In July 2020, I appeared before the Supreme Court petitioning this apex court to adjudge and declare unconstitutional the provisions of the third and fourth paragraphs of article 12 of law n° 37/2012 of 09/11/2012 establishing the value added tax as amended to date (VAT Law), which deny taxpayers credit for input VAT paid on imported services when the same or similar services are locally available (the "impugned provision”).

We submitted, among other arguments, that the impugned provision is contrary to article 95 of the Rwandan Constitution of 2003 revised in 2015

relating to the hierarchy of norms which places international treaties above ordinary laws and expressly provides that a lower law in terms of the hierarchy of norms cannot contradict a higher one.

We based on that and argued that the impugned provision is incompatible with the principle of ‘national treatment’ contained in various trade treaties concluded by Rwanda, including the WTO General Agreement on Trade in Services (GATS), the East African Community (EAC) Common Market Protocol, and Protocol to the Agreement Establishing the Africa Free Trade Area on Services.

In fact, the principle of ‘national treatment’ requires contracting States of the relevant trade treaties to accord to services and service suppliers of any other contracting State, in respect of all measures affecting the supply of services, treatment no less favourable than that it accords to its own like services and service suppliers.

The Supreme Court held that the impugned provision is not incompatible with any of the said treaties, and accordingly does not violate article 95 of the Constitution (the SC Ruling). In substantiating its decision, particularly in relation to the incompatibility with the EAC Common Market Protocol, it stated that there are pending aspects regarding the harmonisation of domestic taxes in partner States including the Council of Ministers’ Directive on VAT.

For some ethical reasons, we shall not comment on the merits of the SC Ruling.

While (at least from the ruling) there is no superior law warranting the abrogation of the impugned provision, one is of the considered opinion that it should still be repealed for the reasons discussed below.

Hindrance to FDIs

Over the years, Rwanda has been implementing various reforms aimed at positioning itself as a preferred destination for Foreign Direct Investments (FDIs). The most recent initiatives include the overhaul of the investment code which came with a number of new incentives, and introduction of new business structures such as partnerships, foundations and protected cell companies.

What is however important to note is that a good number of foreign enterprises deploying their investments to Rwanda are members of large group of companies with operations in various countries. For members of corporate groups, intra-group services (provided by one of the group entity to other members whether directly or indirectly) can be that thing that cannot be just avoided.

Of course, these services may be available in Rwanda, but members of corporate groups would prefer acquiring them from the group service centre at least for synergistic reasons. Given that Rwanda is not alone in the race to attract FDIs, some companies may consider directing their investments in other jurisdictions as the said restriction increases the cost of doing business in Rwanda.

Distortion of international trade in services and violation of neutrality principle

VAT is imposed on final consumption (that is consumption by households, entities supplying VAT exempt goods and/or services, and those involved in non-commercial activities). The burden of VAT should not rest on businesses, which is the reason why VAT is generally collected through a staged process where each business in the supply chain collects and remit the difference between the VAT imposed on its taxed inputs (input VAT) and the VAT imposed on its taxed outputs (output VAT), with the taxpayer being entitled to a refund in case their input VAT exceeds the output VAT.

Denying businesses imported services input tax credit places the VAT burden on them, which would not be the case in case of acquisition of domestic services. This would cause businesses to make decisions not based on economic considerations, but tax considerations, not to mention that it constitutes differential treatment between resident and non-resident suppliers (and goods and services suppliers), which is against the principle of neutrality, an internationally accepted principle of tax policy. It also distorts international trade in services as it is tantamount to double taxation.

Incompatibility with Rwanda’s position as a beacon of free trade

It is a no-brainer to explain how Rwanda is an exemplar of free trade on the African continent. Picking from recent examples, Rwanda has been at the forefront of adoption of the AfCFTA treaty, it is among 7 countries selected to participate in the pilot phase of the AfCFTA, and last week it became the host country for the AfCFTA Adjustment Fund.

So, it is quite ironic to find a protectionist provision like article 12 (3&4) of the VAT Law restricting cross-border trade on the African continent and beyond in the Rwanda’s legal arsenal.

The restriction does not pass the certainty and simplicity test

Certainty is one of the internationally accepted principles of tax policy. It dictates that tax rules should be clear and simple to understand so that taxpayers can anticipate the tax consequences in advance of a transaction. Article 12 (4) of the VAT law states that services are considered not to be available in Rwanda if there is no person who can deliver identical or similar services on the local market.

This then raises the issue as to whether qualitative aspects of the services are also taken into consideration when determining whether a given service is locally available, and in the affirmative, it may be a subjective exercise which may even, in some instances, be abused. There are also evidentiary issues around the implementation of the impugned provision.

Wrapping up, one appreciates the need to promote the local service sector, but it is believed the above highlighted issues necessitate the repeal of article 12 (3&4) of the VAT Law, because it may cost more than it saves. The Government of Rwanda should actually consider other ways of promoting the service industry including direct tax incentives, encouraging local service suppliers to improve the quality of their services to make them competitive instead of using a protectionist approach.

After all, there is no guarantee that denying taxpayers credit for input VAT paid on imported services when the same or similar services are locally available will translate into increased supply of domestic services as some taxpayers may take the risk of importing services irrespective of the fact that the VAT paid on those services may not be recovered.

The views contained herein are those of the author

The writer is a tax and corporate commercial lawyer, and Partner at ENSafrica Rwanda.

Email: dnzafashwanayo@ensafrica.com