Two individuals were arrested last week after it was discovered that they were producing and selling alcohol that contained ethanol and methanol in amounts above the legal limit.

And now, The New Times has learned, they were also involved in a massive and complex tax evasion scheme.

The duo are Beatrice Gahongayire, the owner of African Buffalo Ltd and Bonaventure Niyitegeka, who was in charge of operations at the firm.

African Buffalo is based in Ndera Sector, Gasabo District.

The company produced various alcohol beverages known by brand names; Moonlight Vodka, MasterCane Spirit and ReaWaragi Gin. They were all declared illegal.

One of the tactics used was concealing the real owners of the company.

Gahongayire registered her business under the name of Laurent Semanza who is categorized under Level 2 of the social protection programme, Ubudehe. Category 2 is the second tier income level with the most wealthy at 5 and poorest at 1.

A tax audit of the company revealed that the firm owed taxes of over Rwf1.6 billion, however, Rwanda Revenue Authority (RRA) was unable to collect this tax or cease assets of the owner, who on paper, was not the real owner and based on his categorisation possessed no assets.

Registering the company under someone else’s names made it possible for the owners to avoid cease of assets in the event of tax fraud.

Gahongayire is also suspected to have created other companies to operate as distribution avenues for her alcohol products. She also set up bars to sell her products.

One distribution agency linked to Gahongayire was found to owe about Rwf76 million in taxes.

The second way the Africa Buffalo is suspected to defraud RRA, is through misuse of tax incentives.

To improve the competitiveness of local producers and boost investment, the government granted tax exemptions on select imported raw materials, a policy Gahongayire is suspected of abusing.

Sources with insights to the matter revealed that Gahongayire would import products such as Ethanol and instead of using it as a raw material (the purpose she got the exemption), she would sell to other firms locally without declaring and paying the required taxes.

Documents seen by The New Times show that in 2015, African Buffalo imported an equivalent of 395,500 litres of raw materials while the firm only produced 34,354 litres of wine and liquor, less than 10 per cent of the volumes imported.

The New Times reached out to a senior tax auditor at KPMG Rwanda, Angello Musinguzi on misuse of incentives and its effects on receipts.

He said that a business engaging in the vice causes an economy to be a net importer and reduces taxes such as excise tax and value-added tax that should be paid by manufactures.

"If this is happening, it is illegal and the punishments are heavy including revoking of investment certificate, confiscation of materials, and prosecution. This is planned tax evasion. The incentives are aimed at improving industrialisation and job creation, selling raw materials therefore does not lead to economic growth and leaves Rwanda a net importer. This also reduces taxes such as excise tax and VAT that should be paid by manufacturers,” Musinguzi said.

Investigations by The New Times show that the firm could also have been involved in fraud schemes on Corporate Income tax by creating dummy companies (named Shifrora and Mukabugingo) operating as distributors to enable them to declare huge expenses and low turnovers by overstating the cost of sales. By creating distribution companies under different names and ownership, the firm is suspected to have overstated the cost of sales.

This illegal practice is called Transfer mispricing. It occurs when associated enterprises charge each other for goods or services meant to manipulate markets or to deceive tax authorities.

Gahongayire is suspected to have lowered prices from her firm selling to her own distribution companies with the intention to minimize their taxes (for her firm). The distribution firms would then sell the products at market value reducing the producer’s tax obligation.

Musinguzi said that any firm that creates dummy companies to overstate or drive up the expenses does so illegally to avoid eligible taxes and reduce the Corporate Income Tax eligible.

Another tax expert explained that the fraud scheme is quite complex and not very common and requires a lot of work.

The Spokesperson of Rwanda Investigative Bureau, Dr Thierry Murangira, said that investigation on the firm is ongoing and could not comment further.

RRA officials could not comment on the details on the matter but noted that investigations by authorities are ongoing.

According to court documents, the firm has previously had troubles with the revenue authority with the Court of Appeal in Kigali in July this year ordering that the firm pays Rwanda Revenue Authority Rwf250 million in VAT.