There is a strong case for introducing safe harbours in Rwanda’s transfer pricing legislation

Rwanda’s transfer pricing rules are premised on the arm’s length principle (ALP) just like in many other countries. The principle requires that the conditions of the transactions entered into between related parties do not differ from the conditions that would have been applied to comparable transactions entered into between non-related parties in comparable circumstances. Such conditions include prices, and the transactions entered into between related parties can, for instance, mean between a parent company and its subsidiaries or between sister companies. Compliance with the ALP is a factual or fictitious exercise as it requires related parties to imagine themselves as unrelated, and price their transactions in the manner that they would be priced if they were between independent parties. This requires collection and analysis of data on similar transactions entered into between independent parties which may be difficult and costly to secure, selection of the most appropriate transfer pricing method(s) and preparing heft documentation without even being certain that the outcome of such laborious and costly exercise will be accepted by the tax administration. The effort taxpayers put into complying with transfer pricing regulations might be excessive compared to the size of the company and the actual risk of transfer pricing manipulation. Transfer pricing audits themselves can be very time-consuming and resource-intensive for both tax authorities and companies. This resource intensiveness might not always be justified by the level of risk or complexity involved in the transactions being audited. The above begs the question as to whether certain transactions and/or taxpayers, depending on the transfer pricing risk they present, cannot be subject to a relatively simplified transfer pricing regime to reduce the compliance burden, ensure certainty and efficiency. This would be achieved by introducing safe harbours, which according to the OECD Transfer Pricing Guidelines 2022, are provisions that apply to a defined category of taxpayers or transactions and that relieve eligible taxpayers from certain obligations otherwise imposed by the country’s general transfer pricing rules by for instance allowing taxpayers to establish transfer prices in a specific way or exempting a defined category of taxpayers or transactions from the application of all or part of the general transfer pricing rules, including some or all associated transfer pricing documentation requirements. One of the areas that, in my opinion, presents a low transfer pricing risk and should be subject to safe harbours are low value-adding intra-group services which are supportive in nature, such as accounting, legal, human resources, IT services and other services of administrative and clerical nature. Safe harbours should also be introduced in relation to intra-group lending transactions. On low value-adding intra-group services, safe harbour provisions would be expected to reduce the level of scrutiny of the benefit test by, for instance, not requiring the taxpayer to specify individual acts undertaken that give rise to the costs charged or produce correspondences or other evidence of individual acts, provided other eligibility criteria that may be imposed by the tax administration, such as maintaining records of the costs incurred in performing intra-group services, service agreements and allocation keys are satisfied. Safe harbour provisions would also specify a profit mark-up, say 5%, to all costs, which would not need to be justified by benchmarking studies. Safe harbours may be applied to intra-group lending transactions by for instance allowing the tax administration to periodically publish the interest rate it deems to be consistent with the arm’s length principle, which if applied by the taxpayer would be automatically accepted by the tax administration as long as the other criteria for eligibility to the safe harbour regime are met. If designed in a manner that reflects appropriate degree of approximation to arm’s length prices that would be otherwise permitted in determining transfer prices, safe harbours would reduce the taxpayers’ compliance burden, provide certainty to/for eligible taxpayers and transactions, and permit the tax administration to redirect its administrative resources from the examination of lower risk transactions to the examination of more complex or higher risk transactions and taxpayers. This would overall reduce transfer pricing disputes. However, given that safe harbours adopted in Rwanda would not bind other jurisdictions unless they are adopted on a bilateral or multilateral basis, and may lead to double taxation in case their parameters are set at levels either above or below arm’s length prices, taxpayer should be allowed to select between being subject to the safe harbour regime and determining arm’s length prices based on the requirements under the general transfer pricing rules. The views contained herein are those of the author. The writer is a tax and corporate commercial lawyer and International Tax Affiliate at the Chartered Institute of Taxation, UK.

Opinions

There is a strong case for introducing safe harbours in Rwanda’s transfer pricing legislation