The tax administration practice in Rwanda encourages taxpayers in doubt to ask the Commissioner of the Rwanda Revenue Authority (RRA) to give them guidance on how the tax law will apply to a business transaction they are considering, even before they enter into the transaction itself. This kind of interpretation and guideline issued by the Commissioner is referred to as a private ruling.
According to the practice in Rwanda- not specifically provided for in the tax laws- a taxpayer may apply in writing to the Commissioner for a private ruling relating to a future transaction or an arrangement the taxpayer is considering. Where a taxpayer has made an application to the Commissioner for such a ruling, the Commissioner may issue the taxpayer with a ruling setting out the Commissioner’s view on the application of the tax law to the taxpayers proposed business transaction.
Private rulings are an effective way for a taxpayer to establish, at an early stage, the RRA’s position on a proposed transaction or business arrangement, before the taxpayer decides to proceed with the transaction or not. This enables the taxpayer to assess in advance what the potential tax liability may be if they were to proceed with the proposed transaction or arrangement.
This would enable them to take into consideration the tax implications of the transaction as they contract with the other party.
If the private ruling is unfavourable to the taxpayer, then the taxpayer has an opportunity of adopting alternative tax arrangements without necessarily attracting tax liabilities.
A private ruling is different from an assessment issued by the Commissioner. An assessment of a taxpayer’s taxation liability is made by the Commissioner after a review of the information provided by the taxpayer in the taxation return for the particular year of income together with any additional information obtained by the RRA pursuant to an audit or investigation of the taxpayer’s affairs.
In layman’s terms, a private ruling enables a “dry-run” without necessarily attracting a tax liability in the form of an assessment.
It is advisable to apply for the private ruling about the transaction, before entering into the transaction itself.
In principle a private ruling should be binding on the Commissioner and not the taxpayer. This means that even if the tax law is ultimately found to apply to the arrangement in a different way to that set out in the ruling from the commissioner, the taxpayer will not be liable for any more tax than that which would have been payable under the private ruling.
However in order to successfully argue for a private ruling to be binding on the Commissioner, the taxpayer must have made full disclosure of the nature of all aspects of the transaction for which they are seeking the ruling.
In addition to this, the taxpayer must also ensure that the transaction proceeds in exactly the way in which they described it to the Commissioner when they were seeking for the private ruling.
Furthermore, the private ruling may only be binding on the Commissioner in respect of the particular taxpayer, as opposed to applying to the general public at large. This is where a private ruling is different from a practice note which issued by the commissioner to the general public.
So if in doubt, feel free to ask the RRA. Remember whatever they say is not binding on you.
However, if you decide to ignore what they say, then prepare for a tough battle ahead, because they will not back down easily.
Paul Frobisher Mugambwa, Tax Manager PwC Rwanda