Some non-Value Added Tax (VAT) registered taxpayers are now obliged by Rwanda Revenue Authority (RRA) to provide invoices/receipts generated by an Electronic Billing Machine (EBM). The receipt is a documentation to support the taxpayer’s tax deduction claims. This directive, which came into effect on January 1, 2021, impacts businesses and other entities claiming tax deductions associated with expenses. There are still challenges with the implementation of this directive, but overall it should serve RRA’s objective of broadening the uptake of electronic invoicing systems. Since 2013, EMBs have helped VAT-registered taxpayers in Rwanda to improve bookkeeping and VAT compliance. All VAT-registered businesses must provide customers with a certified VAT receipt, and currently approximately 95% of all VAT registered suppliers have an electronic invoicing systems to generate these receipts. RRA is currently developing a number of software solutions to improve the accessibility, convenience and accuracy of EBM processes. The new EBM applications will be mobile accessible and provide web-based invoicing and online integration with taxpayers’ invoicing systems. RRA plans to get to the point where audit and tax collections would rely substantially on data analytics derived from electronic billing systems. Going forward, we are likely to see more ‘benchmark audits’ establishing taxpayers’ true sales patterns, using data analytics to flag taxpayers deviating from this pattern and potentially triggering automatic ‘mystery shopper’ audits to verify non-compliance among taxpayers. Certainly RRA has a tall order of expectations to meet. Modernizing RRA service delivery, broadening the tax base, enforcing tax compliance and supporting development through effective, data-driven tax revenue collection are not idle concerns. Even so, the directive requires clarification in a number of areas and, through a process of public engagement, these clarifications have already helped to address some sticky issues. A few challenges and clarifications One challenge associated with extending the scope of EIS to corporate income tax is that not all expenses are supportable by invoices. RRA has clarified by indicating that certain expenses which can be validated through other means, such as payroll costs indicated by PAYE declarations and imported service costs indicated by withholding tax declarations, may qualify for deduction without EIS receipts. Costs associated with the transport of imported goods should be supported by invoices which can be stamped and validated by customs officials, even if the transporters themselves do not issue EBM receipts. Recently, the CG has issued a series of industry-specific announcements that intend to clarify, streamline and support tax compliance for taxpayers operating in the construction and agriculture sectors. In agriculture, RRA has acknowledged that non-commercial and non-registered small-hold farmers may supply cooperatives, traders or processing factories without issuing EBM invoices/receipts, whereas their trading partners can still benefit from taxable income deductions provided that they keep detailed records of transactions with these farmers. Additionally, a new category of supplies (category D) in EIS software has been introduced which would apply to certain small- and medium-sized entities as non-VAT registered taxpayers and enable them to issue EIS invoices without having to register for VAT. RRA is likely to continue issuing additional announcements and updates as needed. One sector that would benefit from urgent clarification is the NGO sector. Most NGOs are not in commercial trading and therefore don’t have or need EBM, but RRA could validate the sponsorships/donations received by NGOs through the annual financial statements that they submit and therefore not require them to issue EIS receipts to donors/sponsors. Another challenge is of a legal nature. Whereas Rwanda’s tax procedure law requires persons who carry out taxable activities to issue invoices generated by EIS, the deductibility of expenses is actually governed by the Income Tax Law. The income tax law only requires taxpayers to substantiate their purchases/expenses with proper purchase receipts - not necessarily EIS invoices. RRA may face legal disputes if they intend to implement CG announcements as law. In our view, RRA should reinforce the importance of EBM invoices but allow a certain degree of flexibility when auditing taxpayers’ expenses. Whereas EBM invoices should be the primary evidence a taxpayer should present as proof of purchase, RRA should be flexible enough to accept other forms of supporting documents if EBM invoices are not available, provided that RRA can validate that the cost was actually incurred and income declared by the other party. The possession of EBM invoices should not be an end in and of itself! The writer is an Associate Director leading PwC Rwanda’s tax practice. The views expressed in this article are of the writer.
