18 June 2018

Rwanda: Budget 2018/19 - Govt Moves to Reduce Revenue Leakage

Photo: The New Times
Shoppers at a city supermarket (file photo).

Firms will now pay more taxes following a new regime that caps tax deductibles at 2 per cent of the turnover.

The new tax regime is part of the measures geared towards closing loopholes and enabling the government to raise more domestic revenue.

The deductions on taxable income include management fees, technical fees and royalties.

Effective July 2018, anything above the cap is subject to taxation.

This is part of the government's plan to raise funds from a previously 'ignored' aspect of the economy as the country moves towards self-financing.

The move is also being rolled out in most regional economies with varying percentages as the cap.

Experts say that that the step is an indication of a deliberate effort to reduce revenue leakages especially by multinationals who use the deductibles as an avenue to repatriate their profits.

The move has however triggered mixed reactions from a section of the private sector.

Affected firms include operators of international franchises such as major hotel brands who do not own the assets they manage.

This means that if their management fees are over 2 per cent of their turnover, the excess of the cap will be subject to taxation.

Other firms are calling for the separation of management and technical fees because of how their operations are structured.

"A lot of multinationals want to procure some of these services centrally because of economies of scale. When you lump this together, it defeats the purposes of economies of scale and when one tries to source the services locally, they are more expensive. There is a need to distinguish between the two," a CEO of a regional bank said.

Allan Gichuhi, a partner at Ernst and Young Rwanda said that a section of their clients have expressed concern.

However, Rwanda Revenue Authority says that the move is necessary as there is often a revenue leakage due to lack of such measures.

Some firms would declare up to 20 per cent of turnover as management fees to reduce their taxable incomes

RRA Commissioner General Richard Tusabe said that lack of such measures has previously seen a section of firms come up with services, naming them as management fees.

"This has been unfair due to the fact that some of the people who buy shares have missed out on dividends because of such fees and services that some companies list as management fees," Tusabe said.

This is part of the thin line the government has to trend when announcing new budgets as they ensure that the country remains attractive for investment and that multinationals do not take unfair advantage of the economy.

"Globalization has come with its own set of challenges. For instance, as Rwanda tries to attract investment from across the globe, businesses often come into the country with their own business models and terms that we do not want to interfere with. However, we have to be tax efficient towards their models," Tusabe noted.

He also said that the government was in the process of setting up a tax tribunal as courts take long to rule on cases which is often an inconvenience to businesses.

"A tax tribunal has been discussed extensively with stakeholders. We are trying to design a tribunal that will cover multiple private sector challenges," Tusabe said.

The budget also created a tax avenue through taxation of Board members sitting allowances at 30 per cent.

The Rwf2.4 trillion budget read on Thursday last week has reduced dependence on aid and assistance to just 16 per cent.

The national budget for the next fiscal year has put more emphasis on supporting local industries to produce more and empowering young people to create jobs.

The budget will be domestically funded at the tune of 84 percent as the Government expects to finance 68 per cent of the 2018-19 budget through domestic resources, 16 per cent through loans and expects 16 per cent to come from grants.

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