Rwanda. Income tax alert April Rwanda s Income Tax Alert: April In this bulletin.

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1 Rwanda Income tax alert April 2018 In this bulletin Getting you on the go with the new law 2 Article 3: Definition of terms 3 Article 5- Source of taxable income 4 Articles 6 and 11 5 Article 12: Tax rate 6 Article 16: Payments exempted from employment income tax 8 Article 26: Non-deductible expenses from taxable income 9 Old article 26: Investment allowance- deleted 10 Article 31: Bad Debts 11 Transfer pricing and capital gains 12 Capital gain and dividend income 13 Article 46: Entities which are exempted from corporate income tax 14 Income tax rates Article 52: Taxation of income from the rent of movable and immovable assets 15 Article 53: Corporate restructuring 16 Article 55: Taxation in case of liquidation 17 Employee declaration and sitting allowance 18 Article 60: Withholding tax on payments or other methods of extinguishing an obligation 19 Withholding tax 21 Article 62: Paragraph 2 22 Still on withholding tax 23 Contacts 24

2 Getting you on the go with the new law Why? A new income tax law, Law no 016/2018 has been gazetted repealing Law no 16/2005 of 18/08/2005 on direct income tax and all prior legal provisions, including the Commissioner General s rules and Ministerial orders contrary to this law. The law came into force on 13 April A number of amendments have been made and below we provide a detailed review of the new income tax law and specifically focusing on the new provisions that have been introduced. Article 2: Scope of this law Article 2 defines the scope of the new law which covers the following taxes: personal income tax, corporate income tax, withholding tax and capital gains tax. Capital gains tax was not part of the scope of the previous income tax act, although any gains derived by a resident entity were taxed as part of the entity s business profits. The new law has a specific article on taxation of capital gains. Article 3: Definition of terms This is the definition section of the law and a number of definitions have been introduced. We review a few of these that we think would have immediate impact on how businesses are currently structured and operated. Definition of an employee: the previous act did not define an employee and therefore there was a tendency amongst some employers of grading employees contracts as consultancy contracts as this meant that the employers did not have any tax obligations with regard to such employees. The new income tax law now defines an employee and it will no longer be possible to disguise employment contracts as consultancy contracts. 2

3 Article 5- Source of taxable income Overhauled and reworded The income sourcing provision of any income tax law is a very important reference as it determines which income is within the scope of a country s taxing rights. If the income earned by a taxpayer is not listed under this provision, then normally such income is outside the country s scope of taxation. The entire income sourcing provision has been overhauled and reworded. In general, according to the new provision, income is taxable in Rwanda if such income is from activities performed in Rwanda or activities performed abroad by a resident of Rwanda. In particular the provision introduces the following types of income into Rwanda s scope of taxation: The entire income sourcing provision has been overhauled and reworded Direct or indirect sale or transfer of shares or debentures Under the repealed income tax act it was possible for a foreign company to sell shares in a local company and not declare taxes on gains made from that sale. The law was deficient to capture such a transaction. With the introduction of this provision, the sale or transfer of shares in Rwanda companies will now attract capital gains tax. This provision is so broad that it even captures indirect sale or transfer of shares in resident companies. (see Article 36, 37, 38 and 39 on taxation of capital gains) change of profits into shares that increases the capital of partners Under the repealed income tax law, conversion of profits into equity was not considered a source of income and escaped withholding tax. Now the new law specifically brings it into the ambit of taxation. In other words, it will be treated as a dividend distribution (See Article 41 and 60) Services performed by nonresidents abroad All payments made by a resident entity for services performed abroad, other than those consumed abroad, such income is now considered as sourced from Rwanda and therefore constitutes taxable income. For example, a payment to a foreign designer for architectural drawings /designs to be used in Rwanda is now considered as sourced from Rwanda by the foreign designer. However, payment for market research about a certain market that a resident entity intends to venture into would not be considered as sourced from Rwanda on the basis that such services are consumed in the market that the resident entity is venturing into. 3

4 Articles 6 and 11 Permanent establishment and taxable income Article 6: Permanent establishment (PE) This is the provision that is used to determine whether the activities of any person trigger a taxable presence in Rwanda. This article has been amended to introduce a time barred provision in the new law. According to the old PE definition, foreign companies carrying out activities in Rwanda triggered a tax presence immediately upon commencing operations in Rwanda. The new PE provision is now aligned to international practice and foreign companies will only trigger a tax presence in Rwanda if their activities in Rwanda exceed ninety (90) days in a twelve (12) month period, either continuously or intermittently. This means such companies will be required to declare income earned from such contracts under the corporate income tax regime. For foreign companies whose activities in Rwanda are for periods less than 90 days, income derived from such contracts would be taxed under the withholding tax regime. Article 11: Taxable income This provision has been updated to include capital gains and the sale or free transfer of an immovable property allocated to the business as taxable income. This is a move to capture capital gains of disposal of various assets under the tax ambit which was not explicitly provided for previously. Article 11 has been updated to include capital gains 4

5 Article 12: Tax rate This is the article that provides for tax rates applicable to the various categories of businesses. This article has been amended to specifically exclude liberal professions from being taxed under the lump sum tax regime of 3% of the annual turnover sometimes referred to as turnover tax. Under the repealed income tax law, all businesses that made a turnover of less than FRw 50 million were subject to a flat rate tax of 3% of the turnover. The new law has excluded liberal professions from this regime and they will now be taxed under the real regime irrespective of the turnover. Liberal professions have been excluded from being taxed under the lump sum tax regime A liberal profession is defined as; Profession exercised on the basis of special skills, in an independent manner, in offering services to the clients This provision is broad and is likely to result in inconsistencies and subjectivity in application by the Rwanda Revenue Authority officers. It also introduces certain inequities within vocations. In some tax jurisdictions the term liberal profession is defined to mean a person who is often subject to a code of ethics and specific legislation regarding professional conduct and is personally liable for his professional deeds. The definition normally captures bookkeepers, accountants, company auditors, tax consultants, architects, land surveyors, interior designers, real-estate agents, lawyers and legal advisors, public notaries, bailiffs, doctors, specialist doctors, dentists, etc. These are exactly the type of professions that the Government of Rwanda is currently promoting with its vision of a service and knowledge based economy and a professionalized workforce in Rwanda that is the envy of the region. Is this the right time to exclude these professions from the category of SME enterprises? In our view the amended provision was self-regulating in that if such businesses reached the FRw 50 million threshold, they would have automatically graduated to the real regime. Transporters of persons and goods The Article also includes a new flat amount of tax for activities of road transport of persons and goods. 5

6 Article 16: Payments exempted from employment income tax The original article has been split into two articles. That is Article 16: Payments exempted from employment income tax and Article 17: Persons exempt from employment income tax. Generally Article 16 has largely remained the same apart from deleting the paragraph below. retirement contributions made by the employer on behalf of the employee and or contributions made by the employee to a qualified pension fund to a maximum of ten per cent (10%) of the employee s employment income or one million and two hundred thousand (1,200,000) Rwandan francs per year, whichever is the lowest Under the repealed law, contributions by both the employer and the employee to both the state pension fund and a qualifying pension fund was exempt from income tax. In other words the employee was never taxed on the employer s contribution, and the employee s contribution also should not have been taxed. We are using the phrase should not for the employee s contribution because RRA s practice and application of this law was different. Actually, despite the fact that the law specifically exempted the employee s contributions to a qualified pension fund in our view, RSSB is one of these funds RRA denied taxpayers this relief. Since this article continued to generate disputes during tax audits on amending the law, RRA recommended that the paragraph be completely deleted. However, the deletion of this paragraph creates another problem. Whereas the law exempts retirement contributions made by employers on behalf of the employees from income tax, with this amendment the exemption is only restricted to contributions made to the state pension fund (RSSB). This means that contributions made by employers to other pension funds would not be exempted from income tax. They would be regarded as benefits to the employees on which they would be required to pay taxes. In our view the amendment is regressive, considering that the government is trying to liberalize the pension sector. Retaining this provision would have served as an incentives to attract employers to start contributing to private pension funds. Such tax policy measures are likely to slow down the growth of private pension funds which are already struggling to take off. Article 16 has largely remained the same Article 18: Benefits in kind The provision has not changed, however it has provided more clarity on taxing benefits in kind as regards rent paid directly by the employer and leasing of cars for employees. Under the repealed law the practice was that if accommodation was provided by the employer, whether rented or owned by the employer, the benefit in kind was computed as 20% of the employee s remuneration. However this treatment was contentious and there was inconsistent application of the provision even among revenue officers. 6

7 Clarity on benefits in kind, business profit and tax exemptions The new law has now clarified the position to the effect that where rent of a house or motor vehicle is directly paid by an employer for an employee, the amount paid will be taxed like any other allowance. This means that the benefit in kind is the cost the employer incurs to provide such a benefit. Article 19: Computation of business profit There are no changes to this provision apart from replacing the basis of reporting from the National accounting plan to Generally Accepted Accounting Principles to be consistent with the Companies Act. Article 21: Tax exemption for profit on agricultural and livestock activities No change to this Article however a new paragraph has been introduced to clarify a tax treatment. Article 21 provides that income earned by an agriculturalist or a pastoralist on agricultural or livestock activities is exempt from income tax if the turnover from agricultural or livestock activities does not exceed FRw12m in a tax period. A new paragraph has been introduced to the effect that when turnover exceeds FRw12m, then it is only the amount that is in excess of FRw12m that is taxable. 7

8 Article 26: Non-deductible expenses from taxable income This article details expenses that should not be deducted in arriving at the taxable profit. The new law introduces two amendments to this Article. Directors fees There is an exclusion from paragraph 1 of this Article as below: cash bonuses attendance fees and other similar payments made to the members of the Board of Directors Meaning that these expenses are now fully tax deductible. However, companies are now required to deduct withholding tax of 30% on sitting allowances allocated to the members of the Board of Directors (see Article 59). Management, technical fees and royalty fees paid to non-residents The new law has introduced a new paragraph to this article which restricts payment of management, technical and royalty fees to a non-resident person to 2% of the company s turnover. Any payments in excess of 2% will be considered a nondeductible expense. Whereas we are aware that the original intention was to restrict such payments to related persons, it seems with the current wording of this paragraph, that the total management, technical and royalty fees whether paid to a non-related person or not is going to be restricted to 2%. The Commissioner General will need to clarify this position as a number of companies outsourcing most of their core functions to third party non-resident entities could significantly be affected, if the paragraph is misinterpreted to mean that it captures all such payments to non-residents. 8

9 Old article 26: Investment allowance- deleted The investment allowance has been removed from the income tax act. Companies can only access tax incentives under the investment code (Law No. 06/2015). Article 28: Depreciation This Article provides for tax depreciation allowances for a number of assets. The new law has included in the 5% tax depreciation category industrial equipment and machinery. This means that industrial equipment and machinery are to be depreciated over a period of 20 years. This period seems quite long and very few machines would last this long. This means that industrial equipment and machinery are to be depreciated over a period of 20 years The Commissioner General will therefore need to define industrial equipment and machinery as it is currently open to ambiguities. For example, will ovens/cookers used in restaurants be considered as industrial equipment/machinery- despite the fact that these assets are unlikely to last for longer than a few years? If 5% is to be retained, industrial equipment and machinery should be restricted to such machinery which is part and parcel of the fabric of factory plants (manufacturing lines). Information and communication systems This paragraph now clearly describes how information and communication systems should be depreciated. Information and communication systems whose life spans are more than 10 years are depreciated at 10% on a straight-line basis, while computers, accessories and other information and communications systems whose life span is 10 years and below are depreciated at 50% on a reducing balance basis. 9

10 Article 31: Bad Debts Article 31 provides for conditions and circumstances under which a taxpayer can claim a deduction for bad debts Article 31: Bad Debts Article 31 provides for conditions and circumstances under which a taxpayer can claim a deduction for bad debts. However, the article provides for a condition that is unrealistically achievable by many businesses. The Article requires that before a taxpayer can claim for a bad debt relief/deduction, the taxpayer needs to demonstrate that he/ she has taken all possible steps in pursuing payment and has shown concrete proof that the debtor is insolvent. The requirement to show that the debtor is insolvent is unrealistic and unattainable. Not every bad debtor will be insolvent. Furthermore, for a number of businesses the value of the debt could be small in comparison to the cost (both monetary and time) to justify companies opting for legal action. In order to address this challenge, the new law has introduced a paragraph which provides that for an individual whose debt is less than FRw 3million, the taxpayer would not need to prove that the debtor is insolvent but must provide proof that he has taken all reasonable steps over a period of three years to recover the debt. Whereas the new law addresses part of the problem regarding small debts, it is still our view that the requirement for debtors to first be insolvent before taxpayers can claim a relief for bad debts is unrealistic. Provided a taxpayer can demonstrate that he has taken reasonable steps (such as evidence of reminders and followups with the debtor) to recover the debt, this should be sufficient evidence for a taxpayer to claim a deduction. The Commissioner General should explore following the guidance provided by IAS

11 Transfer pricing and capital gains Article 32: Loss carried forward This Article restricts the carrying forward of tax losses to a period of 5 years. Beyond 5 years the losses are forfeited. However a new paragraph has been introduced where a taxpayer can apply to the Commissioner General and request for the losses to be carried forward for more than 5 years provided they fulfill the conditions/requirements set by an order of the Minister of Finance. The order is yet to be published. Article 32 also provides that a company will forfeit its tax losses during the tax period if the direct and indirect ownership of the share capital or the voting rights of a company changes more than 25% by value or by number. Government needs to review this provision of the law because it discourages muchneeded acquisitions and mergers in the economy. Rwanda needs this practice as we seek to attract strategic investors into poorly performing companies. The option of applying to the Commissioner General to grant a waiver from forfeiting these losses should be extended to mergers and acquisitions. We also hope the Order from the Minister will consider these circumstances. Article 33: Transfer pricing between related persons This article now requires related persons involved in controlled transactions to have documents justifying that their prices are applied according to arm s length principle. In other words, companies are now expected to have transfer pricing policies and documentation. RRA is also in the process of issuing TP guidelines that would help taxpayers formulate these policies. The guidelines are still being reviewed but companies should not wait for the guidelines to start formulating their TP polices. Failure to have TP policies, the RRA will adjust transactions prices in accordance with general rules on transfer pricing, issued by an Order of the Minister of Finance. Article 36: Capital gain tax The new law has introduced capital gains tax on sale or transfer of shares. The gain is determined as the difference between the acquisition value of shares and their selling or transfer price. Therefore, the gain is not adjusted for/ indexed for inflationary elements over time of ownership of the shares. We understand that this is compensated for by the lower rate of tax applied to the gain. A new article 37: Tax rate on capital gain introduces the capital gains tax rate which is 5% of the gain. 11

12 Capital gain and dividend income Withholding and declaration Article 38: Withholding and declaration of capital gain tax. This new law places the obligation of withholding tax and declaring the same to RRA on the company in which the sale or transfer has occurred. This requirement seems unusual in that companies would be expected to have full details of their shareholders especially sale or transfer that would happen between two non-residents and sometimes these sales/transfers could be indirect sales/transfers. Article 41: Dividend income The definition of dividend income has been updated and broadened. Dividend income now includes income from shares in any societies, other similar income that may be generated by all entities that pay corporate income tax, as well as the outstanding balance of profit after an adjustment is made by RRA after a transfer pricing audit. This is a catch it all definition that will capture any share based remunerations to shareholders to be considered as dividends and any profits identified after a transfer pricing audit irrespective of whether they are distributable or not. 12

13 Article 46: Entities which are exempted from corporate income tax Two new entities have been accorded an income tax exemption status and these are: the Agaciro Development Fund Corporate Trust; and the Business Development Fund limited BDF Ltd. The list now comes to nine entities/ institutions that are exempted from income tax as listed below: 1. the City of Kigali and Districts; 2. the National Bank of Rwanda; 3. entities that carry out only activities of a religious, humanitarian, charitable, scientific or educational character, unless the revenue received exceeds the corresponding expenses to the extent that those entities conduct a business; 4. international organizations, agencies of technical cooperation and their Two new entities have been accorded an income tax exemption status representatives, if such exemption is provided for by international agreements; 5. qualified pension funds; 6. public institutions in charge of social security; 7. the Development Bank of Rwanda; 8. the Agaciro Development Fund Corporate Trust and 9. the Business Development Fund limited. The Article also introduces a requirement for these institutions to submit financial statements to the RRA not later than 31 March following the tax period. This means that all NGOs, faith based institutions, schools and other not for profit organisations are now obliged to submit financial statements to RRA. 13

14 Income tax rates Article 47: Zero-rated entities Whereas this is not a new provision, the Article on Zerorated entities is new. It covers companies and cooperatives that carry out micro finance activities approved by competent authorities who pay corporate income tax at the rate of 0% for a period of 5 years from the time of their approval. These entities are also required to submit their financial statements to the RRA not later than 31 March following the tax period. Article 48: Scope of tax liability to corporate income tax Generally there is no change to this article, apart from the insertion of an addition paragraph on dividend income. The new paragraph provides that: dividends paid between resident companies and which have been subject to the withholding tax referred to in Article 53 of this Law are not included in corporate taxable income Under the repealed law intercompany dividends were exempt from both withholding tax and corporate income tax. Under the new law, dividend income is only exempted from corporate income tax. Article 49: Corporate income tax rate This provision has been updated and the following removed: 0% corporate income tax rate for venture capital companies; tax incentives for companies operating in the Free Trade Zone or foreign companies that have their headquarters in Rwanda; and profit tax discounts. Most of these investments are now accessed through the investment code. However the Article still grants a reduced tax rate for newly listed companies on the capital market for a period of 5 years. 14

15 Article 52: Taxation of income from the rent of movable and immovable assets A new article specifically dealing with taxation of income from rent of movable and immovable assets has been introduced. Whereas this is not a new provision, a new article specifically dealing with taxation of income from rent of movable and immovable assets has been introduced. The Article provides that: Income from the rent of movable and immovable assets incorporated as assets of entities which are subject to corporate income tax is consolidated in the total taxable income. This has been a treatment adopted by most businesses, but this article now specifically provides for the treatment. 15

16 Article 53: Corporate restructuring There are no major changes to this Article apart from a slight change in wording and splitting of the previous Article 46 on Corporate Reorganisation into two articles, namely Article 53 which now provides the definition of corporate restructuring and Article 54 which explains the tax treatment of restructured companies. The definition of corporate restructuring under Article 53 now has five situations under which companies are considered as restructured. The old Article had four. The provision on a merger of two or more resident companies under the old Article 46 has been split into two situations for the company to qualify as restructured. Situation 1. a merger of two or more resident companies into a separate company Under this condition the merger needs to result in a separate company being formed. Situation 2. the acquisition of the entire company s assets so that its existence is replaced by the purchasing company Under the old Article 46, it was always contentious whether the kind of restructuring under situation 2 was a merger of two companies or fell under other conditions. Article 53 now clarifies that position. 16

17 Article 55: Taxation in case of liquidation The old Article 47 on liquidation of businesses provided that all liquidation proceeds are considered as dividends on shares in the last tax period of the company s existence. This meant that withholding tax of 15% was payable on liquidation proceeds. Furthermore, the old Article 16 on income on commercial activities also provided that business profits included liquidation proceeds. This meant that liquidation proceeds were subject to corporate income tax of 30% under article 16 and also withholding tax at the rate of 15% under article 47. The Article on liquidation of businesses has now been updated to the effect that it is after payment of liabilities and distribution of dividends that the remainder shall be considered as dividends on shares in the last tax period of the company s existence. Withholding tax will now be charged on both the distributed dividends and the proceeds that remain after liabilities and dividends are paid - since the proceeds that remain from liquidated assets are considered dividends from shares. Now the withholding tax will be charged on both the distributed dividends and the proceeds that remain after liabilities and dividends are paid 17

18 Employee declaration and sitting allowance Article 58: Circumstances in which the declaration and payment of the tax on employment income are made by the employee A new article has been introduced to clarify the position of when an employee becomes responsible for his/her own taxes. Generally, it is the responsibility of the employer to deduct PAYE and declare and pay it to the RRA. However, in the past there have been situations where international agreements signed with certain organisations have taken away this responsibility. This article now clarifies that where such responsibility is taken away from the employer, the employee has the obligation to declare his or her own taxes to RRA within the prescribed time period of the law. Article 59: Tax on sitting allowance Under the repealed law, sitting allowances and similar payments to Boards of Directors were not deductible expenses in arriving at the entity s taxable income. Under the new law this provision has been deleted. However, a new Article 59 has been introduced which provides: Sitting allowance allocated to the members of the Board of Directors are taxable at a rate of thirty percent (30%) Whereas under the repealed law, it was the company that had to incur the tax cost, under the new law it is the directors that will bear the tax cost. 18

19 Article 60: Withholding tax on payments or other methods of extinguishing an obligation The entire Article on withholding tax has been overhauled and new wording and provisions have been introduced. For the purpose of understanding the new provision under Article 60, we have reproduced the paragraphs and provided our comments on the implications of the new provisions. Paragraph 1 A withholding tax of fifteen percent (15%) of the total amount excluding Value Added Tax (VAT) where applicable is levied on payments or other methods of extinguishing an obligation made by resident individuals including tax-exempt entities, when such payments or other methods of extinguishing an obligation are made to a person not registered with the Rwandan tax administration or to a registered person who does not have recent income tax declaration. This paragraph clarifies two issues: withholding tax is deducted on the same base that is used to determine VAT; and even where a taxpayer is registered with the tax administration they have to show evidence that they have filed the most recent income tax declaration if withholding tax is not going to be deducted from their pay. Paragraph 2 Payments or other methods of extinguishing an obligation subject to the withholding tax of fifteen percent (15%) are related to the following: 1. dividends, except income distributed to holders of shares or units, in collective investment schemes This paragraph has now been amended to bring into the tax ambit dividends paid to resident entities. Under the old provisions, dividends paid to resident entities were exempted from withholding tax. 2. financial interests: interest on deposits in financial institution for at least a period of one year As a way of encouraging a savings culture, interest on savings for a period of more than one year is now exempted from withholding tax. This is not a new provision but a clarification of the old law. interest on loans granted by a foreign development financial institution exempted from income tax under applicable law in the country of origin The repealed law did not explicitly exempt interest earned by foreign development financial institutions from withholding tax. This new provision now explicitly exempts interest paid to foreign development financial institutions from withholding tax. Article 3 (paragraph 9) of the new law defines a foreign development financial institution to mean an: institution carrying out financial activities with public funds, for which administrative decisions are made by Government representatives and having public interest missions, such as sustainable development and poverty reduction. 6 gambling activities The taxation of gambling activities is currently governed by law number 29/2012 establishing tax on gaming activities. The law also provides for withholding tax of 15%. The phrase gambling activities will need to be defined. The exemptions were handled on a case by case basis by the Minister of Finance. Where the exemptions were not granted, a number of local entities that borrowed from foreign development financial institutions had to assume the tax burden. 19

20 6 goods sold in Rwanda This paragraph has been amended to explicitly provide that it is only goods sold in Rwanda that would attract withholding tax if the supplier is not tax registered. The repealed law provided that any goods supplied by companies that are not registered with the tax administration were subject to withholding tax. We still see a challenge with this provision as it is prone to the same misinterpretation that was applied to the previous provision. For example, if a foreign company wins a tender to supply goods to a customer in Rwanda, would these goods be considered as sold in Rwanda or sold outside Rwanda and imported into the country by the Rwanda customer? When is withholding tax payable? Under the repealed law, withholding tax was only payable when actual payment to the supplier was made. This meant that if the supplier was not paid, withholding tax was not due. The new law specifically provides that liabilities which reduce the taxable income of a taxpayer are deemed as paid if the liability exceeds six months following the tax period. In other words, for all accrued expenses that attract withholding tax (that have not been paid by the end of the company s financial year end), the withholding tax liability can now only be deferred for six months. This therefore means that withholding tax for all accrued expenses that attracted withholding for the year ended 31 December 2017 would be due on 15 July 2018 if the expenses remain not settled by June We therefore advise companies to review their accrued expenses to determine the level of potential tax liability that they would need to consider as a result of unsettled accrued expenses that attract withholding tax. Withholding tax treatment of expenses incurred by non-residents on behalf of their local permanent establishments. It is a common practice for group companies to incur offshore costs on behalf of their local permanent establishments and only recharge the local company when the local company is financially able to pay. The current practice has been for the local company to only account for withholding tax when they are recharged and not when the foreign supplier is paid by the non-resident. A new provision has been introduced which requires local companies to declare and pay withholding tax at the time when the non-resident pays the foreign supplier and not when the non-resident recharges for the costs. 20

21 Withholding tax Commercial goods and public tenders Article 61: withholding tax on goods imported for commercial use This article has now been split into two articles. Article 61 specifically deals with withholding tax on imported goods for commercial use and Article 62 (see below) deals with withholding tax on public tenders. Article 61 now provides that withholding tax of 5% will be charged on only goods imported for commercial use. This seems to imply that goods imported for noncommercial use such as goods imported for domestic purposes would not attract the 5% advance withholding tax. The Commissioner General will need to clarify what is meant by goods imported for commercial use. Article 62: withholding tax on public tenders Article 62 deals with withholding tax on public tenders. The withholding tax charged under Article 61 and 62 is an advance tax payment which is claimable / recoverable by the taxpayer at the end of the tax period. The income tax law has introduced a new wording to this Article as below: Paragraph 1 withholding tax on public tenders of 3% of the sum of invoice excluding VAT is retained when public tenders are paid 21

22 Article 62: Paragraph 2 However a tax of 15% shall be withheld on public tenders if the recipient is not registered with the tax administration or he/she is registered but does not have his/her previous income tax declaration We understand that in the past there has been misinterpretation of this provision by some taxpayers, especially foreign companies that win government tenders. Some companies have claimed that the only withholding tax rate applicable on public tenders is 3% and not 15%. The new law has now clarified this position by introducing a new wording that requires public institutions to deduct withholding tax of 15% on tenders won by persons not registered with the tax administration. This provision captures all non-resident companies since they would naturally not be registered with the tax administration. The wording of this new paragraph would be fine if the foreign supplier is to provide services to the Government entity. The withholding tax treatment would be in line with the treatment provided for under Article 60 (withholding tax on service fees) which applies to entities that do not procure goods and services through public tender systems. However, if the foreign supplier supplies goods under a public tender this provision seems to suggest that the public institution would be required to deduct 15% on supply of goods because the supplier would not be registered with the tax administration. It is important to realise that if the same foreign supplier supplied the same goods but not under a public tender, there would be no requirement for the recipient of the goods to deduct the withholding tax of 15%. Therefore the wording of paragraph 2 of Article 62 will create inequality and discrimination in the tax system considering that foreign supplies of goods to public institutions would cost more - because of this withholding tax - than if similar supplies are supplied to private entities. Further, this Article may face other challenges especially from foreign suppliers whose countries are members of the World Trade Organisation. Article 62: Paragraph 2 Rwanda is a member of the World Trade Organisation1. The WTO s legal texts of the General Agreement on Tariff and Trade (GATT) of 1947 as amended, note the following. The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject to internal taxes Paragraphs 1 and 2 of Article III of GATT provide that: The products of the territory of any contracting party imported into the territory of any other contracting party shall not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied, directly or indirectly, to like domestic products. Moreover, no contracting party shall otherwise apply internal taxes or other internal charges to imported or domestic products in a manner contrary to the principles set forth in paragraph 1... The provisions in GATT confirm the view that in case of imported goods, the foreign supplier should not be subject to internal taxes such as withholding tax as this contravenes the WTO s objective of eliminating discriminatory treatment in international commerce. 22

23 Still on withholding tax Furthermore, even if the interpretation of Article 62 was to apply to foreign suppliers, this provision is likely to eventually be redundant as regards importation of goods from WTO member states. This is because Article 190 (supremacy provision) of the Constitution of The Republic of Rwanda provides:...upon their publication in the official gazette, international treaties and agreements which have been conclusively adopted in accordance with the provisions of law shall be more binding than organic laws and ordinary laws except in the case of non-compliance by one of parties. This means that if the provision under Article 62 was to be extended to foreign suppliers trading in goods with Rwanda, the provision under GATT would prevail. The cost of imported goods will drastically increase by an additional 15% It important to realise that imports into Rwanda cannot be income made in Rwanda because the place of transaction is in the foreign country (exporter) hence it is only the foreign country that has the right to receive tax on those sales transactions. It should be noted that this is different from imported services because such services are transacted (executed) on Rwandan soil and therefore Rwanda has a right to levy tax on such transactions. In our view, if this Article is interpreted to suggest that public institutions will have to deduct withholding tax of 15% on payment for goods to foreign suppliers, this is going to have an adverse impact on foreign goods supplied to government entities. The cost of imported goods will drastically increase by an additional 15% as foreign suppliers will start factoring in tax costs in their price quotes. Public institutions will have to start absorbing the extra 15% in addition to the other import taxes. 23

24 Contact our tax experts in case of any clarification Moses Nyabanda Partner, PwC Rwanda Frobisher Mugambwa Associate Director, PwC Rwanda This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it PricewaterhouseCoopers Rwanda Limited. All rights reserved. In this document, PwC refers to PricewaterhouseCoopers Rwanda Limited which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.