For many groups of companies or multinationals, intra-group services, which are services provided by one or more entities within a group to other companies in the group, or for the benefit of the group as a whole, can be the kind of thing that cannot be just avoided. Like attending the wedding celebrations of a cousin whom you hardly ever see and don’t actually like very much, it is your duty as a good family member to make that effort. Some intra-group services such as management services, central purchasing, human resource and finance services can be directly provided by the parent company or one of the group company to other group companies (for want of a better term, I shall refer to these services as direct services) whereas other services like legal, tax, IT and marketing can be contracted-out or bought-in by one group company to the benefit of other group entities with the costs for such services being reallocated and recharged to other group companies using sensible allocation keys such as headcount and turnover. Sometimes a mark-up is added on the costs recharged. Income tax (or at least transfer pricing) implications of intra-group services have attracted much attention, but VAT implications of such services can be sometime overlooked, hence the consideration of such subject by this article. Consideration of VAT implications of intra-group services in Rwanda requires a look at the relevant provisions of law n° 37/2012 of 09/11/2012 establishing the value added tax (the “VAT Law”). In terms of article 3 of the VAT Law, value added tax is charged on taxable goods and services; and taxable imported goods and services. Taxable goods and services are under article 2 of the same law defined as taxable goods or service supplied to a person, and this suggests that VAT must be charged, applying the relevant rate, on each supply of goods or services unless such goods or services are VAT exempt. These provisions of the VAT Law can work easily with direct services, and unless such services are VAT exempt, VAT must be charged at the relevant rate whenever the supply of such services is made. In case such intra-group services are supplied to the Rwandan group company by a foreign group company (imported services), VAT will be declared and paid by the Rwandan group company recipient of such services using the VAT reverse charge mechanism in accordance with article 12 of the VAT Law, and if such or similar services could be obtained on the Rwandan market, the VAT paid will not be allowed as deductible or refundable input VAT. Conversely, the application of the above provisions to the contracted-out or bought-in services especially when the costs for these services are recharged to the group companies recipient thereof without a mark-up being added by the group entity that procured such services may not be an easy task. This is largely owing to the fact apart from being procured by and invoiced to the relevant group entity, these services (e.g. training and employee development; and developing and monitoring of staff health procedures) are in some instances directly provided to the group entities recipient of the services by a third party original supplier. That then gives rise to the question as to whether there is a supply of service by the relevant group company for the purpose of VAT, which this article answers in the affirmative in that the costs recharged by the relevant group entity at least cover the cost to such group entity of making the services available to other group entities recipient of the services, with all the value added tax implications alluded to in relation to direct services coming into play. In any case, no VAT would apply if the cost recharged by the group entity is a disbursement in the sense that the relevant group entity had paid an invoice issued by a third party to one of the group companies and was recouping the cost from such group company. The above indicates that the issue of application of VAT on intra-group services is rarely that simple, and Rwandan companies supplying and/or making payment for intra-group services (as the case may be) should seek tax advice to ascertain whether or not service charges or recharges they receive from and/or pay to their parent companies or other group entities represent consideration for vatable supplies. The views contained herein are those of the author, and do not constitute a legal or tax advice. The writer is a corporate commercial and tax lawyer, and senior associate at ENSafrica Rwanda. Email: dnzafashwanayo@ensafrica.com Telephone: +250 788 309 880 The views expressed in this article are of the writer.
