1.

TAXABLE INCOME/ALLOWABLE EXPENSES

summary of the deductions from taxable income (allowable expenses) as outlined in Article 25 of
Law 16/2018, along with the non-deductible expenses from taxable income as listed in Article 26:

Deductions from Taxable Income/Allowable Expenses (Article 25):

1. Direct Purpose of Business: Expenses must be incurred directly for the purpose of the business
and directly chargeable to the income.

2. Real Expense with Substantiation: Expenses must correspond to real expenses and can be
substantiated with proper purchase receipts.

3. Decrease in Net Assets: Expenses should lead to a decrease in the net assets of the business.

4. Related to Tax Period: Expenses must be used for activities related to the tax period in which they
are incurred.

Non-Deductible Expenses from Taxable Income (Article 26):

1. Dividends and Profits Paid-Out:Dividends declared and profits paid-out to beneficiaries are not
deductible.

2. Reserve Allowances and Special-Purpose Funds:Reserve allowances, savings, and other special-
purpose funds are not deductible unless specified otherwise.

3. Fines, Penalties, and Donations:Fines, penalties, donations (except to non-profit organizations

within certain limits), and recoverable VAT are not deductible.

4. Income Tax Paid and Personal Consumption Expenses:Income tax paid in accordance with the law
or abroad, and personal consumption expenses, are not deductible.

5. Entertainment Expenses and Overheads:Entertainment expenses (except for general sporting

activities for employees) and 20% of certain business overheads are not deductible.

6. Management, Technical Services, and Royalty Fees:Management, technical services, and royalty
fees paid to non-resident persons exceeding 2% of the taxpayer's turnover are not deductible.

7. Interest on Loans Between Related Persons:Interest arising from loans between related persons,
exceeding a certain threshold, is not deductible.

These provisions aim to ensure that only legitimate business expenses directly related to generating
income are deductible for tax purposes, while certain expenses that do not contribute directly to
business activities or are not substantiated are not deductible.

2. DEPRECIATION:

here's a table summarizing the depreciation rates for different types of business assets as outlined in
Article 28 of Law 16/2018:
 Depreciatio
Asset Type n Rate

Buildings, Heavy Industrial Equipment, and 5% per

Machinery annum

10% per
Intangible Assets (Including Purchased Goodwill)
annum

Information and Communication Systems (Life over 10% per

10 years) annum

Computers and accessories, Information and 50% per

Communication Systems (Life under 10 years) annum

25% per
Other Business Assets
annum

This table provides a clear overview of the depreciation rates applicable to various categories of
business assets, ensuring accurate calculation of depreciation expenses for tax purposes.

Computation of Depreciation:
1. Cost/WDV (Written Down Value): Start with the initial value of the asset or the written down
value from the previous period.

2. Additional: Add any additional costs incurred during the tax period.
3. Less Disposal (Sales Price): Subtract the sale price of assets sold during the tax period.

4. Depreciation Basis: Calculate the depreciation basis.

5. Apply Appropriate Depreciation Rate: Multiply the depreciation basis by the appropriate
depreciation rate.

6. Depreciation: Calculate the depreciation amount.

Adjustment:

If the depreciation basis is less than zero, that amount is added to the business profit, and the
depreciation basis becomes zero.

If the depreciation basis does not exceed five hundred thousand Rwandan francs, the entire
depreciation basis is deemed to be a deductible expense.

Example Scenario:
Let's consider a company that purchased machinery for its business operations.

The acquisition value of the machinery is $50,000.

During the tax period, the company incurred additional costs related to the machinery amounting to
$5,000.

The machinery was sold at the end of the tax period for $10,000.

Computation Steps:

1. Cost/WDV (Written Down Value): Initial value of the machinery = $50,000

2. Additional Costs: Additional costs incurred during the tax period = $5,000

3. Less Disposal (Sales Price): Sale price of the machinery sold during the tax period = $10,000

4. Depreciation Basis:

Depreciation basis = (Cost/WDV + Additional Costs) - Disposal (Sales Price)

Depreciation basis = ($50,000 + $5,000) - $10,000

Depreciation basis = $45,000 - $10,000

Depreciation basis = $35,000

5. Apply Appropriate Depreciation Rate: Let's assume the machinery falls under the category of
"Heavy Industrial Equipment" with a depreciation rate of 5% per annum.

6. Depreciation:Depreciation = Depreciation Basis * Depreciation Rate

Depreciation = $35,000 * 5%

Depreciation = $1,750

Adjustment:

Since the depreciation basis is positive, no adjustment is needed.

The depreciation expense for the tax period is $1,750.

Summary:

In this example, we calculated the depreciation of machinery using the method outlined in Article 29
of Law 16/2018.

We considered the acquisition value, additional costs, disposal (sales price), and applied the
appropriate depreciation rate to determine the depreciation expense for the tax period.

3 ACCELERATED DEPRECIATION
let's break down the steps for calculating accelerated depreciation with an example:

Steps for Calculating Accelerated Depreciation:

Step 1: Determine Eligibility: Check if the investment meets the criteria for accelerated depreciation.
Ensure that the investment is in qualifying business assets worth at least $50,000 each and meets
sector-specific requirements or investment thresholds.

Step 2: Calculate Accelerated Depreciation: If the investment is eligible, calculate the accelerated
depreciation for the first year. The depreciation rate is a flat 50% for new or used assets.

Step 3: Ensure Compliance: Ensure compliance with asset retention and reporting obligations. The
assets must be retained for at least three years after benefiting from accelerated depreciation. Any
disposal before three years must be reported to the Tax Authority, and tax benefits must be repaid if
disposed of early.

Example Calculation:

Let's consider a business owner, John, who invested $60,000 in new machinery for his manufacturing
plant. The machinery falls under the specified sectors and meets all eligibility criteria for accelerated
depreciation.

Step 1: Determine Eligibility: John's investment in the machinery meets the eligibility criteria for
accelerated depreciation as it exceeds the minimum investment threshold and falls within the
specified sectors.

Step 2: Calculate Accelerated Depreciation: Given that the machinery is eligible, John can claim
accelerated depreciation of 50% in the first year. The calculation is as follows:

Accelerated Depreciation = 50% of $60,000 Accelerated Depreciation = $30,000

Step 3: Ensure Compliance: John must ensure that he retains the machinery for at least three years
after claiming accelerated depreciation. If he decides to dispose of the machinery before three years,
he needs to inform the Tax Authority and repay any tax benefits received.

Summary:

John can claim accelerated depreciation of $30,000 for the first year on his investment in the
machinery. However, he needs to comply with the asset retention and reporting obligations to avoid
penalties for early disposal.
 4: SPECIAL INCENTIVES FOR REGISTERED INVESTORS IN RWANDA

Incentive Eligibility Requirements

- Investment: At least $10,000,000 in tangible and intangible assets -

Employment and Training: Provide employment and training to Rwandans -
International companies
Preferential Corporate Financial Transactions: Conduct international financial transactions of at least
with headquarters or
Income Tax Rate of $5,000,000 annually - Establishment: Well-established in the sector within
regional office in
Zero Percent (0%) which it operates - Expenditure: Utilize at least $2,000,000 per year in
Rwanda
Rwanda - Administration and Coordination: Set up administration and
perform at least three specified services in Rwanda

Preferential Corporate
Registered investors - Exporting at least 50% of turnover - Operating in specified sectors such as
Income Tax Rate of
meeting specific criteria energy, transport, ICT, financial services, low-cost housing, etc.
Fifteen Percent (15%)
Registered investors
Corporate Income Tax investing at least
- Investment: At least $50,000,000 in specified sectors
Holiday of Seven Years $50,000,000 in specified
sectors
Corporate Income Tax
Approved microfinance
Holiday of up to Five - Approval by competent authorities
institutions
(5) Years
Exemption of Customs
Tax for Products Used Registered investors in
- Investment in products used in Export Processing Zones
in Export Processing Export Processing Zones
Zones

Exemption of Capital
Registered investors - Capital gains from investment not subject to tax
Gains Tax

Value Added Tax

Registered investors - Refund of Value Added Tax paid within specified period
Refund

- Issuance of residence permit - Ability to recruit foreign employees with

Immigration Incentives Registered investors
certain investment thresholds

- Timing of inclusion and deduction based on percentage of completion -

Taxation of Profits Construction companies
Capital allowances prorated according to work done - Losses from completed
from Long-Term engaged in long-term
long-term contracts can be carried back and offset against previously taxed
Contracts contracts
profit
a table comparing all the information about the special incentives for registered investors in Rwanda:

5. VALUE ADDED TAX (VAT)

a summary table based on the provided information:

Concept Explanation Formula Example

VAT is excluded
John purchased goods
from the price or
of 10,000,000 RWF
amount. VAT
exclusive of VAT.
Exclusive of exclusive on VAT = Price × VAT
Compute the amount
VAT exclusive is equal rate
of VAT. VAT =
to the price or
10,000,000 × 18% =
amount times the
1,800,000 RWF.
VAT rate.

Mary purchased goods

VAT is included in of 10,000,000 RWF
the price. To VAT = (VAT Rate / inclusive of VAT.
Inclusive of
calculate VAT on (VAT rate + 100)) Compute the VAT. VAT
VAT
inclusive, use a × Price = (18 / 118) ×
VAT fraction. 10,000,000 =
1,525,425 RWF.

Trader A buys sugar

from Trader B for
VAT on purchases
20,000 RWF without
Input VAT made by a -
VAT and pays 3,600
taxpayer.
RWF VAT. Input VAT =
3,600 RWF.
 Trader B sells sugar to
a customer for 24,780
VAT charged on
RWF inclusive of VAT
Output VAT sales made by a -
and charges 3,780
taxpayer.
RWF VAT. Output VAT
= 3,780 RWF.

VAT Payable = 3,780

Difference between VAT Payable =
RWF (Output VAT) -
VAT Payable output VAT and Output VAT - Input
3,600 RWF (Input VAT)
input VAT. VAT
= 180 RWF.

For a product priced at

VAT-exclusive price 100 RWF, the
Value of Consideration =
on which VAT is consideration is 118
Supply Value + VAT
charged. RWF (100 RWF + 18
RWF VAT).

For standard rated

Proportion of the VAT Fraction = products with 18%
VAT Fraction consideration Rate of Tax / (100 VAT, VAT Fraction =
attributable to VAT. + Rate of Tax) 18 / (100 + 18) = 18 /
118.
 A taxable supply is
Supplies on which
any supply of goods or
Taxable VAT is chargeable.
- services made in
Supplies Can be standard-
Rwanda, other than an
rated or zero-rated.
exempt supply.

Supplies such as
exports, certain
agricultural products,
Zero-Rated Taxable supplies and certain education
-
Supplies taxed at 0%. and healthcare
services may be zero-
rated for VAT
purposes.

6. a summarized comparison of the rules relating to VAT refunds and registration:

Medium
Aspect Large Taxpayers Taxpayers Small Taxpayers
- Less than Frw
100,000: Deduct
- Less than Frw 200,000: Deduct in next in next filing
filing period - Frw 200,000 to Frw 2,000,000: period - Frw
Refund
Refunded before audit if retained by 200,000 to Frw
Thresholds
treasury; Audit if requested more than 3 1,000,000:
times Refunded before
audit if retained
by treasury

- More than Frw 2,000,000 or between Frw

200,000 and Frw 200,000,000 for more than
3 times: Audit for validity
 - Prior to refund:
Desk audit without - Audit for requests
Audit - Prior to refund: Desk audit without going to
going to over Frw 500,000 for
Process taxpayer’s premises
taxpayer’s more than 3 times
premises

Taxable transactions of at least Frw

Registration
20,000,000 in preceding calendar year or
Threshold
Frw 5,000,000 in preceding quarter

Newly formed businesses may operate up to

3 months without registration, must register
before end of 3-month period if transactions
reach Frw 5,000,000 or more

Combine all activities and register as one

Combined
single taxable unit if person has different
Registration
businesses in same or different locations

7. WITHHOLDING TAXES

a summary with tables outlining the withholding tax rates as mentioned in the provided information:

Table 1: Withholding Tax Rates on Employment Income (Article 56)

Monthly Taxable
Income (RWF) Tax Rate
Up to 30,000 0%
30,001 -
20%
100,000
Above 100,000 30%

Table 2: Withholding Tax Rates on Other Payments (Article 60)

Withholding
Type of Payment Tax Rate
Dividends 15%
Financial Interests (excluding specified
15%
cases)
Royalties 15%
Service Fees (excluding specified cases) 15%
Performance Payments (certain
15%
categories)
Gambling Activities 15%
Goods Sold in Rwanda 15%
Dividends attributed to a Rwandan
15%
company

Table 3: Withholding Tax Rates on Importation and Public Tenders

 Withholding
Type of Transaction Tax Rate

Goods Imported for Commercial Use 5%

Public Tenders 3% or 15%

Table 4: Withholding Tax Rates under Double Taxation Agreements

Technic
Country Dividends Interest Royalty al Fees
South
10% 10% 10% 10%
Africa
Belgium 10% 10% 10% 10%
Mauritius 10% 10% 10% 12%
Barbados 7.50% 10% 10% 10%
Singapore 7.50% 10% 10% 10%
Jersey 10% 10% 10% 12%

some examples illustrating the application of withholding taxes based on the provided information:

Example 1: Withholding Tax on Employment Income

John earns a monthly salary of 120,000 RWF. According to the withholding tax rates on employment
income:

For the first 30,000 RWF, there is no tax.

For the next 70,000 RWF (30,001 - 100,000 RWF), the tax rate is 20%.

For the remaining 20,000 RWF (above 100,000 RWF), the tax rate is 30%.

Calculation: Tax on the first 30,000 RWF: 0% Tax on the next 70,000 RWF (20%): 70,000 * 0.20 =
14,000 RWF Tax on the remaining 20,000 RWF (30%): 20,000 * 0.30 = 6,000 RWF

Total withholding tax on employment income = 14,000 RWF + 6,000 RWF = 20,000 RWF

Example 2: Withholding Tax on Dividends under a Double Taxation Agreement

Company X, a Rwandan company, receives dividends from a company in Singapore. According to the
double taxation agreement between Rwanda and Singapore, the withholding tax rate on dividends is
10%.

If Company X receives dividends of 100,000 RWF from the Singaporean company, the withholding tax
would be calculated as follows:

Withholding tax on dividends (10%): 100,000 * 0.10 = 10,000 RWF

Company X would withhold 10,000 RWF as tax and remit the remaining 90,000 RWF to the
Singaporean company.

These examples demonstrate how withholding taxes are calculated and applied in different scenarios
based on the specified rates and agreements.

8. EAST AFRICAN CUSTOMS UNION

Here are key points to keep in mind while calculating taxes based on the provided information:

1. Common External Tariff (CET): Understand the three-band structure with minimum, middle, and
maximum rates. Products imported into the Community are subject to these rates.

2. Internal Tariff Elimination: Internal tariffs among Partner States are eliminated. Ensure that no
internal tariffs or charges of equivalent effect are applied on trade among member states.

3. Non-Tariff Barriers: Partner States must remove existing non-tariff barriers and refrain from
imposing new ones, except as permitted by the Protocol.

4. Rules of Origin: Determine if goods qualify for Community tariff treatment based on the Rules of
Origin. Goods must either be wholly produced within a Partner State or undergo substantial
transformation.

5. National Treatment: Partner States must not discriminate against products of other Partner States
through legislation or administrative measures. Internal taxation should not exceed that imposed on
similar domestic products.

6. Anti-dumping Measures: Dumping is prohibited if it causes material injury to domestic industries.

The Secretariat must be notified of any anti-dumping measures taken.

7. Subsidies and Countervailing Measures: Partner States must notify each other of any subsidies
granted. Countervailing duties may be levied to offset the effects of subsidies.

8. Safeguard Measures: Apply safeguard measures in cases of sudden surges of imports causing
serious injury to domestic producers. Transitional measures may be implemented for certain
industries.

9. Export Promotion Schemes: Understand the conditions and limitations of export promotion
schemes, such as duty drawback schemes, duty and VAT remission schemes, and manufacturing
under bond schemes.

10. Special Economic Zones: Consider the benefits and exemptions provided within special economic
zones, such as free ports, for facilitating international trade and promoting economic development.

11. Exemption Regimes: Harmonized exemption regimes specify goods excluded from payment of
import duties. Ensure compliance with the specified exemptions.

12. Calculating Taxes: Determine applicable tariff rates, exemptions, and any adjustments based on
rules of origin or specific trade promotion schemes when calculating taxes on imports or exports
within the Customs Union.
By considering key points, you can accurately calculate taxes and ensure compliance with the
regulations of the East African Customs Union.

1. Calculation of Common External Tariff (CET):

If a product is imported into the Community, determine its classification under the Harmonised
Customs Commodity Description and Coding System (HS code).

Apply the corresponding CET rate: minimum rate (0%), middle rate (10%), or maximum rate (25%)
based on the product category.

2. Internal Tariff Elimination:

If a product is traded between Partner States, no internal tariffs should be applied. Thus, no
additional taxes are levied beyond the Common External Tariff.

3. Rules of Origin Calculation:

Determine if the imported goods meet the criteria for Community tariff treatment based on the
Rules of Origin.

For example, if goods are produced within a Partner State, they are considered eligible for
preferential treatment.

4. Anti-dumping Measures:

If a Partner State determines that dumping is occurring and causing material injury to domestic
industries, it may impose anti-dumping duties.

Calculate the amount of anti-dumping duty based on the estimated subsidy granted on the imported
product.

5. Export Promotion Schemes:

For example, if a company exports goods produced within a special economic zone, it may be eligible
for duty drawback schemes.

Calculate the amount of duty drawback based on the prescribed conditions and limitations set by the
competent authority.

6. Exemption Regimes:

If certain goods are included in the harmonized list of exemption regimes, they may be excluded
from payment of import duties.

Calculate the total import duty by excluding the exempted goods from the taxable value.

7. Special Economic Zones (SEZs):

For goods imported into an SEZ, they are granted total relief from payment of duty.

Calculate the total import duty payable by considering whether the goods will be used within the SEZ
or removed for home use.
These examples demonstrate how to calculate taxes within the East African Customs Union by
considering various factors such as tariff rates, rules of origin, export promotion schemes, and special
economic zones.

9. customs valuation, here are the key points to consider:

1. Definition of Customs Value: The customs value of imported goods is the value used for levying ad
valorem customs duties on imported goods.

2. Identical Goods: Goods are considered identical if they are the same in all respects, including
physical characteristics, quality, and reputation. Minor differences in appearance do not preclude
goods from being regarded as identical.

3. Similar Goods: Goods are considered similar if they have like characteristics and like component
materials that enable them to perform the same functions and be commercially interchangeable.
Factors such as quality, reputation, and the existence of a trademark are considered in determining
similarity.

4. Exclusion Criteria for Identical and Similar Goods: Goods incorporating engineering,
development, artwork, design work, and plans and sketches undertaken in the Partner States are
excluded from being considered identical or similar.

5. Production Requirement: Identical or similar goods must be produced in the same country as the
goods being valued.

6. Related Persons: Persons are deemed related if they meet certain criteria, including being officers
or directors of each other's businesses, legally recognized partners, having an employer-employee
relationship, or having a significant ownership or control relationship.

7. Basic Value for Taxation of Imported Goods:

The basic value of imported goods includes:

The value of the goods for customs duty implementation.

The cost of insurance and freight incurred in bringing the goods to the importing country.

The cost of services facilitating the import of goods.

Any customs duty, excise, port charges, or other fiscal charges payable in respect of the import.

If goods are re-imported after repair, renovation, or improvement without a change in nature, the
value of the import is the increase in value resulting from the repair, renovation, or improvement.

These key points provide guidance on understanding and applying customs valuation principles for
imported goods within the specified framework.

Sure, here are some examples illustrating customs valuation principles based on the provided
information:

1. Identical Goods:

Example: Company A imports smartphones from Country X. Company B imports the exact same
model of smartphones from the same manufacturer in Country X. Since the smartphones are
identical in all respects, including physical characteristics, quality, and reputation, they are
considered identical goods.

2. Similar Goods:

Example: Company C imports laptops from Brand Y with similar specifications as laptops imported by
Company D from Brand Z. Although the brands are different, the laptops have like characteristics and
perform the same functions, making them commercially interchangeable. Therefore, they are
considered similar goods.

3. Exclusion of Goods Incorporating Development Work:

Example: Company E imports machinery that incorporates unique design work and engineering done
within the Partner States. Since the machinery includes elements of development work undertaken
in the Partner States, it is excluded from being considered identical or similar goods.

4. Related Persons:

Example: Company F and Company G are both owned by the same individual and share common
directors. They are considered related persons under the customs valuation framework due to their
ownership and directorship relationship.

5. Basic Value for Taxation:

Example: Company H imports a shipment of goods from Country Z. The total customs value for
taxation purposes includes the value of the goods, the cost of insurance and freight to transport the
goods to Rwanda, and any customs duties, excise, or port charges payable on the import.

6. Re-importation after Repair:

Example: Company I exports machinery to Country Y for repair and subsequently re-imports it to
Rwanda after the repair work is completed. The value of the import is determined by the increase in
value of the machinery resulting from the repair, renovation, or improvement.

These examples demonstrate how customs valuation principles are applied in various import
scenarios, considering factors such as the nature of goods, their origin, and relationships between
importing entities.

10. determining customs value outlined in the provided information include:

1. Transaction Value:The price actually paid or payable for the goods when sold for export to the
Partner State, adjusted under certain conditions.Acceptable if certain criteria regarding restrictions,
conditions, and relationships between buyer and seller are met.

2. Transaction Value of Identical Goods: If customs value cannot be determined using transaction
value, the value of identical goods sold for export to the Partner State and exported at or about the
same time can be used.
3. Transaction Value of Similar Goods: If customs value cannot be determined using transaction
value or transaction value of identical goods, the value of similar goods sold for export to the Partner
State and exported at or about the same time can be used.

4. Reversal of Order of Application of Deductive Value and Computed Values: If customs value
cannot be determined using the above methods, deductive value or computed value methods can be
used, with the option to reverse the order at the importer's request.

5. Deductive Value: Based on the unit price of imported goods sold in the greatest aggregate
quantity in the Partner State to unrelated buyers, subject to deductions for certain costs and charges.

6. Computed Value: Based on the cost or value of materials, fabrication, profit, general expenses,
and other necessary expenses incurred in producing the imported goods.

7. Fallback Value: If customs value cannot be determined using previous methods, determined using
reasonable means consistent with the principles and general provisions of the schedule and based
on available data in the Partner State.

8. Adjustments to Value:Additions to the price actually paid or payable for the goods, including
certain costs, charges, and expenses incurred by the buyer, to determine the customs value.

Regarding transfer pricing:

It refers to determining prices in transactions between related parties to reflect market conditions.

The arm's length principle is endorsed to ensure transactions with related parties are made under
comparable conditions as transactions with independent parties.

The arm's length principle helps avoid tax advantages or disadvantages and reduces the likelihood of
double taxation.

Proper documentation is necessary to substantiate transfer pricing to avoid adjustments by tax

authorities.

These methods and principles help ensure fair and accurate determination of customs value and
transfer pricing in international trade transactions.

10. To apply the arm’s length principle effectively, the Rwanda Revenue Authority (RRA) recommends
a three-step approach:

Step 1: Conduct Comparability Analysis

Identify and compare economically relevant characteristics of transactions between related parties
and those between independent parties.

This involves:

Examining related party transactions.

Identifying comparable transactions between independent parties (internal and external

comparables).

Step 2: Identify the Most Appropriate Transfer Pricing Method and Tested Party
Choose the most suitable transfer pricing method and tested party based on the comparability
analysis.

Internationally accepted methods include:

Traditional transaction methods (CUP, resale price method, cost plus method).

Transactional profits methods (transactional profit split method, transactional net margin method).

Consider factors such as the nature of the transaction, availability of data, and reliability of
comparables

Step 3: Determine the Arm’s Length Results

Apply the chosen transfer pricing method to determine the arm’s length results for related party
transactions.

Ensure that the prices or margins are consistent with those adopted by independent parties in
similar transactions.

Application of Transfer Pricing Methods.

1. CUP Method (Controllable Uncontrollable Price): Compares prices of related party transactions
with prices of independent party transactions under similar circumstances.

Example: Comparing the price of computer disk drives sold to a related overseas subsidiary with the
price sold to an unrelated local company.

2. Resale Price Method:

Applies when a product purchased from a related party is resold to an independent party.

Calculates the arm’s length price by reducing the resale price to the independent party by a
comparable gross margin.

3. Cost Plus Method

Focuses on the gross markup obtained by a supplier who transfers goods or provides services to a
related purchaser.

Adds a comparable gross markup to the costs incurred by the supplier to arrive at the arm’s length
price.

4. Transactional Profit Split Method

Splits the combined profits of related party transactions in a manner similar to how independent
parties would allocate profits.

Useful for highly interrelated transactions or where unique contributions are made by each party.

5. Transactional Net Margin Method (TNMM)

Compares the net profit relative to an appropriate base attained by the taxpayer from related party
transactions with that of comparable independent parties.
Related Party Services and Loans:The arm’s length principle also applies to related party services and
loans. For services, the "benefits test" is applied to determine if related party services have been
provided.

For loans, the arm’s length principle ensures that the interest charged for related party loans reflects
market conditions.

Adhering to this three-step approach and selecting the appropriate transfer pricing method ensures
compliance with the arm’s length principle and helps avoid transfer pricing adjustments by tax
authorities.

11 This excerpt provides a comprehensive overview of professional ethics in the field of

accounting. Let's break down some key points:

1. Professional Ethics Definition: Professional ethics in accounting refer to the standards of behavior,
values, and guiding principles established by professional organizations to ensure that accountants
perform their job functions according to ethical principles.

2. Public Interest Responsibility: Accountants have a responsibility to act in the public interest,
considering the legitimate interests of various stakeholders such as clients, government, financial
institutions, investors, and the business community.

3. Fundamental Principles: The fundamental principles of professional ethics in accounting include:

Professional competence and due care

Confidentiality

Professional behavior

Integrity

Objectivity

4. Conceptual Framework Approach: Accountants are required to identify, evaluate, and address
threats to compliance with the fundamental principles using a conceptual framework approach. This
involves:

Identifying threats

Evaluating the significance of threats

Applying safeguards to eliminate or reduce threats to an acceptable level

5. Threat Categories: Threats to compliance with fundamental principles fall into categories such as
self-interest, self-review, advocacy, familiarity, intimidation, and threats to professional competence
and due care.

6. Safeguards: Safeguards are measures that may eliminate or reduce threats to an acceptable level.
They can be created by the profession, legislation, regulation, or the work environment.

7. Ethical Conflict Resolution: When faced with an ethical conflict, accountants should consider
relevant factors and determine the appropriate course of action. This may involve consulting with
others, such as those charged with governance of the organization.
8. Integrity: Accountants are expected to be straightforward and honest in all professional and
business relationships, avoiding associations with false or misleading information.

9. Objectivity: Accountants must not compromise their professional judgment due to bias, conflict of
interest, or undue influence.

10. Professional Competence and Due Care: Accountants have an obligation to maintain professional
knowledge and skill, as well as to act diligently in accordance with applicable standards.

11. Confidentiality: Accountants must respect the confidentiality of information acquired as a result
of professional and business relationships, refraining from disclosing it without proper authority.

12. Disclosure of Confidential Information: There are limited circumstances where accountants may
be required or permitted to disclose confidential information, such as when authorized by law or
professional duty.

Overall, adherence to professional ethics is crucial for maintaining trust, integrity, and credibility
within the accounting profession and ensuring that accountants act in the public interest.

12. This
document outlines detailed procedures and
principles related to tax audit and investigation,
including various methods used for income
reconstruction in cases of suspected tax evasion. Let's
break down some key points:
Tax Audit
Notification: Taxpayers must be informed in writing at least seven days before an audit, specifying
the place and duration of the audit and any specific documents required.

Unique Audit Principle: Tax administration generally audits a taxpayer only once per type of tax and
tax period, with exceptions listed.

Audit Procedures: Contradictory procedure, issue-oriented audit, desk audit, and audit without
notice are outlined.

Time Limit: The power to audit is generally limited to five years, extending to ten years if the
taxpayer concealed information to evade tax.

Desk Audit: Conducted in the auditor's office based on specified criteria.

Other Sources of Information: Public or private institutions and other persons must provide
requested information within fifteen days.

Final Note for Rectification: Issued to the taxpayer after a specified period without response or after
considering taxpayer explanations.

Audit Without Notice: Permitted in cases of serious indications of tax evasion, allowing for
immediate assessment or fines.
Inadmissibility of Documents: Taxpayers cannot introduce additional documents during appeals that
were not produced during the audit without valid reason.

Tax Investigation
Criminal Activities: Includes deliberate underreporting of income, false entries, and hiding assets.

Access to Premises: Authorized officers may search business premises without notice, with a warrant
for residential premises.

Stages of Investigation: Surveillance, evidential audit, case preparation, arraignment, and

termination are outlined.

Income Reconstruction: Various methods are described, including direct (bank deposits, invoices)
and indirect methods (net worth, sources and applications of funds).

Burden of Proof: The Revenue authority must show evidence of willful intent to evade tax, with
different burdens of proof for civil and criminal cases.

Defenses Against Income Reconstruction: Taxpayers can contest reconstructions by focusing on

errors in the application of methods rather than the theory behind them.

This comprehensive overview illustrates the meticulous process involved in tax audits and
investigations, emphasizing adherence to legal procedures and principles.

13. Defenses Against Income Reconstruction

Methods
Net Worth Method:

Cash Hoard Defense: Taxpayers may claim the existence of a cash hoard not considered by the
Revenue authority, supported by circumstantial evidence like regular cash transactions, distrust of
banks, or documented large cash expenditures before the examination period.

Sources and Applications of Funds:

Beginning Funds Balance: Taxpayers may argue that the starting funds balance was understated due
to a cash hoard or assets sold for cash not included in the analysis.

Percentage Markup:

Weaknesses: Taxpayers may dispute calculations, claiming they don't consider factors like breakage,
theft, or changes in the business environment.

Bank Deposits:

Alternative Nontaxable Source: Taxpayers can defend against this method by providing evidence of
alternative nontaxable sources for the deposits.

Unit Volume Computation:

Dispute Volume Assumptions: Taxpayers may challenge volume assumptions as unrealistic for their
business, citing factors like marketing plans, employee training, or bulk sales.

Determination of Income through Back-duty Cases

Steps: Taxpayers can declare income supported by documentation, prepare a capital statement to
estimate asset growth, and adjust for non-taxable income or expenses.

These defenses highlight the strategies taxpayers may employ to contest income reconstruction
methods used by the Revenue authority, emphasizing the importance of providing credible
alternative explanations and evidence.

14. Interest, Fines, and Penalties in Taxation

Interest Paid by Tax Administration:

Refund Delays: If a taxpayer is discharged from tax, interest, or penalties by a decision but does not
receive the refund within the prescribed time, the Tax Administration must pay interest on the due
refund.

Administrative Fine for Non-declaration and Non-payment:

Graduated Fines: Taxpayers failing to declare or pay tax within the required time limits are subject to
fines ranging from 20% to 60% of the due tax, based on the duration of the delay.

Late Payment of Tax:

Penalties for Late Payment: Taxpayers who declare but fail to pay tax within the prescribed time
limits face penalties ranging from 10% to 30% of the principal tax due, based on the duration of the
delay.

Understatement of Tax:

Fines for Understatement: Taxpayers understating tax liability by 10% to 20% face fines of 10% of the
understated amount, doubling if the understatement exceeds 20%.

Late Payment Before Notice Assessment:

Penalties for Voluntary Declarations: Taxpayers who voluntarily declare and pay tax after the
prescribed time limits but before being notified of an imminent audit face penalties ranging from
20% to 40% of the due tax

Administrative Fine for Non-declaration and Non-payment After Audit or Investigation:

Post-Audit Penalties: Taxpayers found to have neither declared nor paid tax after an audit or
investigation face a fine equivalent to 60% of the due principal tax.

Failure to Comply with Electronic Invoicing:

Administrative Fines: Failure to use recognized electronic invoicing systems or providing undervalued
invoices can result in fines of two times the value of the transaction.

Failure to Provide Information:Information-related Fines: Taxpayers failing to provide accurate or

complete information related to audited transactions face fines equivalent to 5% of the transaction
value under audit.
1 RENTAL INCOME
the taxable income from such rentals is calculated, based on the information you provided:

Gross revenue from rentals is reduced by 10% as deemed expenses.

Interest paid on loans related to the rentals can be deducted from the taxable income.

Tax depreciation expense, which is the depreciation of the machinery, land improvements, or
livestock, can also be deducted.

Once these deductions are applied, the remaining amount represents the taxable income from the
rentals, which is subject to taxation.

2 Loan and Salary Advances

There are added to the taxable income, benefits on a loan including advance on a salary
exceeding a three (3) months’ salary given to an employee valued at a difference between: The
interest on loan, which would have been paid by the employee during the month in which the loan
was received, calculated at a rate of interest offered to Rwanda; And the actual interest paid by the
employee in that month;

Here's how the calculation works:

1. Determine the hypothetical interest on the loan: Calculate the interest that would have
been paid by the employee during the month in which the loan was received. This is calculated at a
rate of interest offered within Rwanda.

2. Calculate the actual interest paid by the employee in that month.

3. Find the difference between the hypothetical interest and the actual interest paid.

4. Add this difference to the employee's taxable income.

For example, let's say an employee receives a loan exceeding three months' salary, and the
hypothetical interest on the loan for a given month is $200, but the employee only pays $150 in
actual interest for that month. In this case, the difference of $50 ($200 - $150) would be added to the
employee's taxable income.

3 Housing Benefits
Under this provision, if an employer provides housing benefits to an employee, meaning the use or
availability of premises (including or excluding household equipment or other contents) for
residential occupation, a portion of the value of that benefit is added to the employee's taxable
income.

Here's how it's calculated:

1. Determine the employment income of the employee, excluding any other benefits in kind.

2. Calculate twenty percent (20%) of the employment income.

 3. This calculated amount represents the taxable value of the housing benefit provided to the
employee.

However, there's a special consideration when the employer directly pays rent for a house or
motor vehicle for an employee. In such cases, the amount paid directly by the employer for rent is
treated as any other allowance referred to in Article 15 of Law 16/2018, meaning it is subject to the
same taxation rules as other employment income components outlined in that article.

TAX EXEMPTION FOR PROFIT ON

AGRICULTURAL AND LIVESTOCK ACTIVITIES
4. Under Article 21 of Law 16/2018, there are tax exemptions for profit earned by agriculturalists or
pastoralists engaged in agricultural or livestock activities, subject to certain conditions. Here's a
breakdown:

1. Income Threshold: If the turnover (revenue) from agricultural or livestock activities does
not exceed twelve million Rwandan francs (12,000,000 RWF) in a tax period, the profit earned from
these activities is fully exempt from income tax.

2. Exceeding the Threshold: If the turnover exceeds twelve million Rwandan francs (12,000,000
RWF) in a tax period, only the amount exceeding this threshold is subject to taxation. The income up
to the threshold amount remains exempt from income tax.

This exemption aims to support small-scale agriculturalists and pastoralists by providing tax relief on
their income from agricultural or livestock activities, thereby encouraging and promoting these
essential sectors of the economy.

Let's illustrate the tax exemption for profit on agricultural and livestock activities with an example

Suppose a farmer in Rwanda engages in agricultural activities and earns income from selling crops. In
a given tax period, their total turnover (revenue) from agricultural activities amounts to 15,000,000
Rwandan francs (15,000,000 RWF).

According to Article 21 of Law 16/2018:

If the turnover does not exceed twelve million Rwandan francs (12,000,000 RWF), the profit earned
from agricultural activities is fully exempt from income tax.

If the turnover exceeds twelve million Rwandan francs (12,000,000 RWF), only the amount exceeding
this threshold is subject to taxation.

In this example:

1. Turnover from agricultural activities = 15,000,000 RWF

2. Threshold for tax exemption = 12,000,000 RWF

Therefore, the amount subject to taxation would be the turnover exceeding the threshold: Taxable
income = Turnover - Threshold Taxable income = 15,000,000 RWF - 12,000,000 RWF Taxable income
= 3,000,000 RWF

So, only the profit earned from the portion of turnover exceeding the threshold (3,000,000 RWF)
would be subject to income tax. The income up to the threshold amount (12,000,000 RWF) remains
exempt from taxation, providing tax relief to the farmer.

PROFIT ON ASSETS IN FOREIGN CURRENCY

5. Let's break down the steps of the calculation for profit or loss on assets denominated in foreign
currency, along with an example:

Calculation Steps:

1. Determine the Value of the Asset at the End of the Tax Period:

Identify the asset denominated in foreign currency.

Use the exchange rate on the last day of the tax period to convert the value of the asset into the local
currency.

2. Determine the Value of the Asset at the Beginning of the Tax Period:

Use the exchange rate at the beginning of the tax period to convert the initial value of the asset into
the local currency.

3. Calculate the Gain/Loss on Valuation:

Subtract the initial value of the asset from the value at the end of the tax period.

The result represents the gain or loss on valuation.

4. Include the Gain/Loss in the Assessment of Business Profit:

The gain or loss on valuation is included in the calculation of business profit for that tax period.

Example:
Let's consider a scenario involving a business that has a receivable denominated in US dollars (USD).
Here are the details:

Value of the receivable at the end of the tax period: $10,000 USD

Exchange rate on the last day of the tax period: 1 USD = 950 Rwandan francs (RWF)

Value of the receivable at the beginning of the tax period: $8,000 USD

Exchange rate at the beginning of the tax period: 1 USD = 900 Rwandan francs (RWF)

Calculation:

1. Value at the End of the Tax Period:

Value of receivable at the end = $10,000 USD

Conversion to local currency = $10,000 USD * 950 RWF/USD = 9,500,000 RWF

2. Value at the Beginning of the Tax Period:

Value of receivable at the beginning = $8,000 USD

Conversion to local currency = $8,000 USD * 900 RWF/USD = 7,200,000 RWF

3. Gain/Loss on Valuation:

Gain/Loss = Value at the End - Value at the Beginning

Gain/Loss = 9,500,000 RWF - 7,200,000 RWF = 2,300,000 RWF

Result:

The gain on valuation of the receivable denominated in USD during the tax period is 2,300,000
Rwandan francs.

This gain will be included in the assessment of business profit for that tax period.

6. COMPUTATION OF TAXABLE PROFITS

the computation of taxable profits based on the steps you provided:

Step 1: Calculation of Profits/Loss

Calculate the overall profit or loss from business activities.

Step 2: Consideration of Expenses

Allowable Expenses: Deduct expenses that are allowable for tax purposes, such as those related to
the operation of the business.

Disallowable Expenses: Add back any expenses that are not allowable for tax deduction.

Step 3: Consideration of Income

Trading Income: Leave trading income as is.

Non-Trading Income: Deduct any non-trading income from the overall profit.

Additional Considerations:

Deduct any items that should have been debited but were not, such as premiums paid on short
leases.

Add any items of income that should have been credited but were not.

Step 4: Deduction of Capital Allowances

Deduct capital allowances on plant and machinery, as well as industrial buildings, from the adjusted
profit.

This process results in the computation of taxable profits, which is the amount subject to taxation.
Let's illustrate this with an example:
Example:

Step 1: Profit/Loss: $50,000

Step 2: Allowable Expenses: $20,000; Disallowable Expenses: $5,000

Step 3: Trading Income: $30,000; Non-Trading Income: $8,000 Additional Considerations: Premiums
on short leases not debited: $2,000

Step 4: Capital Allowances: $7,000

Computation:

1. Adjusted Profit: $50,000 + $5,000 (Disallowed) - $8,000 (Non-Trading Income) - $2,000 (Additional
Consideration) = $45,000

2. Taxable Profit: $45,000 - $7,000 (Capital Allowances) = $38,000

In this example, the taxable profit, subject to taxation, is $38,000.