Telecoms giant MTN Rwanda is in talks with the revenue authority to settle a Rwf9 billion ($12 million) tax dispute out of court.
In a case that has lasted over two years, the Rwanda Revenue Authority dragged MTN Rwanda, the country’s largest mobile phone services provider by market share, to the commercial court, accusing it of “illegal computation” and seeking to recover the amount.
The court ruled in favour of MTN Rwanda, but RRA has appealed the ruling in the High Court. “We appealed because we thought we had a strong case on management fees and they also had a strong case on other components,” Richard Tusabe, RRA Commissioner General, told The EastAfrican.
Sources familiar with the case say the tax dispute involves disclosure of information regarding the financial support MTN Rwanda claims to receive from its parent company, South Africa-based MTN Group.
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RRA wants MTN Rwanda to disclose in its financial statements the exact amount of support it receives from its parent company.
The two parties have agreed to settle the case out of court. But The EastAfrican has learnt RRA is likely to only recover slightly over Rwf2 billion ($2.6 million), which MTN Rwanda has agreed to pay.
When contacted, MTN Rwanda confirmed the two parties are concluding an amicable settlement but refused to comment until the legal process is complete.
Meanwhile, RRA is crafting legislation to help curb losses from big businesses operating in the country as it seeks to boost domestic revenue.
The EastAfrican has learnt that the legislation currently being drafted aims to curb tax evasion by multinationals that have over the years taken advantage of loopholes in the country’s tax laws.
The tax body has also established a special unit in charge of international taxation issues including cross-border transactions.
The tax body wants to specifically deal with high level tax planning by multinationals that gives them room to evade tax. For instance, of particular concern is how to minimise losses incurred in management fees, income earned for services and labour as most multinationals continue to employ foreign nationals in managerial positions.
Multinationals are said to evade tax by “waiving” management fees owed to them by their limited partnership investors in exchange for profitable shares in the company through a carried interest.
Managers are deemed to have made a cashless contribution in the amount of the fee to the company, which is deemed to earn profits like an investor’s cash contribution.
Except that, however, managers have leeway to find profits to cover it. Company governing documents usually allow the general partner to find profits to cover the waived fee in any accounting period, so in fact it is a payable fee.
Sometimes there is a clawback if cumulative profits are insufficient to cover waived fees. In the most aggressive version of this practice, fees are waived shortly before payment is due, so that managers can ensure that profits are available to cover them.
However, he added that RRA is crafting a legislation that will help to crack down on corporate tax evasion using management fees as companies continue to import services from their parent companies.
He pointed out that the ambiguity within the current law has made it difficult for RRA to recover all taxes due.
“We have a clear framework and the moment we have the law (to cap the management fees) we believe that this business of capital flight should be strongly minimised,” Mr Tusabe said, underscoring that the new law will cap management fees.
Mr Tusabe added that they will be taxing any management fees above a specific set limit.
Management fees, he argued, should be reducing every year as businesses establish their local operations.
“If you have imported services for the past 10 years, theoretically you should be importing less after 10 years because what we expect from you as an investor is to build a strong local presence,” Mr Tusabe said.
However, in a separate transaction, the figures in the company accounts show that Crystal Ventures — Rwanda’s biggest investment company, which recently indirectly sold a 20 per cent stake in the mobile phone services provider by creating Crystal Telecom, listed on the Rwanda Stock Exchange — has made more money over the past three years from its terminated management contract with MTN Rwanda than from dividends.
Crystal Ventures owns 100 per cent of Crystal Telecom, and Crystal Telecom has a 20 per cent stake in MTN Rwanda. Crystal Telecom earns dividends from MTN Rwanda. It also reports 20 per cent of what MTN Rwanda makes in profit as its share of income.
Crystal Ventures received Rwf5.2 billion ($7.5 million) from 2012 to 2014 in management fees, according to the information memorandum for the IPO; Crystal Telecom made Rwf4.1 billion ($6.1 million) in profit over the same period.
However, it is not clear what the management fee charged by Crystal Ventures to MTN Rwanda over this period constituted. The fees were terminated in 2014.
On dividend payoff, Crystal Telecom earned Rwf2.1 billion ($3.1 million) in 2014, which was paid out on April 17, just before the IPO.
“Typical preferred projects are those that can deliver a minimum return on investment of between 15 and 20 per cent, with an investment horizon from 5 to 15 years, or until the sector matures with a clear and profitable exit option,” states a letter by Jack Kayonga, the chairman of Crystal Telecom, in the information memorandum for the IPO.
MTN Rwanda controls 49 per cent of the market, but its revenues have been declining as it faces stiff competition from new entrants such as Tigo Rwanda and Airtel Rwanda.