The Rwandan government has started enjoying the benefits of the new income tax law. However, some businesses say it has hit their earnings.
The law, which came into force on April 16, has widened the government’s tax net and promises better income flows to fund the country’s budget.
“This is a good law,” said Richard Tusabe, Commissioner-General of the Rwanda Revenue Authority, adding that it widens the tax base, plugs domestic revenue leaks and promotes business growth.
In this fiscal year, the taxman was tasked to collect Rwf1,351.7 billion ($1.5 billion) in domestic tax revenues.
As a way of sealing the gaps employers and employees have been using to avoid paying income taxes, the new law defines an employee and introduces a 30 per cent income tax on wages and salaries.
It has also roped in workers who previously preferred contracts so as to pay 15 per cent withholding tax. The new law has also abolished the three per cent lump sum withholding tax professionals in private practice used to pay, and introduced a 30 per cent corporate income tax.
Direct or indirect sale or transfer of shares or debentures now attracts a 5 per cent withholding tax, which is meant to ensure that foreign companies that sell shares in a local company declare taxes on gains made from the sale.
Tax experts argue that the previous law was unable to fully capture such transactions. With the new law, sitting allowances and similar payments to boards of directors are now taxable at a rate of 30 per cent.
Whereas under the repealed law it was the company that had to incur the tax cost, under the new law, it is the directors who bear the tax cost.
Management, royalty and technical fees paid to non-residents have been capped at 2 per cent of the company’s turnover. Anything above that is now taxable.
But experts at PricewaterCoopers (PwC) say the provision could be misinterpreted to mean that it captures all such payments to non-residents.
Experts at PwC want the Commissioner General to clarify this, given that a number of companies outsourcing most of their core functions to non-resident entities could be significantly affected.
The income tax law also requires multinational companies to produce proof justifying the prices of services and goods purchased or provided by sister companies to guard against inflating costs, which impact the final corporate income tax businesses pay.
Small businesses have been saved from the lengthy and costly process of proving insolvency.
The new law has introduced a clause that says that for an individual whose debt is less than Rwf 3 million ($3,400), the taxman does not need to prove they are insolvent but rather that it has taken all reasonable steps over three years to recover the debt.
But as the taxman rakes in more revenues, companies say their earnings have taken a hit.
Victor Madiela, managing director of Bralirwa,the Rwanda Stock Exchange-listed brewer, said the income tax law adversely impacted income and profit in the first six months of 2018.
Bralirwa paid an additional Rwf100 million ($115,574) in tax to comply with the law, which increased withholding tax on dividends from 5 per cent to 15 per cent.
This, according to the brewer, impacted shareholders based outside the East African Community.
MTN Rwanda CEO Bart Hofker also said that the new law has increased the telco’s tax burden, without giving details.
He added that they are in discussions with RRA on interpretation of the law. He said the firm paid Rwf27 billion ($307 million) in regular taxes last year. It remains unclear whether MTN Rwanda will pay dividends to its shareholders, who include MTN Group, which has 80 per cent stake, and Crystal Telecom, an RSE-listed company.
Hofker said much as is willing to pay dividends, is waiting for final outcome of the negotiations MTN Rwanda has started with RRA on interpretation of the new law.