On 14th December 2020, Rwanda published Ministerial Order No. 003/20/10/TC of 11 December 2020 in the Official Gazette. The order which comes into force on the date of publication in the Gazette establishes general rules on transfer pricing between related persons involved in controlled transactions and largely conforms with the 2017 OECD guidelines. It empowers the Rwanda Revenue Authority to adjust profits earned between related parties if it considers that the trading arrangements between related parties do not adhere to the arm’s length principle. In this article, we will cover the key aspects of the Order.
Scope of transfer pricing rules
One of the key points is the scope of application of the transfer pricing rules. We note that the Order has a wider scope than the OECD guidelines in that, not only controlled transactions are covered by the rules but also deemed controlled transactions.
A controlled transaction is a transaction between two (or more) enterprises that are related with respect to each other. Parties are related where there is direct or indirect participation in control, management or capital of one party over another. On the other hand, deemed controlled transactions are transactions between parties that are not related but which fall under the category of controlled transactions due to the fact that one of those persons is resident in a country where the Rwanda tax administration considers as providing a beneficial tax regime.
Article 3 of the Order defines a beneficial tax regime as not subject to tax or subject to tax at a maximum rate of twenty percent (20%) or grants tax breaks to non – resident individuals or companies or does not have economic substance requirement within its jurisdiction or where foreign-sourced income is not taxed or taxed at a maximum rate of twenty percent (20%) or where there is no access to information with regards to taxpayers.
Controlled transactions covered under the Order include domestic transactions between related parties as there are preferential tax zones in Rwanda to promote investment and the Revenue Authority has noted some profit shifting to entities located in these zones.
The allocation of profits to permanent establishments in Rwanda will also have to follow the arm’s length principle in accordance with the Order.
Methods for determining arm’s length
Section 2 of the Order sets out the allowed methods which include both transaction-based and transactional profit methods, as opposed to the repealed transfer pricing rules which only provided for transaction-based methods.
Transaction-based methods are the comparable uncontrolled price (CUP) method, resale price method (RPM), and cost-plus method (CPM).
Transactional profit methods are the net margin method and profit split method.
The use of alternative methods is also allowed where none of these five methods can be reasonably applied to achieve an arm’s length outcome and where the alternative method yields an outcome consistent with what would be achieved by independent persons engaging in uncontrolled comparable transactions under comparable circumstances.
Threshold for the documentation requirement
A de minimis exception is provided for, where a taxpayer with an annual turnover of less than Rwandan Francs (FRW) 600-million and whose controlled transactions have a value of less than FRW10-million individually or an aggregate value of less than FRW100-million, is not required to prepare the required transfer pricing documentation. Regardless of the threshold for documentation, all taxpayers which fall under the scope of the transfer pricing regulations need to comply with arm’s length requirements in undertaking relevant transactions.
Documentation required and timing for filing
Whilst there is no requirement for a taxpayer to prepare a local file or master file as under the OECD guidelines, the Order requires the preparation of a transfer pricing policy and documentation that verifies that the conditions of controlled transactions are consistent with the arm’s length principle in addition to books and records normally required under the Rwandan tax laws. The documentation needs to include at least 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; the prescribed controlled transactions schedule, the format as annexed to the Order and 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 requirement for the content of transfer pricing policy seems to be fairly comparable to that of a local file and need to include an overview of the taxpayer’s business operations; the global organisational structure of the group; a description of the multinational enterprise business and the business strategy pursued by the taxpayer; a list of the taxpayer’s key competitors in Rwanda, a description of controlled transactions; detailed comparability and functional analysis; and an explanation of the important assumptions made for the selection of most appropriate pricing method.
With respect to country-by-country reports, it is provided that, reports must be filed within 12 months after the last day of the reporting fiscal year of the MNE group if an ultimate parent (assumed in another
jurisdiction) has been required to prepare a report. The Order does not provide country-by-country reporting requirements in general.
The documentation setting out the global organisational structure of the group of companies to which a Rwandan taxpayer belongs, needs to set out all related persons, the shareholding and management structure, and is required to be submitted to the Revenue Authority with the first income tax declaration of the taxpayer. Whenever there is a change in the global organizational structure and such documentation is amended, the updated version must be re-submitted to the tax administration.
The prescribed controlled transactions schedule needs to be lodged together with the income tax declaration.
All other relevant transfer pricing documentation for a relevant tax period must be in place before the deadline for income tax declaration and need to be submitted upon request by the Revenue Authority within seven (7) days from the date of receipt of the written request.
Documentation must be submitted in any of the official languages of the Republic of Rwanda (English, French and Kinyarwanda). However, in practice, transfer pricing documents are normally completed in English.
The Order does not prescribe any specific penalty for failure to submit, late submissions or incorrect disclosure.
Statute of limitation
The general rule of five years applies from the date of filing the tax return applies. The tax authorities can ignore the five-year limitation when they suspect fraud or intention to evade the payment of tax. Hence generally tax inspectors can audit transactions going back 5 years and taxpayers need to be in a position to prove arm’s length application.
Conclusion
Rwanda seems to be stepping up its efforts to clamp down on abuses of the transfer pricing system. The Revenue Authority has over the past few years increased its capabilities in terms of training, and equipping staff with the required expertise to conduct tax pricing audits. It is expected that the likelihood of tax audits will be on the rise. Taxpayers will be well advised to ensure that they have appropriate documentation in place to justify the pricing of their transactions as this is the first line of defense in case of an audit.