In December 2024, during a panel session focused on tax policy and its role in enabling development financing and domestic revenue mobilisation in Africa, held as part of the Annual Meetings of the Africa Tax Administration Forum ("ATAF"), Ronald Niwenshuti, the Commissioner General of Rwanda Revenue Authority ("RRA"), acknowledged the support RRA has received from ATAF in the area of international taxation, including transfer pricing. He noted that, thanks to enhanced skills in these areas, revenue collected from international tax audits, including transfer pricing, now accounts for more than 30% of the total tax collections generated through audits.
This suggests that the Rwandan tax administration is becoming increasingly sophisticated in matters of international taxation, particularly in the area of transfer pricing. There is also growing scrutiny of cross-border transactions, especially those involving entities within the same multinational enterprise ("MNE") group, that is, controlled transactions. This trend is evident in the RRA's approach to transfer pricing audits, where the focus is not only on determining whether the pricing of controlled transactions is consistent with the arm's length principle ("ALP"), but also on verifying whether the alleged controlled transaction actually took place and whether the conduct of the parties supports the claimed transaction or indicates that a different transaction may have occurred. As a result, the tax administration has, in some instances, been seen to disregard certain controlled transactions and/or replace them with other transactions especially when the transactions in question lack commercial rationale.
Whether the tax administration decides to reduce or increase the consideration received or paid by a member of an MNE group based in Rwanda for the supply of goods and/or services by or to another member of the same MNE group or decides to disregard their transactions or replace them with other transactions (transfer pricing adjustments), the primary outcome would be an increase in taxable income (for corporate income tax purposes) of the audited MNE group entity.
However, it does not necessarily end there. Transfer pricing adjustments may have other tax implications beyond increasing the taxable income of the audited MNE group entity.
Constructive dividend
The fact that primary transfer pricing adjustment increases the taxable income of the audited MNE group entity by increasing or decreasing the consideration received from or paid to another entity within the same MNE group does not take away the fact that there has been movement of excess value from one entity to another which would not have occurred had both entities dealt at arm's length.In this regard, it is asserted that a secondary transaction is deemed to have taken place whereby the excess value resulting from the primary transfer pricing adjustment is considered to have been transferred under a separate transaction and must be taxed accordingly.
In Rwanda, the secondary transaction takes the form of a dividend under article 40 of the 2022 law establishing taxes on income as amended (Income Tax Law) which states that dividend income includes the outstanding balance after the taxation of income from the correction made by the tax administration in the transfer pricing.
This suggests that if, for instance, a Rwandan resident company purchases goods from its parent company and/or sister company in a foreign country, and the tax administration finds that the price paid by the Rwandan company is above the arm's length price, the difference between the price actually paid and what is determined to be the arm's length price would be construed as a dividend paid to the foreign parent company and/or sister company and taxed accordingly. This also justifies the fact that the tax administration never refunds withholding tax paid on intra-group service fees that are eventually rejected (whether in whole or in part) by the tax administration.
The constructive dividend would be subject to withholding tax at the rate of 15% and of course given the time difference between the date such dividend would be deemed to have been paid, and the date of the secondary adjustment, heavy penalties and interest would likely apply. Another interesting feature of secondary adjustment is whether constructive dividend under article 40 of the Income Tax Law would also be treated as a dividend for the purpose of different double taxation avoidance agreements ("DTAAs") signed by Rwanda and taxed at lower rates provided for under such DTAAs.
Potential value added tax and customs implications
Primary transfer pricing adjustments may increase or decrease the value or consideration for which goods and or services were supplied between related persons, creating discrepancies between the value of such goods and/or services in the books of a member of an MNE group for corporate income tax purposes and the value used for the purposes of computing value added tax and import duties.
Unless both entities involved in a controlled transaction are resident in Rwanda (Rwandan transfer pricing legislation applies even when both parties to a controlled transaction are resident in Rwanda), transfer pricing adjustment are unlikely to lead to assessment of additional VAT in case of supply of goods and/or services by a Rwandan resident entity to a non-resident entity within the same MNE group given that exported goods and services are exempted from VAT. This would also be the case where a Rwandan resident entity has acquired goods and /or services from a related non-resident entity, as in such a situation transfer pricing adjustment by the Rwandan tax administration can only lead to a decrease in the consideration paid for such good and/or services (downward adjustments). The latter case may however lead to a situation where the value accepted by the tax administration as consistent with the ALP is below the value used for the purpose of calculating VAT and import duties as the case maybe, opening up the possibility for claiming VAT refund (if such VAT was not allowed as input VAT particularly for imported services) and import duties.
Wrapping up, the implications of transfer pricing adjustment go beyond corporate income tax, and this adds an extra layer of complexity. MNEs operating in Rwanda should ensure they have robust documentation in support of their controlled transactions including detailed intercompany agreements, documentation regarding selection of appropriate transfer pricing methods and their application, functional and comparability analysis, and so on, as the finding that they are not dealing at arm's length (which is likely in the absence of robust documentation) would be costly.
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.
