By KABONA ESIARA

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Rwanda's decision to cap the amount of fees subsidiaries can pay to their mother companies could have far-reaching effects on technology and intellectual property-driven businesses.

A provision in the new income tax law which came into force in April caps management, royalty and technical fees local companies pay to their related non-resident companies at two per cent of the turnover.

The objective of this new regulation is to check capital flight, a practice the taxman say is used by multinationals seeking to minimise tax payments in order to reduce profits of subsidiaries, so that they pay less corporate tax.

“Some people have been paying management fees as high as 20 per cent of turnover… you find a domestic company has been in losses for life,” said Richard Tusabe, commissioner general of the Rwanda Revenue Authority (RRA) in defence of the new measure.

“Let's have a ceiling on turnover for payments to related parties… not profits,” said Mr Tusabe.

“The perception that the new measure has come to kill businesses is wrong. The law is to stem capital flight,” Mr Tusabe stressed.

The new tax measure introduces a 30 per cent corporate tax rate on turnover, in addition to 15 per cent withholding tax and 18 per cent VAT reserve charge should a company pay anything above the two per cent cap. The provision now pushes the total tax rate on management fees, royalty and technical fees to 63 per cent.

Associate Tax Director at PricewaterhouseCoopers Rwanda, Frobisher Mugambwa, says the country has put in place Transfer Pricing (TP) rules and guidelines that are soon to be issued.

The purpose of these TP laws is to act as an anti-tax avoidance measure for capital flight. The RRA is expected to concentrate on effectively implementing these laws.

“However, by introducing the two per cent restriction on management fees, technical fees royalty payments, RRA has made the TP rules redundant. Even where companies can justify their management fees, technical fees and royalty payments, as based on the TP rules issued by RRA, the new tax income law seems to override these rules. The costs will still be restricted to two per cent of the company’s turnover making a number of organisation’s TP policies worthless,” he pointed out.

The other East African Community countries have not capped their income tax fees and they are still collecting 15 per cent withholding tax and some even do not charge VAT reserve charge.

Rebalancing

Another regulation causing jitters is the property tax to be enforced in the coming days. The government introduced it in a move to widen decentralised revenue.

Analysts say the future of taxes is not in direct or indirect taxes but in local government taxes.

Any government that positions itself and collects enough local government tax will be able to sustain its budgets from local revenue resource mobilisation.

Rwanda is ahead on the continent, being one of the few countries which has digitised all its land titles and has put in place measures to start earning from land.

One such measure is the restriction of plots to a standard size of 300 square metres for developers or a tax ranging between Rwf300 ($0.34) and Rwf800 ($0.91) per every extra square metre.