Business COMMENTARY: Is there withholding tax on payment for goods supplied by foreign companies?

Last week in this column, I wrote about the withholding tax implications of procuring services from abroad and the responsibility of Rwandan businesses. I also mentioned that when it comes to goods provided by foreign suppliers, the withholding tax regime in Rwanda has often been misinterpreted—especially by government entities. It’s important to understand why this is the case.The law on withholding tax provides that a tax of 15% should be levied by resident persons on payment for goods supplied by companies or physical persons not registered with RRA.A number of entities have interpreted this provision to mean that whenever payment is made for goods to any person not registered with the RRA—including non-resident companies—then they are obliged to withhold tax on such payments. Is this entirely true?Take for example, if a procurement officer of a company went to Belgium and purchased a special widget for US $100,000, should the officer withhold 15% Rwanda Tax on paying for the widget since the Belgian supplier will not be registered with RRA?To answer this question, it’s important to understand the scope of Rwandan taxation.Rwanda principally operates a source based system of taxation. This means that only income which is deemed to be from sources within Rwanda is liable to be taxed in Rwanda. Income is deemed to be from a source in Rwanda if it is generated from activities carried on through a place of business in Rwanda.Therefore the only instance when a non-resident person is liable to tax in respect of goods supplied in Rwanda, is when the non-resident is “trading in Rwanda through a fixed place of business” as opposed to “trading with Rwanda” by merely supplying goods to a Rwandan entity.My understanding and reading of the provision (Article 51 (7)) that is normally referred to by Government entities that attempt to charge withholding tax on goods supplied by foreign suppliers is that the provision is meant to apply to resident companies not registered with RRA but supply goods to other resident companies. It could also apply to non-resident companies that carry on business activities in Rwanda- but are not registered with RRA.One way of determining whether a non-resident company is “trading in Rwanda” is to consider whether the company is the importer of record. By importer of record I mean the person RRA will consider as having imported the goods and who is therefore liable to tax.For example, if a Government Ministry decides to procure machinery from a South African supplier, the supplier has no place of business in Rwanda but he will be responsible for transporting the goods up to Kigali (ex-Magerwa). The Ministry will then take ownership from this point. Would the Ministry be required to withhold tax on payments for the goods?The answer is no. First, the South African company will not be considered as sourcing income from Rwanda since it will have no fixed place of business in Rwanda. Secondly, the Ministry will be considered the importer of record since it will be responsible for all customs clearance procedures.It important to note that once goods are imported into Rwanda and cleared by customs the goods should not suffer any further internal taxes on payment for the goods. This is further confirmed by the World Trade Organisation, of which Rwanda is a member, and its rules on international trade under the General Agreement on Tariffs and Trade of 1947 (GATT).Under this multilateral agreement, products of the territory of any country imported into the territory of another county should not be subject, directly or indirectly, to internal taxes or other internal charges of any kind in excess of those applied to similar domestic products.By charging internal taxes like a withholding tax on foreign suppliers of goods, Rwanda would contravene the rules of WTO and its objective of eliminating discriminatory treatment in international commerce. Thankfully, Rwanda does not do so.Paul Frobisher is a Tax Manager at PwC Rwanda Limited.