High tax rates in the country recently attracted public outrage, a concern that President Paul Kagame said should be addressed with immediate effect, noting that while tax collections remain crucial for development, there should be strategic ways to ease the burden on taxpayers. This has pushed the government to make some tax reforms, to which it will forego Rwf27 billion this year in the process of easing the current tax rates. Rwanda Revenue Authority (RRA) indicates that Value Added Tax (VAT) and Corporate Income Tax (CIT) account for about 50 per cent of tax revenues collected in the country. In an exclusive interview with The New Times, Emmanuel Habineza, Managing Partner of BDO in East Africa –an international network of practicing firms in audit, tax, and advisory services, gives insights into some changes that taxpayers would like to see happening. Below are excerpts. TNT: As the govt makes tax reforms, what changes would you like to see in terms of taxes on employment income? BDO: Taxes on employment income should consider some unavoidable work-related expenses an employee incur and thus reduce them from tax base. These include transport to/from workplace, lunch at work place, compulsory dressing code, among others. We suggest a reasonable tax base reduction as a percentage of an individual’s gross salary. Rwanda as a service economy given that the industry employs many people within the middle class, therefore, a tax rate reduction will support Small and Medium Enterprises to prosper and create more job opportunities or invest the saved resources for expansion expenses, from which the government would collect additional taxes such as VAT and CIT from an enlarged tax base. Furthermore, for efficient tax base enlargement, it would be appropriate to put in place a mechanism that stimulates employees to verify how much employers have paid on their behalf and be compensated for reporting any inconsistences. TNT: How is the practicability of VAT and CIT taxes? BDO: We have noted that sometimes, RRA excessively delays to give VAT refunds without any form of compensation while a taxpayer will be extremely penalized when they delay to pay. We request a quick refund process and compensation, for instance, RRA can collect the due taxes by starting with the refunds they owe a taxpayer in case of delays. Another reform to consider is in regards to the Commissioner General’s rule stating that the VAT claims should be rejected if the vendor has not yet declared and paid related VAT output. This is not practical since there is no legal provision allowing a buyer to force vendors to pay VAT. Applying this is penalizing a buyer who is not empowered to exercise his right and the VAT law itself does not provide any right to RRA to reject that claim. Moreover, we noted an abusive enforcement of EBM (Electronic Billing Machine) on buyers. The recent announcement from RRA stipulates that if one’s goods will be confiscated when they have no EBM receipt. This is pure abuse because, as I mentioned, there is no legal provision for a buyer to forcefully ask for an EBM receipt, rather, the law requires a seller to systematically issue EBM. In addition, the VAT law needs to elaborate on which kind of trader is required to pay an EBM, it is an exaggerated enforcement to impose EBM on a small vendor. When it comes to tax rate, 18 percent VAT is logical but should not apply across all sectors of economy. First layer value addition and services are unduly expensive because of full tax burden without input VAT. The policy to become service economy would need to have an industry-focused fiscal policy to stimulate the same. This may require reducing VAT on some sectors of the economy. TNT: What reforms do you suggest regarding CIT and Withholding taxes? BDO: In the newly enacted Corporate Income Tax law –about three months ago –there are some issues that still need to be addressed. For instance, the Transfer Pricing policy regulating local subsidiaries of foreign companies is not yet clear and relevant on domestic price benchmarking database. In addition, the requirement to prepare documentations conflicts with capping the management fees such as royalties and technical services sourced from foreign companies instating two percent of the turnover. The 30 percent CIT is very high if we need to compete with other economies on international market. Our proposal is to reduce tax rate and increase lump sum base with purpose to reduce collection efforts and compliance cost. This can be coupled with the introduction of a minimum CIT payable for loss making or lower tax payable, and the reduction of fiscal incentives to be replaced if need be by non-fiscal. TNT: To conclude, would you say that the tax procedures and local administration of taxes are relevant? BDO: For tax procedures, RRA should establish a way of whistleblowing for poor service delivery. In line with that, the fiscal campaign and tax compliance reminder should be educative and not intimidating. We also propose that any new regulation should at least require a full tax period transition. The self-disclosure of non-registered taxpayers, takes very long process. In addition to that, the self-assessment principle should be followed and facilitate taxpayers to align declarations to RRA database. This also goes in line with the need to have systems in sync with the tax procedures law, with regards to the the administrative fines that are assessed by the system, yet the law doesn’t provide that. The recovery process of tax assessed during the audit, ignores the continuous appeal procedures allowed to taxpayers (appeal to the Commissioner General, amicable settlement and the court). RRA should not be in a hurry to recover the assessed amount while the taxpayer has more room to appeal. Concluding, the Local administration of tax rates need to emerge from a well contextualized study on purchasing power, socio-economical, among others.
