On the December 14, 2020, by virtue of Ministerial Order No. 003/20/10/TC of December 11, 2020, the Rwandan government introduced new transfer pricing regulations and repealed the more simplistic rules, which had been in force since 2007. The new rules are largely based on the 2017 OECD Transfer Pricing (TP) Guidelines and the arm’s length principle, and in certain instances they also have a wider scope than the Guidelines.
Whilst there could be concerns about the additional compliance burden on taxpayers and about the fact that the effective implementation of these new regulations will largely depend on improving the technical competence of both the tax administration and profession in this area, it is definitely a step in the right direction. The introduction of these new rules continues to place Rwanda at the forefront as a major financial centre in Africa.
The scope of these regulations is wider than the OECD TP Guidelines as it is not only controlled transactions which are covered by these rules, but there is the introduction of the concept of ‘deemed’ controlled transactions, which also fall within the scope.
In view of the fact that Rwanda has certain preferential tax zones to promote investment, controlled transactions also include domestic transactions between related parties and not just transactions with non-Rwandan tax residents.
Transactions are deemed to be controlled, when they involve transactions between unrelated parties involving a tax resident (or PE) in Rwanda and a taxpayer resident in a country considered by the Rwandan tax administration to provide, what is known as, a ‘beneficial tax regime’.
A ‘beneficial tax regime’ is one that does not impose tax or taxes income at a maximum rate of 20 per cent, grants tax-breaks to non-resident individuals or companies and does not require companies to have economic substance in the country of residence.
A ‘beneficial tax regime’ is also one that does not tax income sourced outside the jurisdiction, or taxes it at a maximum rate of 20 per cent; or has no access to information about the structure and ownership of the assets.
Whereas the previous TP rules only provided for transaction-based methods, the new rules permit both transaction-based methods and transactional profit methods. The transaction-based methods are the comparable uncontrolled price method, the resale price method and the cost-plus method. Whereas the transactional profit methods are the net margin method and the profit split method.
The regulations also allow for alternative methods where none of the above-mentioned five methods can be applied in a reasonable manner to achieve the arm’s length price.
Not all taxpayers will be required to prepare transfer pricing documentation. The regulations provide for an exception to taxpayers with an annual turnover of less than Rwf 600m and whose controlled transactions are less than Rwf 10m individually or an aggregate value of less than Rwf 100m. The regulation also provides for exhaustive lists of the transfer pricing documentation which is required, the documents which must be kept by the taxpayers and the deadlines for filing such documentation.
In the last few years, we have seen major changes to international tax principles, primarily as a result of the OECD BEPS project, which has led to a multilateral instrument which has impacted the applicability of tax treaties. The OECD TP Guidelines published in 2017 were another important step towards continuing the bring international tax practices up to date. Rwanda’s new TP regulations embrace both the OECD TP Guidelines and the recommendations emanating from the BEPS project. Countries will be expected to introduce these regulations and guidelines in their domestic tax legislation and Rwanda has clearly set the bar for other countries to follow.
Nicky Gouder is at Partner at Seed Consultancy in Malta, EU
www.seedconsultancy.com
nicky@seedconsultancy.com