Tax compliance can be difficult and costs of non-compliance significant given the financial penalties that can be imposed.This is particularly true when a company is involved in international transactions such as importation of goods or services or trading arrangements with related parties who are non-residents. However, there is no avoidance of international trade as it is now part and parcel of modern business.
Under these circumstances, local businesses, including multinational companies operating in Rwanda, need to be aware of the tax obligations resulting from international transactions and devise ways of coping in order to minimise tax risks and avoid penalties.
It is clearly evident, from audits by revenue authorities worldwide, that non-compliance in the area of cross-border transactions is a minefield. However, despite these tax challenges, more and more companies are coming under increasing pressure to focus resources on core activities, leaving the so called backroom functions to junior accountants to deal with, without the investment to cope with increasing complexity.
This article looks at few areas that if not well handled, can present a company with tax risks. It focuses on the services.
A company which is importing services from non-resident service providers will be required to account for reverse VAT and withholding taxes. However, in most instances, compliance is often forgotten especially if the transaction involved is non-routine. There are also other complexities that arise. Reverse VAT and withholding have different tax points. Reverse VAT is accounted for when service is received, payment made or invoice raised while withholding tax is payable at the time the actual payment occurs. This means that even if one complies with reverse VAT, chances of missing on payment of withholding tax are higher, unless there are strong internal systems to ensure tax compliance. This risk is enhanced in instances, where one department in the company is the one procuring the service but does not involve the tax team from the onset.
The area of expatriate taxation also poses major risk to business especially among multinational companies. In a number of instances, staff seconded from group companies continue be paid in their home country while the host company caters for local allowances. The local portion is then taxed but not full remuneration that the expatriate is entitled to in respect of duties in Rwanda.
The risk is crystallised, where the expatriate staff are tax residents in Rwanda and therefore liable to pay tax on their full remuneration. The group companies subsequently recharge the costs paid for the expatriate staff. A number of questions then arise. Is this a recharge employment costs and therefore exempt from VAT or is it management fees? What are the taxes that arise on this transaction? Is it PAYE at 30% on the expatriate remuneration only or is reverse VAT at 18% and withholding tax at 15% also applicable and due on the management recharges resulting in total cost on this service of 66%. These are issues which if not properly managed can result in increased tax cost and non-compliance.
In addition, there is also the risk of transfer pricing adjustment by revenue authorities where the business arrangement between related parties does not comply with arm’s length principle.
Therefore, businesses need to ensure compliance in this area as well. The arm’s length principle requires that transfer prices charged between related parties are equivalent to
those that would be charged between independent parties in the same circumstances.
To minimise the potential risk in area of international trade, more and more companies are considering using professional assistance to provide independent review of their tax returns, before filing with revenue authorities. In the process, they hope that knowledge will be transferred to their staff that can then be able to deal with compliance much better.
There is need to realise that international transactions present major tax risks if tax compliance is not robust because the amounts involved tend to be significant and non-compliance can result in major financial impact for the company.
Nelson Ogara is a senior tax manager at PricewaterhouseCoopers Rwanda Limited