Rwanda has commissioned an audit into recent merger and acquisition deals involving foreign firms in its latest effort to clamp down on tax avoidance among multinational corporations.
This comes amid growing concern that multinational companies move profits from the countries where they are generated and, in so doing, reduce national tax revenues.
According to Rwanda tax laws, when a foreign investor enters the country through a merger or acquisition (M&A), the proceeds of the deal attract a capital gains tax (CGT) of 30 per cent. But it is exempt on listed securities.
The EastAfrican has learnt that the Rwanda Revenue Authority (RRA) has commissioned audits into recent transactions involving local banks and telecommunication companies after it discovered that certain insurance firms did not independently declare their CGT.
While RRA says it encourages self-assessment by taxpayers, it has been forced to conduct audits as more big companies have high-level tax planning which helps them to evade tax.
Enforcing compliance is also still a challenge for the revenue collector because tax avoidance is deeply embedded in the business models of most multinationals.
“We told them (insurance companies) to comply and they did not; we did an audit,” Laurence Gakwaya, the Deputy Commissioner for the Large Taxpayers Office, told The EastAfrican, pointing out the taxman had collected more than Rwf3 billion following the audit.
“They have different transactions, but we are specifically looking for sale of the shares and they did not declare any,” said Mr Gakwaya.
However, of particular interest to the tax body now is the transaction involving I&M Bank Rwanda, formerly Banque Commerciale du Rwanda (BCR), or Commercial Bank of Rwanda, which has changed ownership three times in recent years, with the latest purchase being by the Kenyan-based I&M Bank.
I&M acquired the Rwandan subsidiary in 2012 as part of a consortium that took over the 80 per cent stake held by British private equity firm Actis Capital in the bank, then trading as Banque Commerciale du Rwanda (BCR).
French- and German government-backed development finance institutions Proparco and DEG, respectively, each ended up with a 12.5 per cent equity in the company.
The new investors joined the government and several Rwandans — with a 0.2 per cent stake — who had co-owned the bank with Actis.
I&M’s majority stake saw it rebrand the lender to I&M Bank Rwanda as part of its integration into the holding company.
The EastAfrican has learnt that CGT is yet to be paid on any of the ownership transfers. It is also not clear whether the company benefited from tax exemption every time it changed hands.
BCR was opened in 1963. Initially wholly owned by the government of Rwanda, it was privatised in 2004 when Actis bought into the business for $6 million. As of April 2010, Actis owned 80 per cent of the financial institution and the government the remainder.
Returned to profitability
Actis was formed in July 2004 as a spinout of CDC Group, Plc (formerly the Commonwealth Development Corporation), which was founded by the British government in 1948 to invest in developing economies in Africa, Asia, and the Caribbean. Having acquired majority ownership of CDC’s emerging markets investment platform, Actis’s investment portfolio was almost $5 billion by April 2010.
BCR returned to profitability in 2009 after overhauling its management structure and revamping its operations. Its profits after tax increased to $4.8 million in 2010 from $2.6 million in 2009.
The bank recorded an increase in net profit last year to Rwf4.56 billion ($6.1 million) from Rwf4.5 billion ($6 million) in 2013, driven by a reduction in non-performing loans and focus on profitable loan segments such as mortgage and small- and medium enterprise loans.
Meanwhile, RRA is also planning an audit of the transaction involving Nigerian-based Guaranty Trust Bank, Plc (GT Bank), which concluded the acquisition of a 70 per cent stake in Fina Bank Group in Fina Bank Group in February 2014 through a combination of capital injection and acquisition of shares from shareholders for a total cash consideration of Ksh8.6 billion ($84.3 million).
The acquisition led to the creation of a new entity in each country — Guaranty Trust Bank Kenya, Guaranty Trust Bank Rwanda (formerly Fina Bank Rwanda) and Guaranty Trust Bank Uganda.
Headquartered in Lagos, GT Bank has a vast business outlay spanning Africa and the United Kingdom and employs more than 12,000 personnel in Nigeria, Cote d’Ivoire, The Gambia, Ghana, Liberia, Sierra Leone and the UK.
An audit is basically an inspection or inquiry by a tax administrator in which a particular taxpayer is assessed in terms of its operation and business undertakings to ascertain the extent of compliance with the tax laws. It is not necessarily an indication that fraud or tax evasion is suspected on the part of the firm being audited.
It can also help the tax administrator to understand the ease or difficulty of application of particular tax laws.
Mr Gakwaya said RRA is also monitoring companies that sold shares this year.
Rwanda has also moved to curb tax dodging by renegotiating the double taxation agreement with Mauritius last year. This followed suspension of the 2001 agreement, from which Rwanda said Mauritius was benefiting disproportionately. Specifically, previously all the taxation rights belonged to Mauritius.
Analysts point to the tax regime in Mauritius, which is considered too generous. As a result, most investors opt to register their companies in Mauritius while doing business in Rwanda and repatriating all their profits without paying taxes locally.