With the growing globalisation of economic activity characterised by free movement of goods, capital and labour, more and more Rwandan residents are now working outside Rwanda, doing business with or in foreign countries, holding shares in non-resident companies and extending loans to non-resident borrowers. However, the tax treatment in Rwanda of foreign income earned from such activities is still the subject of some uncertainty, particularly with respect to double taxation relief.
Worldwide tax system and double taxation relief
Rwanda has a worldwide income tax system in terms of which Rwandan tax residents are taxed in Rwanda on their worldwide income. However, foreign countries from which Rwandan residents derive income will, in most cases, also tax such income on the basis that the same income has its source in their territories. This would give rise to double taxation as the same income would be taxed in both the country of source and the country of residence.
The Rwandan Income Tax Act recognises this potential double taxation and provides for relief by way of the foreign tax credit method. In terms of article 7 of the Income Tax Act, if during a tax period, a Rwandan resident derives income from “taxable activities performed abroad”, the Rwandan income tax payable by that resident in respect of such income is reduced by the amount of foreign tax payable on the income. The foreign tax credit allowed cannot exceed the amount of Rwandan tax that would be payable on the foreign-sourced income.
Uncertainties in respect of unrelieved foreign tax
When the tax due in the country of source is higher than the tax due in Rwanda on the same income, the tax credit allowed may not fully relieve a Rwandan resident taxed abroad from double taxation. It is not clear from the Rwandan Income Tax Act whether any unrelieved foreign tax may be carried forward for utilisation against tax due on foreign income in future years of assessment.
Furthermore, the Rwandan Income Tax Act seems to allow a foreign tax credit only in the case of income derived from “activities performed abroad”, yet foreign income tax may also have been levied on income earned from other means. It is not clear how the “performed abroad” test would be applied to income such as dividends, interest, royalties and service fees. In terms of international tax principles, such income earned by Rwandan residents should be deemed to be foreign-sourced income in terms of the Rwandan Income Tax Act and foreign taxes paid on the same income should also be creditable under article 7 of the Income Tax Act. This is also the approach taken by Rwanda in terms of article 60 of the Income Act, which deems to have their source in Rwanda and, accordingly, taxes dividends, interest, royalties, service fees and other payments made by residents to non-residents.
Some of the issues relating to unrelieved foreign tax are unlikely to arise in instances where there is a double taxation agreement (“DTA”) in effect between Rwanda and the foreign source country which provides for the mechanism of double taxation relief to be applied by the contracting states. For instance, article 22 of the DTA with South Africa provides that South African tax paid by residents of Rwanda in respect of income taxable in South Africa will be deducted from the taxes due according to Rwandan fiscal law. These provisions clearly also apply to taxes paid on income such as dividends in South Africa. However, DTAs seldom address the carry-forward of unrelieved tax, and uncertainties in this respect would typically remain.
Until relevant amendments are effected to the Rwandan Income Tax Act, the applicable foreign tax credit regime will continue to be unclear and Rwandan residents deriving income from foreign sources are advised to seek professional tax advice in that regard.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.