On 14 December 2020, Rwanda's new general rules on transfer pricing (“New TP Rules”) which are in line with the key aspects of the Organisation for Economic Cooperation and Development transfer pricing guidelines and anti-base erosion and profit shifting recommendations were published. The New TP Rules replace the previous rather simplistic rules which have been in force since 2007.
Scope of the New TP Rules
The New TP Rules apply to transactions between related (known as controlled transactions) where one of the parties is a Rwanda tax resident, as well as transactions between non-resident related persons if the transaction concerns the permanent establishment of one of those persons in Rwanda.
Interestingly, the same rules also apply to transactions between unrelated parties involving a Rwandan tax resident or a permanent establishment of a non-resident in Rwanda when the other party to the transaction resides in a country or tax jurisdiction considered by the Rwandan tax administration to provide a “beneficial tax regime”.
A beneficial tax regime is defined as tax legislation characterised by:
- not taxing income or taxing income at a maximum rate of 20%;
- granting tax breaks to non-resident individuals or companies and not requiring taxpayers to carry out substantial economic activity within the country or tax jurisdiction,
- not taxing foreign-sourced income or taxing such income at a maximum rate of 20%; or
- not allowing access to information about the corporate structure of legal entities, the ownership of assets, other rights or economic transactions.
Transfer pricing methods
The New TP Rules permits both transaction-based and transactional profit transfer pricing methods, as opposed to the repealed transfer pricing rules which only provided for transaction-based methods.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 New TP Rules also allow the use of alternative methods 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.
Intragroup services and intangible specific rules
There are specific rules for intragroup service and intangible transactions in the New TP Rules. For service transactions, a service fee is deemed to be at arm's length if:
- it is charged for a service that is actually rendered;
- the service provides, or was expected to provide, the recipient with economic or commercial value to enhance its commercial position; and
- the fee is charged for a service that an independent person in comparable circumstances would wish to pay for such a service if performed by an independent person or would have performed in-house for itself.
For transactions involving intangibles, the contractual arrangements and a number of specified factors are to be taken into account when determining an arm's length price. If the intangible assets are hard to value (HTVI), the tax administration may consider ex-post outcomes as presumptive evidence of the ex-ante pricing arrangements.
Transfer pricing documentation requirements and de minimis exemption
Persons involved in controlled transactions are required to develop transfer pricing policies, and to prepare and keep documentation verifying that the conditions of their controlled transactions for the relevant tax period are consistent with the arm's length principle. The transfer pricing policy must include:
- an overview of the taxpayer's business operations and their organisation;
- the corporate organisational structure;
- 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.
Taxpayers must keep:
- copies of all material intercompany agreements concluded;
- the country-by-country report prepared by the ultimate parent of the taxpayer if it is required to prepare such a report in its country of incorporation;
- a controlled transactions schedule in the form annexed to the New TP Rules; and
- any other documentation or information that is necessary for the determination of the taxpayer's compliance with the arm's length principle with respect to the controlled transactions.
The required documentation must be available before the deadline for filing income tax returns. Documents related to the global organisational structure of a group of companies to which a Rwandan taxpayer belongs must be submitted to the tax administration with the first income tax declaration. Whenever such documentation is amended, the updated version must be submitted to the tax administration.
Other documentation must be submitted upon request by the tax administration within seven days from the date of receipt of the written request, except for the schedule of controlled transactions which must be submitted together with the income tax declaration of the taxpayer and the country-by-country report that must be filed not later than twelve months after the last day of the reporting fiscal year of the multinational enterprises group.
A de minimis exception is provided for, where a taxpayer with an annual turnover of less than FRW600-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.
The New TP Rules also address the non-recognition of controlled transactions, comparability factors, selection of a tested party, source of information on uncontrolled comparable transactions and corresponding adjustments for both domestic and international transactions.
Although the detailed New TP Rules will certainly assist in preserving Rwanda's tax base and fighting the shifting of profits to low tax jurisdictions, they will inevitably increase taxpayers' compliance burden. Transfer pricing audits by the Rwanda Revenue Authorities with corresponding significant tax adjustments based on these rules are anticipated in the near future. However, there are concerns regarding the ability of tax practitioners and staff of the Rwanda Revenue Authorities who may have limited experience in transfer pricing matters, to apply the New TP Rules considering their level of detail and intricacies involved. The effective implementation of these rules will, to a large extent, depend on efficient capacity building in both the local tax profession and the tax administration.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.