Effectiveness of Rwandan Law of Tax Administration in addressing Tax Offences

CHAPTER IV. Existing problems and appropriate strategy

IV.1. RRA dealing with tax fraud and investigation30(*)

According to RRA Annual Report for 2007, efforts have been made in fighting importers who use forged invoices, dumping and monitoring international transit malpractices which had developed especially in paper work. Special attention was also given to operations aimed at fighting smugglers of some sensitive products such as liquors and wines, evaders of value added tax and users of forged documents. Also, operations were carried out in markets and trading centres where several smuggled goods were seized.

During the course of the year 2007, 17 investigation cases out of 48 planned were finalised with a total assessment of Rwf 1.065 billion and 14 cases were in progress at the end of the year.

RRA encountered various forms of VAT refund and credit fraud, such as false claim on exports, overstated input tax, understated output tax and illegitimate businesses registered for the sole purpose of defrauding the government. On average, 18 percent of VAT refund claims lodged were rejected.

In addition, many seizures of fraudulent cases led to recovery of taxes that would have otherwise been evaded. The total revenue recovered was Rwf 256.9 million. Thirty five cases were sent for prosecution and were yet to be concluded in the courts of law. Other violations recorded in 2007 were undervaluation, misclassification, and transit violations.

Other efforts to eradicate or minimize customs fraud and tax evasion have been made by RRA. Information exchange with sister Revenue Authorities on imports destined and transiting through Rwanda was enhanced. Information and documents exchanged with other authorities are composed of true costs for the major exports and imports to our country and will enable RRA create a database capacity for disqualifying fake invoices declared at customs. This has been the most practice used by a majority of non compliant importers.

IV.2. Legislative measures

Legislative control has to do with the nature and design of the tax laws, and the legal provisions and specifications that can be used to help RRA carry out its duties effectively and efficiently. Legislative control includes such things as anti-avoidance provisions; powers of access; review of the tax laws; penalties and sanctions; and tax amnesties.

IV.2.1 Simplifying and amending the law

A well-drafted tax law spells out with precision the matters that are within its scope. But precision is not enough. A law should not be precise at the expense of being complicated and impossible to understand. The easier a tax law is to understand, the lower will be the compliance costs, both for taxpayers and for tax administrators.^31(*)

It is commonly known that good compliance outcomes begin with good legislation. Law that is clear and unambiguous with regards to its intent and interpretation provides a solid base upon which to build administrative compliance programmes and compliance risk management. Difficult or ambiguous law creates increased opportunities for taxpayers to behave in ways that were unintended by the law. In many ways, good law underpins the tax authority's ability to deliver procedural fairness in the conduct of its administration. If taxpayers perceive the law to be unjust or inappropriate, inevitably, there is an increased risk of non-compliant behaviour.

During the year 2007, RRA continued to monitor the application of the tax laws in order to identify any areas of difficulty that may require legislative amendment. In this respect, a document containing areas of possible amendment to the tax laws was prepared. This document has been updated since then and was used as a basis for proposing the amendments to both the Law on Direct Taxes on Income and the Law on Tax Procedures^32(*).

The changes proposed in this draft cover the following:

Clearer presentation of the provision on depreciation^33(*) on Plant and Equipment, which poses ambiguity as to whether the rate for depreciation of heavy plant and machinery falls under the 5% straight line bracket method or if it falls in the depreciation method of pooling at 25%.

§ The tax treatment of finance leases which is missing in the current tax legislation.

§ Clarity on Thin- capitalisation rules.

§ Review of Tax procedures law on the procedure of estimated assessments.

§ Sanction against non-compliance to VAT invoicing: The requirements for items that should be shown in a VAT invoice are specified in the law on Tax Procedures. However, this provision is not supported by sanctions for non-compliance.

For example in 2006, Customs law of 1968 which was complicated and outdated was abrogated and replaced by law no 21/2006 on customs systems, with a view to simplifying it and making it more taxpayer friendly.

Also in 2007 RRA participated in the policy initiative of the law modifying law no 26/2006 of 27/05/2006 determining and establishing consumption tax on some imported and locally manufactured products. The tax on airtime was dropped from 10% to 3%.

RRA should continue to propose reviewing tax laws with the intention of reducing complexity and burden on both taxpayers and the tax administration.

However, it should be noted that simplification are often taken over by the piecemeal amendment of the tax laws to close loopholes that taxpayers have taken advantage of to avoid tax. This may actually lead to increased complexity rather than simplification and in some cases further increases the opportunities for Tax offences.

It is also important to remember that it is not just simplification of the tax laws in isolation that can encourage compliant behaviour. There are other regulations and restrictions imposed by other Government agencies such as RIEPA, RBS, etc that can also be simplified to provide incentives for taxpayers to comply. For example, even if the tax laws are simplified, if processes required to register a business are still onerous, taxpayers will not have an incentive to register their business in the first place.

* ³⁰ RRA Business Plan, Kigali, March 2007

* ³¹ Law Design and Drafting(Volume I; IMF; 1996, Victor Thuronyi, ed)

* ³² RRA Annual Report for 2007, Kigali, March 2008

* ³³ Article 24, paragraph one, of Law No. 16/2005 on the Law on Direct Taxes on Income