Transfer pricing developments
Rwanda is one of the most economically progressive countries in Africa. It has one of the world’s fastest-growing economies, driven by economic and structural reforms and strong international support. Growth averaged 7.5% annually in the decade to 2018.
The National Strategy for Transformation and Vision 2050 strategy is to reach middle-income status in 15 years. This has necessitated economic shift toward high-value, competitive sectors, particularly those that could generate exports. It will also depend on better regional economic integration through the East African Community (“EAC”) and access to sea ports through Kenya and Tanzania. The country has opened the Kigali International Financial Centre to open up Africa to the global financial community.
Rwanda is ranked 2nd in Africa and 29th globally on ease of doing business, favourable tax incentives for FDI, and at least 50 trade agreements with other countries.
The country aims to finance its budget from taxes mobilised from taxable economic activities. It has rolled out a detailed transfer pricing regime which aims to ensure that transactions between resident enterprises and those related to them or those in tax-neutral or tax-efficient regimes are undertaken at arm’s length, so that it can reap the rewards of businesses driven from within its borders.
The new transfer pricing rules
The goal of transfer pricing regimes is to ensure that the arm’s length principle is applied between resident enterprises and their non-resident related entities operating from other countries.
Article 33 of the Law Establishing Taxes on Income (Official Gazette No 16 of 16/04/2018) has always stipulated that controlled transactions with non-residents should fulfill the arm’s length requirements. However, the provisions are terse. The basis for complying with the requirements has been the OECD Transfer Pricing Guidelines, albeit without a strict statutory backing.
In January 2015, the Government triggered a conversation towards the rollout of detailed and home-grown Transfer Pricing Guidelines. Kenya, Uganda and Tanzania, which are partner states in EAC, have had long-established rules and technical capacity. The Draft Transfer Pricing Rules were not finalised, but were canvassed with the private sector and tax practitioners.
On 14 December 2020, the Government promulgated the Transfer Pricing Rules (“Ministerial Order No. 003/20/10/TC”). The Rules are largely modelled around the OECD Transfer Pricing Guidelines, but with a pinch of new and innovative anti-avoidance provisions. Rwanda Revenue Authority (“RRA”) has embarked on enforcing compliance with the new Rules, and audits are expected to become as commonplace as in the other EAC countries.
As later discussed, newer and stricter requirements are introduced. However, the existing treaties concluded by the Government still apply when applying the Rules. Non-discrimination clauses in Double Taxation Agreements (“DTAs”) remain effective. Rwanda has effective DTAs with Belgium, South Africa, Morocco, Turkey, Mauritius, United Arab Emirates, Singapore, Jersey and Barbados, which retain their applicability.
Transfer Pricing Requirements
The following transactions are subject to the Transfer Pricing Rules: -
- Transactions between a person located in Rwanda and subject to tax in Rwanda and a related person located in or outside Rwanda;
- A (direct or indirect) transaction between two non-resident persons if the transaction relates to the permanent establishment of one of the two non-resident persons.
- A transaction between a resident person and a non-resident person who is operating from a place or a country considered by RRA to be a beneficial tax regime
- A transaction between a person, who is resident in a beneficial tax regime, and a permanent establishment of a non-resident, whether such persons are related or not.
A “beneficial tax regime” is a regime which has the following features: -
- Has no income tax, or the tax is at a maximum rate of 20%;
- It grants tax breaks to non-resident individuals or companies;
- It does not require a taxpayer to carry out substantial economic activity within the country or tax jurisdiction;
- It does not tax foreign-sourced income, or taxes such income at a maximum rate of 20%;
- It does not allow access to information about the corporate structure of legal entities, the ownership of assets, other rights or economic transactions.
Transactions subject to transfer pricing adjustments include:
- Sale, purchase or transfer of goods for free;
- Lease of tangible assets;
- Sale, purchase, transfer for free, giving or receiving the right to use intangible assets (i.e. rental or lease of land and buildings);
- Provision of services;
- Lending or borrowing of money;
- Any other transactions which may affect the profit or loss of the person concerned.
Businesses whose annual turnover does not exceed RWF 600 million may be exempted from transfer pricing documentation. To be exempted, they must have carried out transactions with related parties whose value does not exceed RWF 10 million, or with an aggregate value of RWF 100 million.
The concept of comparability is the fulcrum in determining the arm’s length price of controlled transactions. A controlled transaction is comparable to an uncontrolled transaction (taking place in the open market between unrelated persons) when:
- there is no difference between them that could materially affect the factors being examined under the appropriate transfer pricing method; or
- such a difference referred to in item 1 of this Article exists, a reasonably accurate comparability adjustment is made to the relevant factors of the uncontrolled transaction in order to eliminate the effects of such a difference.
Factors reviewed when a comparable is selected include: -
- Characteristics of the property, goods or services transferred or supplied;
- Functions performed by each person involved in the transaction, taking into account assets used and risks assumed;
- Contractual terms of the transaction;
- Economic circumstances in which the transaction took place;
- The business strategies pursued by the related persons in relation to the controlled transaction.
Transfer Pricing Methods
The Rules then outline that a person should determine the “arm’s length” prices of transactions subject to them. This is determined by selecting and applying the most appropriate of the five methods (or any other unspecified method).
The five methods include:
- Comparable Uncontrolled Price
- Resale Price Method
- Cost Plus Method
- Profit Split Method
The Outline of a Transfer Pricing Policy
Transfer pricing policy documentation is required to have the following outline:
- An overview of the taxpayer’s business operations and their organisation.
- A description of the corporate organisational structure to which the taxpayer is a member, and the corporate group’s operational structure.
- A general description of the multinational enterprise business.
- A detailed description of the business strategy pursued by the taxpayer, including an indication whether the taxpayer has been involved in or affected by business restructurings or intangible transfers in the present or immediately preceding year, and an explanation of such aspects on transactions that affect the taxpayer.
- A list of the taxpayer’s key competitors in Rwanda for each material category of controlled transactions in which the taxpayer is involved.
- A description of the controlled transactions and the context to which such transactions took place, including an analysis of the comparability factors;
- A detailed comparability and functional analysis of the related persons in relation to the controlled transaction;
- An explanation of the important assumptions made for the selection of most appropriate transfer pricing method, and, where relevant, the selection of the tested party and the financial indicator;
- A summary of financial information used in applying the transfer pricing method.
- An explanation of the reasons for performing a multi-year analysis, if any;
- A comparability analysis that includes:
- A description of the process undertaken to identify uncontrolled comparable transactions;
- An explanation of the basis for the rejection of any potential internal uncontrolled comparable transactions;
- A description of the uncontrolled comparable transactions;
- An analysis of comparability of the controlled transactions and the uncontrolled comparable transactions;
- Detailed information on any comparability adjustments made;
- Details of any industry analysis, economic analysis, budgets or projections relied on.
- A conclusion as to consistency of the conditions of the controlled transactions with the arm’s length principle, including details of any adjustment made to ensure compliance.
- Information and allocation schedules showing how the financial data used in applying the transfer pricing method may be tied to the annual financial statements;
- A summary of schedules of relevant financial data for comparables used in the analysis, and the sources from which that data was obtained.
- The following documents:
- 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;
- controlled transactions schedule with the model form annexed to this Order;
- any other documentation or information that is necessary for determination of the taxpayer’s compliance with the arm’s length principle with respect to the controlled transactions.
- The country-by-country report must be filed not later than 12 months after the last day of the reporting fiscal year of the multinational enterprises group.
Compliance and Penalties
Transfer pricing documentation must be prepared before the deadline for filing the tax returns. Documentation related to the global organisational structure of the group of companies to which a Rwandan taxpayer belongs, indicating all related persons, their shareholding and their management structure, must be submitted to the tax administration with the first income tax declaration.
The controlled transactions schedule must be submitted to the tax administration, together with the income tax declaration.
Upon request by RRA, the taxpayer must provide the documentation within seven days from the date of receipt of the written request.
A penalty of RWF 1,000,000 (USD 1,000) applies for failure to keep records of controlled transactions. Failure to submit the same within the timelines attracts a penalty of RWF 1 million per month of the default.
How BDO may assist
- Transfer Pricing Documentation and policy preparation
- Transfer pricing policy reviews
- Transfer pricing health checks and compliance reviews
- Assistance with RRA audits and queries
- Transaction structuring and obtaining confirmations
- Transfer pricing dispute resolution