Rwanda introduces transfer pricing regulations

By Rubeena Dina, Director at GTS Africa – Mauritius

The Rwanda government, on 14 December 2020, published in the Gazette a ministerial order establishing general rules on transfer pricing between related parties involved in controlled transactions. The new regulations largely conform with the 2017 OECD guidelines and came into force on the date of publication.

New Ministerial Order No. 003/20/10/TC of 11 December 2020 empowers the Rwanda Revenue Authority to adjust profits earned between related parties if it considers that the trading arrangements between related parties do not adhere to the arm’s length principle.

Scope of transfer pricing rules

One of the key points is the scope of application of the transfer pricing rules.

We note that the order has a wider scope than the OECD guidelines as not only controlled transactions are covered by the rules, but also deemed controlled transactions.

A controlled transaction is a transaction between two (or more) enterprises that are related with respect to each other.

Parties are related where there is direct or indirect participation in control, management, or capital of one party over another.

On the other hand, deemed controlled transactions are transactions between parties that are not related but fall under the category of controlled transactions because one of those persons is a resident in a country that the Rwanda tax administration considers as providing a beneficial tax regime.

A beneficial tax regime is defined as one that does not impose tax or subjects income to a maximum rate of 20%; grants tax breaks to nonresident individuals or companies; does not have an economic substance requirement; does not tax foreign-sourced income or taxes it at a maximum rate of 20%; or where there is no access to information with regards to taxpayers.

Controlled transactions include domestic transactions between related parties; there are preferential tax zones in Rwanda to promote investment and the Revenue Authority has noted some profit shifting to entities located in these zones.

The allocation of profits to permanent establishments in Rwanda must also follow the arm’s length principle in accordance with the order.

Methods for determining arm’s length

The Rwanda order sets out the allowed transfer pricing methods, which include both transaction-based and transactional profit methods, as opposed to the repealed transfer pricing rules which only provided for transaction-based methods.

Transaction-based methods are the comparable uncontrolled price (CUP) method, resale price method (RPM), and cost-plus method (CPM).

Transactional profit methods are the net margin method and profit split method.

The use of alternative methods is also allowed where none of these five methods can be reasonably applied to achieve an arm’s length outcome and where the alternative method yields an outcome consistent with what would be achieved by independent persons engaging in uncontrolled comparable transactions under comparable circumstances.

Threshold for the documentation requirement

A de minimis exception is provided for taxpayers with an annual turnover of less than FRW 600 million (USD 605,143) and whose controlled transactions have a value of less than FRW 10 million (USD 10,085) individually or an aggregate value of less than FRW 100 million (USD 100,857). These taxpayers are not required to prepare the required transfer pricing documentation.

 Regardless of the threshold for documentation, all taxpayers who fall under the scope of the transfer pricing regulations need to comply with the arm’s length requirement in undertaking relevant transactions.

Documentation required and timing for filing

Whilst there is no requirement for a taxpayer to prepare a local file or master file as under the OECD guidelines, the order requires the preparation of a transfer pricing policy and documentation that verifies that the conditions of controlled transactions are consistent with the arm’s length principle in addition to books and records normally required under the Rwandan tax laws.

The documentation needs to include at least the following: copies of all material intercompany agreements concluded by the taxpayer; the country-by-country report where the ultimate parent of the taxpayer is required to prepare such a report; the prescribed controlled transactions schedule, the format as annexed to the order and any other documentation or information that is necessary to determine compliance with the arm’s length principle for controlled transactions.

The requirement for the content of the transfer pricing policy seems to be fairly similar to that of the local file.

It needs to include an overview of the taxpayer’s business operations; the global organisational structure of the group; a description of the multinational enterprise’s business and the taxpayer’s business strategy; a list of the taxpayer’s key competitors in Rwanda; a description of controlled transactions; detailed comparability and functional analysis; and an explanation of the important assumptions made for the selection of most appropriate pricing method.

Country-by-country reports must be filed within 12 months after the last day of the reporting fiscal year of the MNE group if an ultimate parent (assumed in another jurisdiction) has been required to prepare a report. The order does not provide country-by-country reporting requirements, in general.

The documentation setting out the global organisational structure of the group of companies to which a Rwandan taxpayer belongs needs to show all related persons, the shareholding and management structure, and is required to be submitted to the Revenue Authority with the first income tax declaration of the taxpayer.

Whenever there is a change in the global organizational structure and such documentation is amended, the updated version must be re-submitted to the tax administration.

The prescribed controlled transactions schedule needs to be lodged together with the income tax declaration.

All other relevant transfer pricing documentation for a relevant tax period must be in place before the deadline for income tax declaration and must be submitted upon request by the Rwanda Revenue Authority within seven days from the date of receipt of a written request.

Documentation must be submitted in any of the official languages of the Republic of Rwanda (English, French, and Kinyarwanda). However, in practice, transfer pricing documents are normally completed in English.

The order does not prescribe any specific penalty for failure to submit, late submissions, or incorrect disclosure.

Statute of limitation

As a general rule, the statute of limitations is five years from the date of filing the tax return applies. The tax authorities can ignore the five-year limitation when they suspect fraud or intention to evade the payment of tax. Hence generally, tax inspectors can audit transactions going back five years, and taxpayers need to be in a position to prove arm’s length application.

Some thoughts

Rwanda seems to be stepping up its efforts to clamp down on abuses of the transfer pricing system.

The Rwanda Revenue Authority has, over the past few years, increased its capabilities in terms of training and equipping staff with the required expertise to conduct tax pricing audits.

 It is expected that tax audits will rise. Taxpayers are advised to ensure that they have appropriate documentation in place to justify the pricing of their transactions, as this is the first line of defense in case of an audit.