Rwanda: New transfer pricing rules
On 14 December 2020, Rwanda passed a Ministerial Order establishing new transfer pricing rules (“TP Order”) replacing the earlier 2007 regulations.
The TP Order outlines how article 33 of the 2018 Income Tax law – which requires transactions between multinationals be carried out under the arm’s length principle – is implemented. This measure is a step forward in aligning the country’s transfer pricing laws with the guidelines prescribed by Organisation for Economic Cooperation and Development.
Controlled and deemed controlled transactions
The TP Order applies to “controlled” and “deemed controlled” transactions.
- A controlled transaction is transaction between related parties where one of the entities is a Rwanda tax resident. Controlled transaction may also apply to non-resident related parties, if at least one of the parties have Rwanda based permanent establishment.
- Deemed controlled transactions are transactions between entities that unrelated but still fall under the category of controlled transactions because one of those entities is a resident in a country providing a beneficial tax regime according to Rwanda tax administration.
A beneficial tax regime is defined by following characteristics:
- not taxing income or taxing income at a maximum rate of 20%;
- granting tax breaks to non-resident individuals or companies and not requiring taxpayers to carry out substantial economic activity within the country or tax jurisdiction;
- not taxing foreign-sourced income or taxing such income at a maximum rate of 20%; or
- not allowing access to information about the corporate structure of legal entities, the ownership of assets, other rights, or economic transactions.
Content of transfer pricing documentation
The OECD guidelines outline an adoption of a three-tiered approach to transfer pricing by way of preparing a local file, a master file, and a country-by-country report. The content of Rwanda TP documentation, as outlined in the new TP Order, is similar to the OECD’s local file content.
TP documentation must be inclusive of but not limited to:
- Business and organisation overview;
- Organisation structure;
- Description of business strategy pursued;
- List of key competitors based in Rwanda;
- Description of controlled transactions;
- Detailed comparability and functional analysis; and
- Explanation of important assumptions made for selection of most appropriate pricing method.
The TP Order mentions that documentation must be prepared in English, French, or Kinyarwanda (official languages of the Republic of Rwanda) and must be supplemented with intercompany agreements; country-by-country report (if the taxpayer is required to prepare it on group level); list of a controlled transactions in prescribed format; and any other documentation necessary to establish arm’s length nature of pricing.
Whenever there is a material change impacting analysis, documentation should be amended, and updated version must be re-submitted to the tax administration.
Threshold requirement and submission deadlines
If the following thresholds are met, taxpayers should prepare documents evidencing arm’s length pricing contemporaneously (i.e. by the time of filing tax return):
- Annual turnover of more than FRW 600 million (approximately USD$ 600,000); or
- Controlled transactions amounting more than FRW 10 million (approximately USD$ 10,000) individually or more than FRW 100 million (approximately USD$ 100,000) on an aggregate basis.
The documentation must be submitted within 7 days from the receipt of a request by the RRA.
Tax return reporting requirements
A schedule of controlled transactions must be submitted with the income tax return filing.
The new TP Rules do not define penalties that will result for absence or deficient TP documents.