Avoidance and Evasion
Evasion of paying tax is a simple breaking of the law whether it be a tax law or any other law.
Avoidance is a means of reducing one’s tax liabilities but within the law. Transfer pricing whether it be done within a country or as a cross-border exercise has been used as a means of reducing a tax liability.
Off-shore loans and deposits/bonds are also used as a means of reducing tax. Interest paid on a loan is tax deductible.
A Ltd a resident of R could borrow money from A2 Ltd which is situated in another country, LLY, where the tax laws are more lenient. The Loan from A2 Ltd attracts interest and the income is taxed in LLY. The interest charged to A in R reduces the taxable income of A.
The RRA and the EAC are developing ways and means or reducing avoidance:
- By encouraging tax payers to be good citizens and help pay their dues for the benefit of Rwanda and ultimately themselves.
- By writing and passing laws to make constructive avoidance illegal. This is where an entity takes positive steps to reduce tax liabilities by means of accounting exercises and using “off-shore” entities and transfer pricing as tools.
See Appendix II which is an extract from the RRA Business Plan 2010-2012 and details aims and targets regarding progress on taxation.
RRA see Threats to include
- Smuggling and tax evasion on the increase;
- Tax planning activities by some taxpayers to avoid payment of taxes;
- Continued low level of compliance by taxpayers to pay tax arrears;
- Loopholes existing in taxation laws;
By showing these in such detail indicates that these points will be tackled by RRA officers and by the writing, passing and implementation of Law(s).
Transfer prising has been covered within the Cross-border trading section. But the concept is as valid within a group within one country as it is across borders.
For many years now, Transfer Pricing has not only used as a legitimate means of pricing goods sold between related parties or members within a group, but also for “transferring” profit to/from an otherwise loss making operation – to reduce the tax bill of the profitable operation and as the loss-maker will be making a smaller loss; but a loss carries no tax bill. Where the group companies reside in different locations with different tax regimes, transfer pricing has been used as a means of taking advantage of the differences.
So if A Ltd in Kigali also owned a business in the Republic of Ireland where corporate tax rates are 12%, by selling goods to Ireland at an inflated price, profits could be transferred to Ireland where they could be subjected to lower tax rates. Obviously, in reality, the plan is quite a simple as that, but the principle is there.
The Article 24 of DTI addresses this situation.
First ‘related persons’ are defined. They include the following categories (Article 24 DTI):
- An individual and his/ her spouse, his/her direct ascendants and descendants
- A company and any person who holds directly or indirectly fifty per cent (50%) or above, in value or by number, of the shares or voting rights in the companies.
In this case, if such parties apply transaction terms other than those which would be employed between independent parties, the Commissioner General of Rwanda Revenue, in conformance with the directives of the Minister of Finance, may direct that the income of one or more of those related persons is to include profits which he/she or they would have made if he/she or they operated as independent persons.
Article 30: Transfer Pricing
Where conditions are made or imposed between related persons carrying out business in their commercial or financial relations which differ from those which would be made between independent persons, the Commissioner General, in accordance with regulations issued by the Minister, may direct that the income of one or more of those related persons is to include profits which he/she of they would have made if he/she or they operated as independent persons.
In order to ensure efficient application of this Article, the Commissioner General may make arrangements in advance with persons carrying out business including money trading, subject to conditions if necessary, that related persons conclude their business in the same way as would be the case between independent persons.
This particular rule is of course an anti-tax-avoidance measure designed to ensure that certain interconnected economic operators do not fix abnormally low or high prices in their business transactions, as this could result in a reduction in assessed incomes and, consequently the tax collected as a result.
With the increasing use of the internet, tax returns filing and payment are two activities which lend themselves to automation. The use of online filing and payment is at various stages of development around the world.
There are advantages for both taxpayers and the revenue authorities in this.
For the taxpayer the key benefits are:
- Convenience – they can do their tax returns at a time, and in a place that suits them.
- Efficiency – they do not have to write out forms, post them, or take them personally to an office.
- Speed – they can complete their transactions quickly.
- Audit trail – there is always an electronic record of what has been submitted without the need to keep paper files etc
- Errors in transcription or electronic reading of forms is reduced For the tax authorities the key benefits are:
- Cost of tax collection is reduced. Once the online system is set up, the staff savings can be considerable, as will the savings on paper, postage etc.
- Compliance Monitoring – with a properly functioning online system the authorities can very quickly focus on non-compliant taxpayers, and with the staff resources freed up from administration can focus more on the high risk areas.
- Efficiency – the streamlining of tax returns and payments will lead to a more efficient operation.
- Probable increased compliance – by making it easier for citizens to file and pay returns it is likely that compliance rates will increase.
The Rwanda Revenue Authority has rolled out an electronic tax filing and payment system that allows taxpayers to file and pay for their taxes online. The self-declaration service is available for VAT, PAYE, withholding (lto), consumption (lto) and iqp (lto) tax.
With this new e-tax system, taxpayers no longer need to travel to Rwanda Revenue Authority offices or stand in long queues. A call centre has also been established to provide customer care to taxpayers through telephone enquiries, further reducing the need for customers to travel to the Rwanda Revenue Authority offices for information.
As a result, the processing time for VAT returns, Income Tax returns and PAYE returns has been reduced from 23.5 days to just 1 day. Commercial Banks have also seen the value of this system and are now enrolling to provide e-tax payment services, further promoting the use of the system.
The Investment Climate Facility for Africa has worked with the Rwanda Revenue Authority to develop the e-tax system as part of the drive to modernise Rwanda’s tax administration.