Taxes pay for health, education, our infrastructure and general running of our country, so you should not complain- too much - about paying taxes.
However, that does not mean you have to pay any more than you need to. In fact, no one should pay more tax than the law requires. The best way of ensuring that you pay only your fair share of taxes is through tax planning.
Tax planning involves reviewing your financial goals in the most tax-effective manner by using tax rules that permit you to reduce or defer taxation and increase your tax deductions.
If you are an employee, there is not much you can do about the tax on your salary. However, if you are in business there are a number of legal ways you can cut down the total tax you pay to RRA.
One of the simplest ways a business can reduce on the amount of tax they pay, legally, is to maximise on their tax deductions and tax allowances.
Tax deductions are simply expenses and allowances that you are allowed to use to reduce your gross income. From a big picture perspective, figuring out your taxes is actually pretty simple. You determine your gross income and then deduct everything allowable under the tax law. After that, compute 30 percent of what is left, and then write out a cheque for that amount to RRA.
Obviously there are other issues you need to consider for example, when to pay tax, what tax returns to fill in and file, what disclosures to make to RRA, etc, but I have used this simplification to emphasize the importance of tax deductions and allowances.
There are many costs involved in running a business that are fairly clear-cut when it comes to considering them a legitimate expense.
These expenses usually come with their own documentation in the form of invoices or bills. The problem comes from the borderline items, yet these are the ones that will increase the profit of the business by reducing the income tax liability. These borderline items need to be faithfully documented.
These borderline items include such things as travel expenses, business lunches, and the use of your private vehicle or mobile phone for business purposes.
All of these are legitimate costs of doing business and therefore are business expenses that can be claimed to reduce your taxable profit, but unless you can document them, they will do you no good.
The important thing is showing the business purpose of the expense. For example, if you entertain clients at a business lunch, business must be discussed. The documentation for this meeting must be more than the simple restaurant receipt; there should be sufficient document that explains the business purpose of the meeting.
When considering whether an expense is tax deductible or not, you should ask yourself the following three questions. Did you or your business incur the expenditure? Was this expenditure incurred during the year of income which is being taxed? Was the expenditure incurred in the production of income included in your business’ gross income? If you can answer yes to all these three questions, then that expenditure is probably deductible for tax.
Here I use the word probably, because not all genuine business expenses that meet the above three criteria are tax deductible.
A good example of such an expense is entertainment. Unless you are in the business of entertaining people, such as the cinema, theatre, hotels and restaurants, the expenses your business incurs on entertaining its customers, potential customers or clients, are not allowable for tax purposes. It may not be fair, but that is the law.
Another area to consider would be the tax depreciation allowances for business assets. You should ensure that you fully utilise the available depreciation allowance for your type of business. The tax law has got favourable deprecation rates for certain investments.
Frobisher Mugambwa is a Tax Manager with PwC Rwanda