Transfer Pricing (TP) is a major concern for tax authorities all over the world and Rwanda’s Revenue Authority is no exception. In simple terms, transfer pricing refers to the price that one division of a company charges another for goods and services. Very often, these divisions are located in different countries or tax jurisdictions.

For tax authorities, those transactions that lack commercial substance are of specific concern – such as those from which local companies derive no real value and payments that are made to low tax jurisdictions.

The Ministerial Order (MO) Nº 003//20/10/TC that was issued by the Government of Rwanda on 14 December 2020. While the enactment of the Order may be viewed as a procedural matter that legitimises existing practice, it is expected that it will embolden the Rwanda Revenue Authority (RRA) to confront transfer pricing malpractice with a renewed energy and zeal.

Companies whose filing deadline is 31 March should act quickly to develop their TP documentation and remedy any gaps. While the new rules may have raised certain questions which have yet to be addressed, it is important to take a proactive position rather than a "wait and see” approach.

The current economic environment has adversely affected tax revenue collection and it is therefore expected that the RRA will be in a hurry to implement the new rules to the letter in a bid to meet its revenue targets. 

Requirements to note

As expected, the Order officially makes it a requirement for affected taxpayers to have local transfer pricing documentation supporting their related party transactions. The Order also articulates specific guidance on the transactions in scope, the transfer pricing analysis required to support related party transactions and the information that must be provided to the RRA upon request. Overall, the new rules may go further than the OECD Transfer Pricing Guidelines, in many cases, and also beyond the transfer pricing requirements in comparative jurisdictions such as with regard to the scope of transactions captured and the attendant disclosure requirements.

The Order’s rules bring into the TP scope two unique transactions that would normally be outside TP regimes ("deemed transactions”). These include:

● transactions between resident related persons – these are normally outside the scope of most TP regimes; and

● transactions between a resident person and a non-resident person who is located in a country considered by the RRA to provide a beneficial tax regime, whether such persons are related or not.

Including such transactions in the scope could have been influenced by ongoing legal reforms to support the Kigali International Financial Centre (KIFC) in Kigali. Economic substance and non-harmful tax laws are at the heart of the KIFC’s values.

Any person engaging in controlled transactions will be required to have contemporaneous documentation to verify that all related party transactions must at all times be reflective of the current dynamics of the company and the controlled transactions. The guidelines provide that this should be reviewed on an annual basis. Therefore, a critical and strategic assessment of the impact of the new TP rules on affected transactions should start immediately.

Consequences of non-compliance

Some of the consequences for non-compliance can be inferred from the Order while others would follow standard corporate income tax procedures. For example, the Order states that non-arm’s length transactions will be disregarded for tax purposes. This could potentially mean that the entire transaction will be disallowed, and tax paid thereon at the full corporate income tax rate.

As the Order does not provide for specific transfer pricing related penalties, the default penalties for non-compliance, as provided for under the Tax Procedures law, will apply. These include:

● Rwf1,000,000 [US$1,000] for failure to keep records of controlled transactions and a further

● Rwf1,000,000 [US$1,000] per month where such records are required to be submitted to RRA and the taxpayer fails to submit them.

In certain areas, the Order’s guidance and rules require additional clarification. For example, the Order’s "beneficial regime” limitation would capture all transactions with counterparties located in jurisdictions where the corporate income tax rate is below 20%. The rules may discourage companies from procuring goods and services from low tax jurisdictions, and Rwandan companies may need to start finding out whether the suppliers they are dealing with pay taxes at the rate above 20% in their home countries.

Finally, the Order could have ramifications for Rwanda’s tax treaty partners. Most Double Taxation Agreements (DTAs) that Rwanda has concluded have non-discrimination articles which require Rwanda not to levy an additional taxation burden on foreign investments vis-à-vis domestic investments. The new TP rules could conflict with the non-discrimination DTA provisions and we are likely to see taxpayers challenging certain provisions in the Order.

The writer is an Associate Director with PwC Rwanda’s Tax practice.

The views expressed in this  article are of the writer.