Rwanda’s income tax law, Law nº 016 / 2018 of 13/04/2018 Establishing Taxes on Income is under review and the main reason for most of the proposed changes is to accommodate Kigali International Financial Centre (KIFC)’s initiative. KIFC strives to "promote and develop Rwanda as a leading financial destination for international investment and cross-border transactions in Africa.” Since the official commencement of operations of the KIFC, a number of reforms including legal have been executed and some of them are already having an impact on the country’s investment landscape. As of the date of this article, the draft-law has been transmitted to the parliament for consideration. The key changes proposed include the following;
Tax holiday for foreign Experts
The draft law seeks to exempt people who work as experts or professionals directly for an entity doing business licensed by KIFC from paying personal income tax on foreign sourced income during the first five (5) years following the date of becoming resident in Rwanda. This exemption is intended to attract experts and investors while also boosting the local workforce, particularly in the technology and financial sectors.
Taxation of partnerships
After the enactment of its first ever partnerships law late last year, the surfaced concern was how these new structures of corporate entities were to be taxed differently from traditional companies. In the draft-law, it is proposed that income generated from general partnership, limited partnership and limited liability partnership be taxable at the level of each partner and not the entity itself. The partnership must prepare its financial accounts, determine and declare the taxable share in profit of each of the partners in their respective legal status, withhold corresponding tax liabilities and remit them to the tax administration. In determination of tax liability, corporate partners are subject to corporate income tax while individual partners are subject to personal income tax. This move comes in to enforce the key benefit of partnership structured entities which is tax transparency.
Incentives for startups
The draft-law proposes exempting newly registered startups (registered during the concerned annual tax period) from withholding tax on sitting allowance, on payments or other methods of extinguishing an obligation, and on public tenders. This would allow startups save up to 15% tax bill on sitting allowance, on payments or other methods of extinguishing an obligation and 3 % on public tender invoices and 15% if the startup is registered but does not have its previous income tax declaration. This will allow new entrepreneurs to build businesses with extra funds that they would have spent on the tax bill.
Digital Economy
The draft-law designates income derived from online advertising services, the supply of user data, online search engines, online intermediation platform services, social media platforms, digital content services, online gaming, cloud computing services or standardized online teaching services as taxable income. This tax regime is new in Rwanda and looks like the country wants a fair share of the unreservedly growing world’s digital economy. Typically, digital service taxes (DSTs) are taxes imposed on multinational firms based on their digital activities’ income in a particular jurisdiction.
Factually, DSTs are implemented to require multinational digital companies to pay some of their corporate income taxes to countries where their customers are located, even if the companies are not residents in those particular jurisdictions. This is customarily achieved by extending "permanent establishment” concept to cover digital economy through what is known as significant economic presence (SEP). This is the model followed in a number of jurisdictions such as India, where a threshold has been set to constitute SEP. The Indian taxman defines SEP as "systematic and continuous solicitation of business activities or engaging/ interacting with a certain number of users in India through digital means”. This systematic solicitation includes download of data or software in India, subject to a payment threshold set by the tax administration. Another popular model of DST introduced in the taxation of digital economy is one that is imposed as a tax on certain gross revenue streams of the digital company earned in the imposing country. Under this strategy, any company that crosses the revenue stream cap set by the tax administration is subject to DST.
Nevertheless, due to the fact that most of these multinational digital companies are coming from the United States of America, the country labelled most of the proposed DSTs as discriminatory tax regimes and threatened to retaliate against any country imposing digital tax against companies originating from its jurisdiction. From this background, however, the Organization of Economic Cooperation and Development (OECD) (in which Rwanda is a member) laid out a two-part strategy as part of its base erosion and profit shifting (BEPS) work (a set of policies designed to ensure that companies pay taxes in the same places where they generate profit) to tackle digital taxation issues of multinational digital companies.
Component one of the OECD strategy aims to change the way companies demonstrate their presence in a country, which is extremely important for industries with new business models based on data rather than physical presence (Pillar One). Under this pillar, for smaller jurisdictions with GDP lower than 40 Billion Euros (which include Rwanda), the nexus of income will be set at 250 000 Euros to attract digital income tax. Any country that adheres to the agreement (Rwanda has not signed it yet) implementing this plan is prohibited to impose its unilateral DST against multinational digital companies. Pillar two outlines the mechanisms for implementing Global Anti-Base Erosion (GloBE). Once implemented, the GloBE rules will apply to multinational enterprises (MNEs) with at least €750 million per annum gross revenues in two (or more) of the previous four fiscal years. The GloBE includes a "top-up" tax that raises the effective tax rate for an MNE's subsidiary companies and permanent establishments of up to 15% in a jurisdiction. This pillar intended to guarantee that MNEs pay a minimum (15%) tax on income earned in each jurisdiction. The pillar is set to take effect this year. The OECD move aims at ensuring developing harmonized tax regimes of multinational and avoid or at least decrease profit shifting and tax evasion issues.
However, it is not (yet) clear from this draft law how Rwanda’s Tax Administration will enforce this law against multinational digital companies such as Google parent Alphabet, Amazon, Facebook parent Meta, Twitter, among others to pay their dues in Rwanda or whether the digital levy just concerns resident companies only, which I doubt the latter is the desired outcome. On the assumption that multinational digital entities are the target, whether Rwanda adopts either of the regimes discussed above (or any other mechanism), (except if it adheres to the OECD regime which provides for mechanism) the draft-law does not clarify if non resident companies will be required to register as taxpayers and declare income tax themselves or if the levy will be designed as a withholding tax to be declared and remitted to the Tax Administration by the local consumers.
At this point, though it is not (yet) clear what the approach will be, though, it is safe to argue that it is now crystal clear that Rwanda is convinced that it is high time it gets its fair share of the digital economy. In addition to this levy against digital companies, the draft-law, also targets social media influencers (who usually make money by endorsing products, services and brands online) and revenue earned from creating content on platforms such as YouTube. Generally, DSTs have special regimes when it comes to levy rates, from the draft-law none has been adopted (yet).
Corporate Income Tax exempt
The draft-law proposes that special purpose vehicles (SPV) should be exempt from liability of corporate income tax in case the SPV’s revenue received does not exceed the corresponding expenses. SPVS are preferred investment vehicles by foreign investors mainly because they provide enough protection for parent company's assets and liabilities, and they can easily raise capital for their causes. The draft-law also seeks to exempt common benefit foundations; and resident trustees for income earned by a foreign trust. All these exemptions are being considered in order to pave way for the KIFC case.
Withholding tax
The draft-law seeks to extend a number of payments subject to the withholding tax of 15%. The proposed list now includes profit after tax or retained earnings that have been converted into shares, repatriated profits, payments made in cash or in-kind by a resident person on behalf of a non-resident contracted person besides the contractual remuneration, re-insurance premiums paid to non-resident insurers.
Related-Parties’ loans
In the draft-law, it has been suggested that realized foreign exchange loss arising from total loans between related parties in excess of four (4) times of the amount of paid-up equity which excludes provisions or reserves and retained earnings according to the company’s balance sheet, and unrealized foreign exchange losses be classified as non-deductible expenses from taxable income.
Loss resulting from change of control
According to the current tax law, if the direct or indirect ownership of a company's share capital or voting rights changes more than twenty-five percent (25%) by value or number, and the computation of business profit results into a loss incurred by that company, these losses cannot be carried forward. On the contrary, this draft-law proposes that if these losses are a result of an internal business restructuring that retains all shareholders, and those shareholders have been in the shareholding structure for at least three (3) years, the losses can be carried forward.
Corporate tax applicable to Trustees and foundations
The list of entities subject to corporate tax has been extended to trustees, an enforcer or protector of a trust, a cell of a protected cell company, foundations and a non-resident person with a permanent establishment, to avoid tax evasion. This development comes after the enactment of laws governing trustees and foundations later last year and the introduction of protected cell company in the 2021 law governing companies.
Tax evasion
The draft law gives the power to the Tax Administration to adjust transaction prices or profits in accordance with applicable rules on transfer pricing in the event a related person involved in controlled transactions does not maintain required documentation or the documents do not justify compliance with the arm’s length principle, to avoid tax evasion. This is an added layer of power given to Tax Administration to enforce Rwanda’s latest transfer pricing rules put forth by the Ministerial Order N003/20/10/Tc of 11/12/2020 Establishing General Rules on Transfer Pricing. The Transfer Pricing rules require any person with an annual turnover above six hundred million Rwandan francs (FRW 600,000,000) (or below this threshold in case the made controlled transactions have a value which is above or equal ten million Rwandan francs (FRW 10,000,000) or has an aggregate value below one hundred million Rwandan francs (FRW 100,000,000))involved in controlled transactions to prepare and keep the documentation that authenticates that the conditions of its controlled transactions are consistent with the arm’s length principle.
Among other changes suggested, the draft-law clarifies some of the existing provisions such as on royalty income, classifying debentures or other debt securities as financial incomes. The draft law extends capital gains exemption list to cover other securities other than shares on the securities exchange operating in Rwanda. The draft also makes a number of clarifications including but not limited to income on gaming activities to which its specific law has been abolished and redefining permanent establishment concept to include a third party who acts on the company’s behalf and usually exercises the power to negotiate or enter into contracts on the company’s behalf or play the main role leading to the conclusion of such contracts in Rwanda.
The draft-law, if enacted as proposed, will enhance the vision introduced by the KIFC cause and also make the country’s tax policy more transparent and up to date. As the economists contend, fiscal policy that is comprehensible and succinct helps to fast-track long-term economic growth by increasing the rate of investment in both the public and private sectors. In the short run, it can have a positive impact on the level of economic activity by influencing demand and supply for goods and services.
The views expressed in this article are of the author and do not constitute legal advice. Please seek professional advice in relation to any particular matter you may have.
The writer is a corporate and commercial lawyer and Trainee Associate at K-Solutions & Partners.
Email; felix@ksolutions-law.com