Rwanda Overhauls Income Tax Law to Boost Domestic Revenue

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Rwanda is overhauling its income tax law after experts warned that its domestic revenue collections would remain weak for three straight years.

A draft Bill in parliament aims to cut tax subsidies, widen the tax base, bring tax evaders under the net and align tax laws to East African Community policies.

All professionals will pay 30 per cent corporate income tax when the Bill is passed, mirroring the authorities’ drive to formalise the economy and broaden the tax base.

Lawyers, accountants, doctors, architects and engineers have been paying a corporate tax of three per cent of turnover, a regime for small and microbusinesses — even when their turnovers are high.

The lump sum regime will now remain for small businesses whose turnover per year is more than Rwf12 million ($14,070), but less than Rwf20 million ($23,400). The income tax payable shall be three per cent of turnover.

Tax experts say the proposals bring about simplicity in tax determination and fairness among professional service providers.

The Bill also aligns Rwanda’s income tax regime to that of Uganda, Kenya and Tanzania. “Corporate tax is charged at 30 per cent by all countries in the East African Community,” said a tax manager at KPMG Rwanda Angello Musinguzi.

Mr. Musinguzi said the difference comes from capital allowances, with Rwanda’s maximum set at 50 per cent while other countries such as Kenya may go up to 100 per cent for some sectors.

For personal income tax, the difference in the EAC tax regime comes from the tax relief in which Rwanda’s is lower at Rwf30,000 ($35).

However, scrapping the three per cent flat corporate tax coupled with maintenance of VAT and withholding tax on imported services in the Rwanda VAT law.

In Rwanda, imported services attract 15 per cent withholding tax on top of an 18 per cent VAT reverse charge plus a bundle of other taxes.

“The reverse VAT charge makes the use of imported services very expensive,” said Peter Rutaremara, a managing partner at the Rwanda-based Ruma Certified Public Accountants. “We had expected that the new law would scrap the tax to enable us charge competitive rates.”

In the region, Tanzania withholds 20 per cent from imported services but this is reduced to 15 per cent on consultancy fees for East African citizens. Burundi, Uganda, Kenya and Rwanda withhold at 15 per cent on non-resident companies.

The withholding tax rates differ for petroleum and mining companies. For VAT, the standard rate is 18 per cent apart from Kenya which charges 16 per cent.

The Commissioner General of Rwanda Revenue Authority Richard Tusabe said Kigali’s VAT reverse charge on imported services will remain operational until EAC member states adopt the double taxation treaty.

Uganda, Kenya, Burundi, Rwanda and Tanzania signed the agreement in November 2011. However, only Rwanda has ratified it.

“The VAT reverse charge was supposed to be addressed by the double taxation agreement which other regional countries have refused to sign. What do you expect Rwanda to do?” said Mr Tusabe.

Kigali is also tightening controls on transfer pricing that multinationals use to shift costs between items and avoid paying huge amounts of corporate tax through a new law.

When the transfer pricing Bill is passed into law, multinationals will be required to show documentary evidence on how they are trading with their parent companies.

According to Mr. Musinguzi, international companies dump their costs in Rwanda. “They price the services and goods supplied in Rwanda highly in order to reduce margins of subsidiaries to pay less taxes,” said Mr Musinguzi. “If they do not have the documentation, they will pay penalties.”

The Bill caps management fees paid by non-resident persons at two per cent, which means that payments above two per cent are not allowed as a deductible expense from taxable profits.

Plugging tax revenue leaks comes as the ministry of finance and economic planning projected that tax revenue-to-GDP ratio is set to decline to 14.9 per cent in fiscal 2018/19-2019/20, from 15.6 per cent in the fiscal year 2016-17.

The new income tax Bill has also introduced a tax on sale or transfer for free of immovable property of five per cent of sale or market value of the immovable property.

There is also a proposal in other tax laws to increase property tax for residential and commercial purposes from 0.1 per cent to 1 per cent and to 0.5 per cent respectively of market value of immovable property.

“This new tax coupled with proposals for additional taxes on immovable property in other laws will discourage investments unless the intention is to slow down the process of privately-owned immovable property,” said Mr. Rutaremara.

 

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