
permit adjustments by the tax authority even where there is no intent to avoid or evade tax.
Adjustment of prices is generally made by adjusting taxable income of all involved related
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parties within the jurisdiction, as well as adjusting any withholding or other taxes imposed on
parties outside the jurisdiction. Such adjustments generally are made after filing of tax returns
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 generally defined as a price
that an independent buyer would pay an independent seller for an identical item under
identical terms and conditions, where neither is under any compulsion to act.
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 or over time. Some
systems give a preference to certain transactional methods over other methods for testing
prices.
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 functions and risks
that may impact prices are:
• Product development
• Manufacturing and assembly
• Marketing and advertising
• Transportation and warehousing
• Credit risk
• Product obsolescence risk
• Market and entrepreneurial risks
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• 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 to use of the product,
form of consideration, etc.
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 levels. In addition, prices may vary
greatly between different economies or geographies.
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 testing may occur
only on examination of tax returns by the tax authority, or taxpayers may be required to
conduct such testing themselves in advance or filing tax returns. Such testing requires a
determination of how the testing must be conducted, referred to as a transfer pricing method.
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 this method, but it is not
always applicable.
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.
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• 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 methods because market and
economic adjustments to transactions may not be reliable.
These methods may include:
• Comparable profits method (CPM): profit levels of similarly situated companies in
similarly industries may be compared to an appropriate tested party.
• Transactional net margin method (TNMM): while called a transactional method, the
testing is based on profitability of similar businesses.
• Profit split method: total enterprise profits are split in a formulary manner based on
econometric analyses.
• CPM and TNMM have a practical advantage in ease of implementation. Both
methods rely on microeconomic analysis of data rather than specific transactions.
These methods are discussed further with respect to the U.S. and OECD systems.
Two methods are often provided for splitting profits:] comparable profit split and residual
profit split. The former requires that profit split be derived from the combined operating
profit of uncontrolled taxpayers whose transactions and activities are comparable to the
transactions and activities being tested. The residual profit split method requires a two step
process: first profits are allocated to routine operations, then the residual profit is allocated
based on non-routine contributions of the parties. The residual allocation may be based on
external market benchmarks or estimation based on capitalised costs.
Where testing of prices occurs on other than a purely transactional basis, such as CPM or
TNMM, it may be necessary to determine which of the two related parties should be tested.
Testing is to be done of that party testing of which will produce the most reliable results.
Generally, this means that the tested party is that party with the most easily compared
functions and risks. Comparing the tested party's results to those of comparable parties may
require adjustments to results of the tested party or the comparatives for such items as levels
of inventory or receivables.
Testing requires determination of what indication of profitability should be used. This may be
net profit on the transaction, return on assets employed, or some other measure. Reliability is
generally improved for TNMM and CPM by using a range of results and multiple year data.
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. Licensing of intangibles thus
presents difficulties in identifying comparable items for testing. However, where the same
property is licensed to independent parties, such license may provide comparable
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67
transactional prices. The profit split method specifically attempts to take value of intangibles
into account.
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 perform those
services. Two issues exist with respect to charges between related parties for services:
whether services were actually performed which warrant payment, and the price charged for
such services. Tax authorities in most major countries have, either formally or in practice,
incorporated these queries into their examination of related party services transactions.
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 the services allegedly
performed actually benefit the member charged. The inquiry may focus on whether services
were indeed performed as well as who benefited from the services. For this purpose, some
rules differentiate stewardship services from other services. Stewardship services are
generally those that an investor would incur for its own benefit in managing its investments.
Charges to the investee for such services are generally inappropriate. Where services were
not performed or where the related party bearing the charge derived no direct benefit, tax
authorities may disallow the charge altogether.
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.S. rules impose a 20% penalty
where the adjustment exceeds USD 5 million, increased to 40% of the additional tax where
the adjustment exceeds USD 20 million.[
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 required to be in place
prior to filing a tax return in order to avoid these penalties. Documentation by a taxpayer
need not be relied upon by the tax authority in any jurisdiction permitting adjustment of
prices. Some systems allow the tax authority to disregard information not timely provided by
taxpayers, including such advance documentation. India requires that documentation not only
be in place prior to filing a return, but also that the documentation be certified by the
chartered accountant preparing a company return.
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 agreements or
advance pricing arrangements (APAs). Under an APA, the taxpayer and one or more
governments agree on the methodology used to test prices. APAs are generally based on
transfer pricing documentation prepared by the taxpayer and presented to the government(s).
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68
Multilateral agreements require negotiations between the governments, conducted through
their designated competent authority groups. The agreements are generally for some period
of years, and may have retroactive effect. Most such agreements are not subject to public
disclosure rules. Rules controlling how and when a taxpayer or tax authority may commence
APA proceedings vary by jurisdiction.
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69
CHAPTER 6
EMERGING TRENDS IN TAXATION
Contents
A. Avoidance and Evasion
B. Transfer pricing
C. Online Taxation
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70
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 taxable income of A.
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
• Smuggling and tax evasion on the increase;
• Tax planning activities by some taxpayers to avoid payment of taxes;
• Continued low level of compliance by taxpayers to pay tax arrears;
• Loopholes existing in taxation laws;
By showing these in such detail indicates that these points will be tackled by RRA officers
and by the writing, passing and implementation of Law(s).
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.
For many years now, Transfer Pricing has not only used as a legitimate means of pricing
goods sold between related parties or members within a group, but also for “transferring”
profit to/from an otherwise loss making operation – to reduce the tax bill of the profitable
operation and as the loss-maker will be making a smaller loss; but a loss carries no tax bill.
Where the group companies reside in different locations with different tax regimes, transfer
pricing has been used as a means of taking advantage of the differences.
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71
So if A Ltd in Kigali also owned a business in the Republic of Ireland where corporate tax
rates are 12%, by selling goods to Ireland at an inflated price, profits could be transferred to
Ireland where they could be subjected to lower tax rates. Obviously, in reality, the plan is
quite a simple as that, but the principle is there.
The Article 24 of DTI addresses this situation.
First ‘related persons’ are defined. They include the following categories (Article 24 DTI):
• An individual and his/ her spouse, his/her direct ascendants and descendants
• A company and any person who holds directly or indirectly fifty per cent (50%) or
above, in value or by number, of the shares or voting rights in the companies.
In this case, if such parties apply transaction terms other than those which would be
employed between independent parties, the Commissioner General of Rwanda Revenue, in
conformance with the directives of the Minister of Finance, may direct that the income of one
or more of those related persons is to include profits which he/she or they would have made if
he/she or they operated as independent persons.
Article 30: Transfer Pricing
Where conditions are made or imposed between related persons carrying out business in
their commercial or financial relations which differ from those which would be made
between independent persons, the Commissioner General, in accordance with regulations
issued by the Minister, may direct that the income of one or more of those related persons is
to include profits which he/she of they would have made if he/she or they operated as
independent persons.
In order to ensure efficient application of this Article, the Commissioner General may make
arrangements in advance with persons carrying out business including money trading,
subject to conditions if necessary, that related persons conclude their business in the same
way as would be the case between independent persons.
This particular rule is of course an anti-tax-avoidance measure designed to ensure that certain
interconnected economic operators do not fix abnormally low or high prices in their business
transactions, as this could result in a reduction in assessed incomes and, consequently the tax
collected as a result.
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.
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72
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
Rwf
k/SqM
Metres
sold
Rwf K
Rwf k /
Drum
Drums
Rwf k
Outside group
12
100,000
1,200,000
45
50,000
2,250,000
Sale to Y Ltd
12
200,000
2,400,000
300,000
3,600,000
2,250,000
Hides
4
1,200,000
12
200,000
2,400,000
all other costs
4
1,200,000
20
1,000,000
Costs per unit
8
2,400,000
3,400,000
Taxable profits
1,200,000
-1,150,000
Tax payable
360,000
0
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
Rwf k /
SqM
Metres
sold
Rwf K
Rwf k /
Drum
Drums
Rwf k
Outside group
12
100,000
1,200,000
45
50,000
2,250,000
Sale to Y Ltd
7.0
200,000
1,400,000
300,000
2,600,000
2,250,000
Hides
4
1,200,000
7.0
200,000
1,400,000
all other costs
4
1,200,000
20
1,000,000
Costs per unit
8
2,400,000
2,400,000
Taxable profits
200,000
-150,000
Tax payable
60,000
0
Group tax bill
60,000
Tax saving on example 1
300,000
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.
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73
Even so a tax advantage can be gained:
Rwf k /
SqM
Metres
sold
Rwf K
Rwf k /
Drum
Drums
Rwf k
Outside group
12
100,000
1,200,000
45
50,000
2,250,000
Sale to Y Ltd
9
200,000
1,800,000
300,000
3,000,000
2,250,000
Hides
4
1,200,000
9
200,000
1,800,000
all other costs
4
1,200,000
20
1,000,000
Costs per unit
8
2,400,000
2,800,000
Taxable profits
600,000
-550,000
Tax payable
180,000
0
Group tax bill
180,000
Tax saving on example 1
180,000
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.
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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 (lto) tax.
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 need for customers to
travel to the Rwanda Revenue Authority offices for information.
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, further promoting the
use of the system.
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.
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CHAPTER 7.
THE FISCAL REGIME UNDER THE EAC LAW
Tax and EAC
Under EAC Law, business people will continue to pay VAT, Consumption Tax and
Withholding Tax on goods originating from EAC Partner States. East African Community
(EAC) Member states have begun implementing the Common Market Protocol. This means
that Rwanda, Uganda, Kenya, Tanzania and Burundi have entered into a single market with
free movement of factors of production based on the principles of non-discrimination, most
favoured nation status and transparency.
These rights include the free movement of goods, persons and labour.
EAC citizens also have rights of establishment and residence as well as the free movement of
services and capital.
There has been some misconception among the public that under the Common Market
regulations, all goods imported into Rwanda or other member states are exempted from taxes.
This is not the case however, as taxes on international trade will remain safe from import
duty which remains at 0% on all goods from the community that comply with the rules of
origin criteria.
If a trader for example imports iron sheets or soap that are manufactured in Kenya (an EAC
member state) and has a valid certificate of origin, the RRA will not collect import duty (a tax
levied on goods imported into the country) on such goods as long as it is proved the goods are
originating from that region.
In Rwanda, the issuance of certificates of origin has been decentralized to the RRA Gikondo
Customs department and all border posts including those at Gatuna (on the Rwanda-Uganda
border) and Rusumo (on the Rwanda-Tanzania border). While import duty is abolished for
qualifying goods, 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 a
withholding tax of 5 percent.
However, the withholding tax mentioned above is exempt for those who have a tax clearance
certificate (“Quitus Fiscale” – this is a certificate widely used within the French legal system
which has now been incorporated into Rwandan law).
Free movement of goods under the Common Market rules
The Common Market Protocol stipulates that “The free movement of goods between the
Partner States shall be governed by the Customs Law of the Community as specified in
Article 39 of the Protocol on the Establishment of the East African Community Customs
Union”.
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On 1st July, 2009, Rwanda commenced the implementation of the EAC Customs Union rules
and began levying zero percent import duty tariffs on goods originating from the Partner
States, applying the Common External Tariff and the East African Customs Management Act
and Regulations. This was part of a progressive implementation process. Internal tariff
elimination on intra-regional trade was introduced progressively between 1st January 2005
and 31st December 2009.
The removal of VAT, Consumption tax (excise duty) and Withholding tax will be effected
upon realization of a fully fledged customs union which is yet to materialize. If such a union
were to come about, the following might be envisaged; The shifting of borders between
Partner States to the periphery of the EAC;
- The collection of duties and taxes at the point of entry into the Customs Union
Territory;
- Agreements on the revenue sharing mechanisms to be adopted;
- Establishment of a regional authority to administer the Customs Union
- The elimination of rules of origin on intra-regional trade. In a fully-fledged
Customs Union, goods shipped from Nairobi to Kigali for example will not
attract any duties and taxes will be considered in the same way as if the goods
were between Huye, Southern Province and Musanze, Northern Province for
example.
Harmonization of tax policies and laws
The EAC Common Market Protocol provides that “The Partner States undertake to
progressively harmonize their tax policies and laws to remove tax distortions in order to
facilitate the free movement of goods, services and capital and to promote investment within
the Community”.
Harmonization of domestic taxes is being handled under the EAC Framework by the Fiscal
Affairs Committee (in particular the Technical Committee on tax harmonization) and the
Fiscal Affairs Committee has established Technical Working Groups on Value Added Tax,
Excise Tax and Income Tax with the aim of developing a harmonized legal framework on tax
laws and a roadmap for the harmonization process.
It should also be noted that double taxation agreements 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 the (The Customs Co-operation
Council).
RRA emphasizes that the implementation of the EAC Common Market has not changed the
existing fiscal regime and the anticipated changes will progressively be realised as partner
states enter into a fully-fledged Customs Union and the harmonisation of tax policies and
laws is finalised.
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Appendix I
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
The student is encouraged to read this act plus amendments and especial reference should be
made to:
Part 1 defines terms and develops the valuation of goods being transferred across borders and
is quoted below..
The second schedule sub-sections (ss. 18, 19, and 20) Prohibited and restricted imports
generally
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
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Extracts from the Act amended and published in 2008
PART I
I
NTERPRETATION:
1. (1) In this Schedule—
“customs value of imported goods” means the value of goods for the purposes of levying ad
valorem duties of customs on imported goods;
“identical goods” means goods which are same in all respects, including physical
characteristics, quality and reputation. Minor differences in appearance shall not preclude
goods otherwise conforming to the definition from being regarded as identical;
“similar goods” means goods which, although not alike in all respects, have like
characteristics and like component materials which enable them to perform the same
functions and to be commercially interchangeable. The quality of the goods, their reputation
and the existence of a trademark are among the factors to be considered in determining
whether goods are similar.
“identical goods” and “similar goods” do not include, as the case may be, goods which
incorporate or reflect engineering, development, artwork, design work, and plans and
sketches for which no adjustment has been made under subparagraph (1) (b) (iv) or paragraph
9 because such elements were undertaken in the Partner States;
“produced” includes grown, manufactured and mined.
(2) For the purposes of this Schedule—
(a) goods shall not be regarded as “identical goods” or “similar goods” unless they were
produced in the same country as the goods being valued;
(b) goods produced by different persons shall be taken into account only when there are no
identical goods or similar goods, as the case may be, produced by the same person as
the goods being valued.
(3) For the purpose of this Schedule, persons shall be deemed to be related only if:
(a) they are officers or directors of one another’s businesses;
(b) they are legally recognised partners in business;
(b) they have an employer and employee relationship;
(c) any person directly or indirectly owns, controls or holds five percent or more of the
outstanding voting stock or shares of both of them;
(d) one of them directly or indirectly controls the other;
(e) both of them are directly or indirectly controlled by a third person;
(f) together they directly control a third person; or
(g) they are members of the same family.
(4) A person who associates with another person in business, such that one is the sole agent,
distributor or sole concessionaire, however described, of the other shall be deemed to be
related for the purposes of this Schedule if they fall within the criteria of sub-paragraph 3.
TRANSACTION VALUE
2. (1) The customs value of imported goods shall be the transaction value, which is the price
actually paid or payable for the goods when sold for export to the Partner State adjusted in
accordance with the provisions of Paragraph 9, but where—
(a) there are no restrictions as to the disposition or use of the goods by the buyer other than
restrictions which:
(i) are imposed or required by law or by the public authorities in the Partner State;
(ii) limit the geographical area in which the goods may be resold; or
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79
(iii) do not substantially affect the value of the goods;
(b) the sale or price is not subject to some condition or consideration for which a value
cannot be determined with respect to the goods being valued;
(c) no part of the proceeds of any subsequent resale, disposal or use of the goods by the
buyer will accrue directly or indirectly to the seller, unless an appropriate adjustment
can be made in accordance with the provisions of Paragraph 9; and
(d) the buyer and seller are not related, or where the buyer and seller are related, that the
transaction value is acceptable for customs purposes under the provisions of
subparagraph (2).
(2) (a) In determining whether the transaction value is acceptable for the purposes of
subparagraph (1), the fact that the buyer and the seller are related within the meaning
of Paragraph (1) shall not in itself be a ground for regarding the transaction value as
unacceptable. In such case the circumstances surrounding the sale shall be examined
and transaction value shall be accepted provided that the relationship did not
influence the price. If, in light of information provided by the importer or otherwise,
the proper officer has grounds for considering that the relationship influenced the
price, he shall communicate his grounds to the importer and such importer shall be
given reasonable opportunity to respond and where the importer so requests, the
communication of the grounds shall be in writing;
(b) In the sale between related persons, the transaction value shall be accepted and the
goods valued in accordance with the provisions of subparagraph (1) whenever the
importer demonstrates that such value closely approximates to one of the following
accruing at or about the same time.
(i) the transaction value in sales to unrelated buyers of identical or similar goods for
export to the Partner State;
(ii) the customs value of identical or similar goods as determined under the provisions
of Paragraph 6;
(iii) the customs value of identical or similar goods as determined under the provisions
of Paragraph 7.
Provided that, in applying the provisions under subparagraph (2) (a) and (b) of this
Paragraph, due account shall be taken of demonstrated differences in commercial
levels, quantity levels, the elements enumerated in paragraph 9 and costs incurred
by the seller in sales in which the seller and the buyer are not related that are not
incurred by the seller in sales in which the seller and the buyer are related.
The tests set forth in subparagraph (2) (b) are to be used at the initiative of the importer and
only for comparison purposes. Substitute values may not be established under the provisions
of subparagraph (2) (b).
TRANSACTION VALUE OF IDENTICAL GOODS
3. (1) (a) Where the customs value of the imported goods cannot be
determined under the provisions of paragraph 2, the customs value shall be the
transaction value of identical goods sold for export to the Partner State and exported
at or about the same time as the goods being valued:
(b) In applying the provisions of this paragraph, the transaction value of identical
goods in a sale at the same commercial level and in substantially the same quantity
as the goods being valued shall be used to determine the customs value and where
no such sale is found, the transaction value of identical goods sold at the different
commercial level or in different quantities, adjusted to take account of differences
attributable to commercial level or to quantity, shall be used, provided that such
adjustments can be made on the basis of demonstrated evidence which clearly
establishes the reasonableness and accuracy of the adjustment, whether the
adjustment leads to an increase or decrease in the value;
(2) Where the costs and charges referred to in Paragraph 9 (2) are included in the transaction
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80
value, an adjustment shall be made to take account of significant differences in such costs and
charges between the imported goods and the identical goods in question arising from
differences in distances and modes of transport.
(3) Where in applying the provisions of this paragraph, more than one transaction value of
identical goods is found, the lowest such value shall be used to determine the customs value
of the imported goods.
TRANSACTION VALUE OF SIMILAR GOODS
4. (1) (a) Where the customs value of the imported goods cannot be determined under the
provisions of Paragraph 2 and 3, the customs value shall be the transaction value
of similar goods sold for export to the Partner State and exported at or about the
same time as the goods being valued;
(b) In applying this Paragraph, the transaction value of similar goods in a sale at the
same commercial level and in substantially the same quantity as the goods being
valued shall be used to determine the customs value. Where no such sale is found,
the transaction value of similar goods sold at a different commercial level and/or
in different quantities, adjusted to take account of differences attributable to
commercial level and/or to quantity, shall be used, provided that such adjustments
can be made on the basis of demonstrated evidence which clearly establishes the
reasonableness and accuracy of the adjustment, whether the adjustment leads to an
increase or a decrease in the value.
(2) Where the costs and charges referred to in subparagraph (2) of Paragraph 9 are included
in the transaction value, an adjustment shall be made to take account of significant
differences in such costs and charges between the imported goods and the similar goods in
question arising from differences in distances and modes of transport.
(3) Where, in applying the provisions of this paragraph, more than one transaction value of
similar goods is found, the lowest such value shall be used to determine the customs value of
the imported goods.
REVERSAL OF ORDER OF APPLICATION OF DEDUCTIVE VALUE AND
COMPUTED VALUES
5. Where the customs value of the imported goods cannot be determined under the
provisions of paragraphs 2, 3 and 4, the customs value shall be determined under the
provisions of paragraph 6 or, when the customs value cannot be determined under that
paragraph, under the provisions of paragraph 7 save that, at the request of the importer, the
order of application of paragraphs 6 and 7 shall be reversed.
DEDUCTIVE VALUE
6. (1) (a) Where the imported goods or identical or similar imported goods are sold in the
Partner State in the condition as imported, the customs value of the imported goods
under the provisions of this paragraph shall be based on the unit price at which the
imported goods or identical or similar imported goods are so sold in the greatest
aggregate quantity, at or about the time of the importation of the goods being
valued, to persons who are not related to the persons from whom they buy such
goods, subject to deductions for the following:
(i) either the commissions usually paid or agreed to be paid or the additions usually
made for profit and general expenses in connection with the sales in such country of
imported goods of the same class or kind;
(ii) the usual costs of transport and insurance and associated costs incurred within the
Partner State;
(iii) where appropriate, the costs and charges referred to in Paragraph 9 (2); and
(iv) the customs duties and other national taxes payable in the Partner State by reason
of importation or sale of the goods.
(b) Where neither the imported goods nor identical nor similar imported goods are sold
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81
at or about the time of importation of the goods being valued, the customs value
shall, subject to the provisions of subparagraph (1) (a), be based on the unit price at
which the imported goods or identical or similar imported goods are sold in the
Partner State in the condition as imported at the earliest date after the importation of
the goods being valued but before the expiration of 90 days after such importation.
(2) Where neither the imported goods nor identical nor similar imported are sold in the
Partner State in the condition as imported, then, if the importer so requests, the customs value
shall be based on the unit price at which the imported goods, after further processing, are sold
in the greatest aggregate quantity to persons in the Partner State who are not related to the
persons from whom they buy such goods, due allowance being made for the value added by
such processing and the deductions provided for in subparagraph (1) (a).
COMPUTED VALUE
7. (1) The customs value of imported goods under the provisions of this Paragraph shall be
based on a computed value which shall consist of the sum of:
(a) the cost or value of materials and fabrication or other processing employed in
producing the imported goods;
(b) an amount for profit and general expenses equal to that usually reflected in sales of
goods of the same class or kind as the goods being valued which are made by
producers in the country of exportation for export to the Partner State;
(c) the cost or value of all other expenses necessary to reflect the costs added under
Paragraph 9 (2).
(2) A person who is not resident in the Partner State may be required to, or compelled to
produce for examination, or to allow access to, any account or other record for the purposes
of determining a computed value. However, information supplied by the producer of the
goods for the purposes of determining the customs value under the provisions of this
Paragraph may be verified in another country by a proper officer with the agreement of the
producer and provided sufficient advance notice is given to the government of the country in
question and the latter does not object to the investigation.
FALL BACK VALUE
8. (1) Where the customs value of the imported goods cannot be determined under the
provisions of Paragraphs 2, 3, 4, 5, 6 and 7, inclusive, the customs value shall be determined
using reasonable means consistent with the principles and general provisions of this Schedule
and on the basis of data available in the Partner State.
(2) Customs value shall not be determined under the provisions of this paragraph on the basis
of:
(a) the selling price in the Partner State of goods produced in the Partner State;
(b) a system which provides for the acceptance for customs purposes of the higher of two
alternative values;
(c) the price of goods on the domestic market of the country of exportation;
(d) the cost of production other than computed values which have been deter- mined for
identical or similar goods in accordance with the provisions of Paragraph 7;
(e) the price of the goods for export to a country other than the Partner State;
(f) minimum customs values; or
(g) arbitrary or fictitious values.
(3) Where the importer so requests, he or she shall be informed in writing of the customs
value determined under the provisions of this paragraph and the method used to determine
such value.
ADJUSTMENTS TO VALUE
9. (1) In determining the customs value under the provisions of Paragraph 2, there shall be
added to the price actually paid or payable for the imported goods as follows:
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82
(a) to the extent that they are incurred by the buyer but are not included in the price
actually paid or payable for the goods:
(i) the commissions and brokerage, except buying commissions;
(ii) the cost of containers which are treated as being one for customs purposes with the
goods in question;
(iii) the cost of packing whether for labour or materials;
(b) the value, apportioned as appropriate, of the goods and services where supplied
directly or indirectly by the buyer free of charge or at reduced cost for use in
connection with the production and sale for export of the imported goods, to the extent
that such value has not been included in the price actually paid or payable as follows:
(i) materials, components, parts and similar items incorporated in the imported goods;
(ii) tools, dies, moulds and similar items used in the production of the imported goods;
(iii) materials consumed in the production of the imported goods;
(iv) engineering, development, artwork, design work, and plans and sketches
undertaken elsewhere than in the Partner State and necessary for the production of
the imported goods;
(c) royalties and licence fees related to the goods being valued that the buyer must pay,
either directly or indirectly, as a condition of sale of the goods being valued, to the
extent that such royalties and fees are not included in the price actually paid or
payable;
(d) the value of any part of the proceeds of any subsequent resale, disposal or use of the
imported goods that accrues directly or indirectly to the seller.
(2) In determining the value for duty purposes of any imported goods, there shall be added to
the price actually paid or payable for the goods:-
(a) the cost of transport of the imported goods to the port or place of importation into the
Partner State; provided that in case of imports by air no freight costs shall be added to
the price paid or payable;
(b) loading, unloading and handling charges associated with the transport of the imported
goods to the port or place of importation into the Partner State; and
(c) the cost of insurance.
(3) Additions to the price actually paid or payable shall be made under this paragraph only
on the basis of objective and quantifiable data.
(4) Additions shall not be made to the price actually paid or payable in determining the
customs value except as provided in this paragraph.
Following this schedule is a Section headed “Interpretative Notes”. The student is
encouraged to read these notes.
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83
Appendix II
Extract from Rwanda revenue Authority Business Plan 2011-2012
RRA Business Plan 2011-2012
2 INTRODUCTION
The current RRA medium-term strategy covers the period from July 2010 to June 2013.
Major activities to be performed by the authority remain aligned to the three year period
strategy. RRA s strategic directions for the said period are as follows:
a) Maximisation of revenue mobilisation;
b) Service delivery;
c) Encourage voluntary compliance and broaden tax base;
d) Further strengthen the capacity of the organisation.
This however, means that every year, a business plan must be prepared, that is in line with
this medium term strategy.
The 2011/2012 RRA business plan sets out the major activities and strategies to achieve those
activities and indicators upon which success will be measured. This plan is embedded in the
2010/2013 RRA's Medium Term Strategy framework.
Part one of the 2011/2012 business plan reflects RRA's major Corporate Statements that
include: the overall mission, vision, core values and SWOT analysis. Part two of the plan
deals with the priorities as well as key indicators by which performance against objectives
and planned activities during the year 2011/2012 will be monitored.
3 CORPORATE STATEMENTS
RRA s corporate statements remain unchanged for the 2011/2012 business plan; priorities are
aligned to the following RRA s vision, mission and core values:
Mission is:
"Mobilise revenue for national development through efficient and equitable services that
promote business growth."
RRA s Vision is:
To become a world-class efficient and modern revenue agency, fully financing national
needs.
Core values:
• Integrity;
• Customer focus;
• Transparency;
• Professional Service delivery;
• Teamwork.
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84
4 RRA SWOT ANALYSIS
4.1 Strengths
• Strong commitment of RRA staff;
• Improved planning processes;
• Taxpayers education strategy;
• Computerization of core business functions and availability of good IT
• infrastructure leading to efficient service delivery and enhanced revenue collection;
• Operational block management system in every district of Kigali City;
• Collection of National Social Security Fund contributions with associated benefits for PAYE
compliance;
• Licensing of tax advisors that streamlines tax profession and increases taxpayer s
compliance;
• Effective implementation of EAC Customs Union Management Act and Common Market
Protocols;
• Enhanced trade facilitation in domestic and cross border operations;
• Existence of sophisticated equipment to detect and prevent smuggling;
• ISO 9001 2008 certified;
• Existence of a fully fledged in house training institute;
• Flexible management of financial resources;
• Decentralized services.
4.2 Weaknesses
• Slowness to adopt change management;
• Some cases of poor customer care and service delivery;
• Inadequate skills in ICT among staff and limited integration of IT systems;
• Limited skills in some technical areas (e.g. risk management, transfer pricing, mining
taxation, e-commerce and cross border transactions);
• Lack of proper management of tax expenditures;
• Staff shortage as a result of more responsibilities to RRA and continued staff turnover due to
comparatively better remuneration by the private sector;
• Low response levels and ineffective communication;
• Weak audit function and refund processes;
• Delays in revenue data reconciliation exercise;
• Low quality data from the point of data capture up to dissemination point;
• Poor document and data management;
• Corruption practices amongst some RRA officers;
• Lack of a sound welfare scheme;
• Lack of an effective monitoring and evaluation mechanism for monitoring corporate
priorities and projects;
• Poor reading and research culture among RRA staff;
• Slow payment process of suppliers;
• Failure to implement procurement plan well;
• Poor working environment for some RRA offices.
4.3 Opportunities
• Strong government support;
• Strong partnership with both internal and external stakeholders;
• Stable political and economic environment;
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85
• Certification of taxpayers financial statements;
• Existing forum and good relations with the private sector;
• Planned new initiatives to facilitate trade and improve service delivery e.g. etax, electronic
cargo tracking equipment, construction of more One-Stop- Border posts;
• Introduction of electronic tax registry to manage VAT;
• Regional and international cooperation agreements (EARAs1, HMRC2, and SARS3);
• Membership to African Tax Administration Forum (ATAF);
• All-inclusive national ICT strategy
4.4 Threats
• Low level of record-keeping and accounting skills within business community;
• Illiteracy of majority of small taxpayers negatively impacts on the accuracy of tax returns
filed;
• Tax base erosion due to increasing tax-incentives and exemptions demands;
• Informal sector growth;
• Smuggling and tax evasion on the increase;
• Tax planning activities by some taxpayers to avoid payment of taxes;
• Continued low level of compliance by taxpayers to pay tax arrears;
• Globalization challenges petroleum prices, food prices, e-commerce & trade facilitation
demands.
• Low commitment of some stakeholders towards the implementation of shared projects
leading to failure of these projects kicking off;
• Failure by some suppliers to honour the provision of services causing unnecessary delays in
projects implementation;
• Loopholes existing in taxation laws;
• IT security threats;
• Network failures that negatively affect service delivery and work productivity;
5. PRIORITIES FOR 2011/2012
Having examined the environment in which we work and our organisational capabilities, we
have set the following priorities with the corresponding activities to orient the organisation
towards realising the strategic objectives over the period of this plan.
5.1 Maximization of revenue mobilisation
• Achieve revenue targets Rwf 515.5 billion.
• Furnish operational functions with appropriate resources to handle tasks before them.
• Identify measures to cover loopholes in the process of granting incentives.
• Analyse different options to improve efficiency of major tax heads (PAYE, VAT).
• Prepare a proposal to retake some decentralised taxes.
5.2 Service delivery
• Establish more revenue collection and service centres.
• Upgrade the CSR system to streamline its administration.
• Implement electronic services to improve delivery.
1 East African Revenue Authorities
2 Her Majesties Revenue and Customs of UK
3 South African Revenue Service
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86
• Commence construction of One Stop Border Posts.
• Initiate pre-arrival request for exemptions.
• Implement Authorised Economic Operator Program.
• Implement Regional Customs Transit Bond Guarantee Scheme.
• Conduct EAC regional time release study.
• Extend simplified trade regime at borders with Burundi, Tanzania and DRC.
• Carry out a feasibility study to increase border posts threshold.
• Test and implement RADDEX interconnectivity with TRA and OBR.
• Conduct focused taxpayers training programs by sector of activities and by category of
taxpayers.
5.3 Encourage voluntary compliance and broaden the tax base
• Develop a simplified tax declaration and accounting system for SMEs, translated in
Kinyarwanda language.
• Draft a new tax regime for the identified SME category.
• Identify loopholes existing in tax laws and administrative procedures and recommend
amendments.
• Introduce electronic transaction devices (ETD) to improve VAT productivity.
• Integrate CSR software with the tax system and harmonise PAYE and CSR declaration forms.
• Acquire and implement electronic cargo tracking system.
• Establish and implement a name and shame mechanism for non-compliant taxpayers.
• Enhance SIGTAS to deliver a single view taxpayer account.
• Waive off/suspend old and enforce recoverable tax arrears.
• Participate in a study aimed at widening the tax base.
• Connect RRA system to national ID registry office.
5.4 Further strengthen the capacity of the organization
• Carry out a study on current RRA performance and propose reform initiatives to improve
efficiency.
• Train staff in areas that will impact revenue mobilization, customer service and management
functions.
• Streamline customs process and procedures as well as customs work environment for the
acquisition of CSD ISO certification.
• Organise benchmarking and attachment programs for staff in revenue collection operations
in best performing revenue administrations.
• Conduct a study on establishing electronic filing and archive management system.
• Carry out a study for the expansion of RRA Training Institute.
• Replace RRA servers and install new ones to ensure business continuity.
• Enhance RRA networking system.
• Upgrade SAGE to include document management modules.
• Acquire and use new HR management software.
• Connect RRA to RITA Government network.
• Prepare RRA s data by sector of activity.
6. CASCADING KEY OBJECTIVES PROCESS
The above key activities set out what the organisation will do to achieve the set strategic
objectives and how these will be measured. In order to ensure that we remain on course and
ensure that RRA staff perform activities aligned to the corporate goals, a cascading process
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87
that involves further breaking down of the corporate level activities was done at the
departmental level.
Each department has developed a detailed business plan indicating schedule of activities and
timeline guided by the corporate level priorities as reflected in this plan.
Each activity to be performed shows the responsible department as well as the timeline. This
will help in ensuring effective implementation of this business plan and making reviews to
avoid any possible slippages. This will keep the entire organisation focused towards
achieving the vision.
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88
Appendix III a
CIT Real Regime Tax Calculator
5
Business income
(annual turnover)
10
Cost of goods sold
(line 170 of annex A)
15
Gross Profit
(Line 5-line10)
20
Expenses
(line 285 of annex A)
25
Depreciation
line599 of annex A):
30
Total expenses and
depreciation
(add lines 20 through 25):
35
Net operating income
(subtract line 30 from line 15):
40
Investment income
(line15 of annex B):
45
Non operating &
Extraordinary income
(sum of Line 25 through 40
50
Total income
(addline35 through 45):
55
Non operating & extraordinary expenses
60
Investment expenses
(line35 of annex B):
65
Net income
(line50-line55-line60):
70
Reintegration of non-deductible expenses
75
Depreciation
adjustment
(+/-)
80
Loss of carried forward from previous five tax periods
85
Taxable income
(add line65 through line75)-line80:
90
Corporate income tax
(line85 * 30%)
95
Tax discounts
(brought forward from line 160):
100
Foreign tax credit
(line65 of annex C):
105
Corporate income tax
payable
110
Quarterly prepayments
(line70 of annex D):
115
Withholding on imports
120
Withholding on public tenders
125
Withholding on other payments (investments, service fees):
130
Total credits
(sum line 110 through 125):
135
Overpayment from previous periods
140
Net tax due/credit (subtract line140+line145 from line110):
145
Refund claimed
150
Balance
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89
Appendix III b
PIT Real Regime Calculator
5
Self-employment income (line 135 of annex B)
10
Cost of goods sold
(line 170 of annex B)
15
Gross Profit
(Line 5-line10)
20
Expenses
(line 290 of annex B)
25
Net operating income
Deduct line 20 from 15
30
Employment Income
Line 25 of Annex A
35
Investment income
Line 15 of annex C
40
Non operating and extraordinary income
45
Total Income
(sum of Line 25 through 40
50
Employment deductions Line 25 of Annex A
55
Investment expenses
Line 35 of annex C
60
Non operating & Extra-ordinary expenses
65
Total expenses
sum of line 50 through 60
70
Net income
subtract line 65 from line 45
75
Reintegration of non deductible expenses
80
Depreciation adjustment
85
Loss carried forward from previous tax periods
90
Taxable income (add line 70 and line 75 and +/- line80)-line85
95
Personal income tax
100
Tax discounts
(brought forward from line 175)
105
Foreign tax credit
Line 65 of annex E
110
Personal income tax
payable
(line 95 -(line 100+line 105)
115
Quarterly prepayments (line 70 of annex F)
120
Withholding on imports
125
Withholding on public tenders
130
Withholding on other payments (investments, service, fees
135
Withholding on payments (PAYE)
140
Total of credits
(sum line 115 through 135)
145
Overpayment from previous periods
150
Net tax due/credit (Subtract line 140 + line 145 from line 110
155
Tax refund claim
160
Balance

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