We are at the time when we have to prepare for the filing of Corporate Income Tax (CIT) for the tax period ended December 2023, which will be due latest 31 March 2024.
As we watch the time tick down to the deadline, there is critical information that filers should be aware of before submitting their CIT return to the tax administration.
Extension to submit certified financial statements cannot exceed 3 months. Taxpayers whose turnover is equivalent to Frw600M or above, are required by law to submit certified financial statements. Where such certification is not ready for submission within the deadline, an extension can be requested from the Commissioner General (CG) of Rwanda Revenue Authority (RRA). Upon approval, such extension cannot now exceed three (3) months according to the amendment to the Income Tax Law which came into force on 14 September 2023. After this period, fines will apply for delayed submission.
The CIT rate was reduced from 30% to 28% as per law Nº 051/2023 OF 05/09/2023 amending law Nº 027/2022 of 20/10/2022. Given that the amendment came in September, a public ruling by the CG was released on 04 January 2024 to guide the application of the new rate. The ruling provides that the CIT payable for the tax period 2023 will be based on the ‘Pro rata computation method’.
The RRA system shall provide taxpayers with a format for easy tax computation for the Pro rata method provided for in the CG ruling. In summary, income earned from January to the date of publication of the amendment into the official gazette (14 September) will be taxed at 30%, while the income earned from that date to 31 December, will be taxed at 28%. The format mentioned in the CG ruling will automate these rates.
Apart from the amendment, business expenses that are not supported by the EBM invoices, customs declarations, withholding tax and PAYE will not be allowed. For an expense to be allowed validation by the e-tax system, it should have gone through EBM, withholding tax declaration, Pay As You Earn (PAYE), or declared through customs for imports.
Taxpayers with unsupported expenses (those that have not gone through any of the above) are required to submit such expenses to RRA for validation before they are allowed as deductible.
In addition to the unsupported expenses, stock should also be reconciled for it to be accepted for validation. The inventory information in financial statements should match the inventory records in the EBM system.
In addition to the above, Articles 24 and 25 of law no 027/2022 of 20/10/2022 are also critical. Article 24 provides conditions for the deduction of business expenses from business taxable profit. Such expenses should have been incurred wholly and exclusively for the purpose of business and they are directly chargeable to the income, correspond to a real expense, and can be substantiated with proper invoice or receipts accepted by the tax administration, should lead to a decrease in the net assets of the business and were used for activities related to the tax period in which they are incurred.
On its part, article 25 of the same law provides for business expenses that should not be deducted from business profit for CIT purposes. The filer should remember to check aspects like management fees if they exceed 2% of turnover and were paid to a non-resident related person, such should not be deductible, thin capitalisation rule where intercompany loans are involved, and related realised foreign exchange loss in case any, transfer pricing rules especially ensuring that intercompany costs are at arm’s length, the accuracy of tax losses among such expenses that are not eligible for deduction as per the same provision.
It's important to note that the law allows mandatory contributions paid by the business as deductible expenses.
Investors with an investment certificate that allows them preferential CIT rates should exercise due diligence before opting for such rates. There is a need to review the requirements for such rates as set in the law on investment promotion and facilitation, together with their level of investment for the period. It should be noted that the application of the preferential CIT rates is done on a self-assessment basis, which may be later audited by the tax administration.
In conclusion, there is plenty of information that filers of Corporate Income Tax should be aware of, and some have been highlighted here, but not exhaustive, and as such relevant laws as Income Tax Law and other laws that guide CIT filing should be referred to for completeness and timeliness. Early filing is advisable to avoid last minute inconveniences that may occur in the last days of the 31 March deadline.
The author is Tax Manager, Garnet Partners Ltd.
The views expressed in this article are solely those of the author and do not represent the views, opinions, or endorsement of the company where the author is employed.