PEMBE FLOUR MILLS Ltd v RWANDA REVENUE AUTHORITY (RRA)

# PEMBE FLOUR MILLS Ltd v RWANDA REVENUE AUTHORITY (RRA)

- Source: Amategeko - Section: Decisions (Judgements) - Date: 2016-05-29 - Case/document no.: RCOMA 0121/12/CS - Collection: Supreme Court

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PEMBE FLOUR MILLS Ltd v RWANDA REVENUE AUTHORITY (RRA) [Rwanda SUPREME COURT – RCOMA 0121/12/CS (Kanyange, P.J., Rugabirwa and Ngagi, J.) 29 May 2016] Tax law – Direct tax – Taxable business profit – Deductible business expenses – Taxable business profit cannot be waived for him under the pretext that he paid the interest on the loan that he had acquired in foreign currency in case of failure to demonstrate that he/ she/ it is not an individual, commercial banks or insurance company – Law nº 16/2005 of 18/08/on direct tax on income, articles 15, 22, 26 and 28. Tax law – Tax on business profit – Taxable profit – In taxing interest on loan, every loan is not considered in disparity, rather, they are considered as a single unity so that the taxable profit can be figured out. Tax law – Tax on income – Income on benefit in kind – Transport and accommodation facilities are not business expenses in a such a way that they may be deducted from taxable income, it is rather the income in benefit in kind that it gave to them which otherwise had to be taxed had it been given to them cash – Law nº 16/2005 of 18/08/2008 on direct tax on income, articles15 (1 º and 3 º) and 21. Tax law – Business profit – Bad debt – The writ of execution issued by the professional court bailiff demonstrating that it is a bad debt is not a conclusive evidence in support, rather, that writ must be accompanied by documentary evidence issued by competent organs – Law nº 16/2005 of 18/08/2008 on direct tax on income, article 28 (3º). Tax law – Taxable business profit – Investment allowances – It cannot be granted business allowances in case in case of failure to demonstrate that conditions thereto set by the law are met – Law N° 26/2005 of 17/12/2005 relating to investment and export promotion and facilitation, article 18 and Law nº 16/2005 of 18/08/ 2008 on direct tax on income, article 26. Damages – Moral damages, Advocate and procedural fees – It cannot be granted the damages it claim as its appeal has no merit and no advocate and procedural fees can be granted in case it was no established that the appellant appealed with intention of causing harm, rather appeal is his right – Law of 30/07/1888 governing contract or obligations, article 258 Facts: Audit was conducted by Rwanda Revenue Authority for PEMBE FLOUR MILLS Ltd and it was imposed to pay the tax 159.213.827 Frw which includes business profit, PAYE and withholding tax. PEMBE FLOUR MILLS Ltd appealed that decision to the Commissioner General and him also decided that he must pay 124.366.368 Frw for business profit. PEMBE FLOUR MILLS Ltd filed a claim against that Institution to Commercial High Court requesting the waiver of the 124.366.368 Frw of the tax for business profit that was highlighted above as it was unlawfully levied. The Court held that the application was not founded. Not satisfied of that decision, PEMBE FLOUR MILLS Ltd appealed to the Supreme Court claiming that taxed business profit the following base had not to be taxed: 12.150.126 Frw for

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the business profit because he paid the interests of the loan he had acquired in foreign currency based on article 22 (3º) of Law nº 16/2005 of 18/08/2005 on direct tax income, 1.880.000 Frw for PAYE on the years on the year 2008 and 3.927.360 Frw for PAYE on the year 2009 since there are the are the expenses that it incurred as as benefit in kind of transport and accommodation, 105.265.830 Frw for the loss occasioned by Nkurunziza Eric who defaulted and 88.232.316 Frw equivalent to 50% for investment allowance which had to be granted the Commissioner General on his initiative. Rwanda Revenue Authority responded that 12.150.126 Frw must not be excluded from taxable business profit since interest paid on loans and advances from related entities is not deductible to the extent that the total amount of the loans and/or advances in respect of which the interest is paid exceeds four (4) times the amount of equity except if the taxpayer is an individual, commercial bank or insurance company. It added further that the appellant allegations that if every loan’s interest was computed on separate basis, he would not be imposed the totality of the tax he is asked to pay must not be considered since he acquired only one loan. With regard to the amount of money that the appellant claims that must not be taxed because they are allowances to its employees and not salaries, Rwanda Revenue Authority responded that it must not be deducted from the tax especially that either housing or transport granted to employees are subject to depreciation. Again, with regard to the amount of money that the appellant claims it is bad debt, Rwanda Revenue Authority responded that there is no evidence in support and in addition is not the individual who confirms insolvency. It added moreover that the Commissioner General could not on his own initiative confirm the investment allowances since there is neither evidence that PEMBE FLOUR MILLS Ltd is registered in Rwanda Investment and Export Promotion Agency nor it raised the issue either during tax audit or before the Commissioner General during appeal. Held: 1. The fact that Law Nº 16/2005 of 18/08/2005 on direct tax on income in its article 22 (3) lists non-deductible expenses from taxable profit while its last paragraph is an exception which provides for profit may be deducted from the taxable ones after the conditions in that paragraph are met while PEMBE FLOUR MILLS Ltd did not prove that it fulfils those conditions including not being an individual, commercial bank or insurance company indicates that 12.150.126 Frw cannot be excluded from taxable profit on the pretext that the profit was paid in foreign currency. 2. PEMBE FLOUR MILLS Ltd cannot pretend that if Rwanda Revenue Authority had separately computed every loan in regard to its own interest, it would not have been demanded to pay the amount of the tax it is imposed to pay, since during tax period, Rwanda Revenue Authority jointly considers all loans acquired by the taxpayer so as to know the exact amount of the due tax. 3. The benefit in kind comprised of transport facilities and accommodation that PEMBE FLOUR MILLS Ltd granted to its employees cannot be considered as the business expenses which is allowed to be deducted from taxable business profit, it is rather the income on benefit in kind that was allocated to its employees in place of transport and accommodation which would otherwise be taxed as PAYE. 4. The writ of execution issued by the Bailiff is not as well as his/her statements are not conclusive evidence demonstrating that the debtor is insolvent because those documents are not

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accompanied by documents issued by competent organs to demonstrate that the debtor is insolvent. 5. PEMBE FLOUR MILLS Ltd cannot be granted investment allowances of fifty per cent equivalent to 88.232.316 Frw which it requests because it submitted no evidence that it meets conditions set by the Law to grant those allowances. 6. PEMBE FLOUR MILLS Ltd cannot be awarded damages it demands since its appeal has no merit and Rwanda Revenue Authority cannot be awarded procedural fees as well as moral damages since there is no evidence that PEMBE FLOUR MILLS Ltd had sue it with the mere intention of causing prejudice to it, it is rather its right of appealing against the judgment whose ruling does not satisfy it. Appeal has no merit. Cross appeal has no merit. Appealed judgment upheld. Security deposited for court fees equals the expenses on the case. Statutes and statutory instruments referred to: Law 21/2012 of 14/06/2012 relating to civil, commercial, labour and administrative procedure, article 162. Law N° 26/2005 of 17/12/2005 relating to investment and export promotion and facilitation, article 18. Law nº 16/2005 of 18/08/on direct tax on income, articles 15, 22, 26 and 28. Law of 30/07/1888 governing contract or obligations, article 258. No case was referred to Judgment I. BRIEF BACKGROUND OF THE CASE [1] Rwanda Revue Authority conducted tax audit on the years 2006 till 2009 for PEMBE FLOUR MILLS Ltd, the factory processing weat flour, located in Byumba. After the audit, it was imposed to pay 159.213.827 Frw including income tax, employement income and withholding tax. [2] PEMBE FLOUR MILLS Ltd appealed to the Commissioner General and the latter confirmed that the imposed tax was 124.366.368 Frw which includs income tax on the year 2008 and 2009 equivalenrt to 111.330.268 Frw. [3] PEMBE FLOUR MILLS Ltd filed a claim before the Commercial High Court requesting to waive of the tax of 111.330.268 Frw for income tax that was mentioned above since it was unlawfully levied. In the judgment no RCOM 0036/12/HCC, it decided that his application was not founded.

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[4] PEMBE FLOUR MILLS Ltd appealed against the decision to the Supreme Court claiming that in the taxable income, the amount of 12.150.126 Frw might have been waived for the tax income he had paid in foreign currency bu vertue of 3º article of Law Nº 16/of 18/08/2005 on direct tax on income, 1.880.000 Frw for Pay As You Earn for the years 2008 and and 3.927.360 Frw for Pay As You Earn on the years 2009 since it is the benefit in kind of car and housing to its employees, 105.265.830 Frw for the loss he was caused by Nkurunziza Eric since he is a bad debtor and 88.232.316 Frw which is equivalent to 50% for investment allowance which had to be granted by the Commissioner General on his own initiative. It requested further Rwanda Revenue Authority to give it damages of different kind. [5] The case was heard in an open court on April 19, 2016 PEMBE FLOUR MILLS Ltd represented by counsel Nsengiyumva Abel while Rwanda Revenue Authority was represented by counsel Mugire Joseph. II. ANALYSIS OF LEGAL ISSUES 1. Whether income tax paid in foreign currency totaling 12.150.126 Frw may be deducted from taxable income of the year 2008 [6] Counsel for PEMBE FLOUR MILLS Ltd claimed that based on the exception embodied in 3º of article 22 of Law Nº 16/2005 of 18/08/2005on direct tax on income 1 12 150 126 Frw must be exempted from levy in the interests of taxation since he had paid the ineterest of the loan he had acquired in foreign currency, but the Commercial High Court levied that loan based on the lat paragraph of that article regardless of the fact that it is a principle in connection to the interests which may be paid in either foreign of Rwandan corrency. [7] He stated further that if, during the tax period, every interest was computed in connection to its relevant loan by virtue of article 22 (3º) of Law Nº 16/2005 as cited above, in Kinyarwanda version, he could not pay 12.150.126 Frw since every debt could not go beyond four times the loan he had acquired. [8] Counsel for Rwanda Revenue Authority states that 12.150.126 Frw must not be deducted from taxable business profit since the last paragraph of article 22 of the aforecited law provides that in the case of a taxpayer other than an individual, interest paid on loans and advances from related entities is not deductible to the extent that the total amount of the loans and/or advances in respect of which the interest is paid exceeds four (4) times the amount of equity. [9] He asserts further that the allegations of PEMBE FLOUR MILLS Ltd if every interest have been computed in connection to its relevant debt, it could not pay 12.150.126 Frw of interests have not merit because he had acquired the unique loan of 846.000 USD which means that it had not to be split up so that taxable bisiness income could be levied, rather, he insisted, based on the last paragraph of article 22 of Law cited above either in French verision or Kinyarwanda version, the fiscal period, when Rwanda Revenue opted for the consolidation of all taxes imposable to the taxpayer and hence computed interests.(check again for meaning) 1 22(3º) of Law Nº 16/2005 of 18/08/2005 on direct taxes on income provides that interest paid on loans denominated in a currency other than the Rwandan Franc in excess of the London Inter-Bank Offered Rate (LIBOR) at the beginning of a tax period with an increment of one percent (1 %);

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THE VIEW OF THE COURT [10] Article 22 (3º) of Law Nº 16/2005 of 18/08/2005 on direct tax income which serves as the defence of PEMBE FLOUR MILLS Ltd provides that 3° interest paid on loans denominated in a currency other than the Rwandan Franc in excess of the London Inter-Bank Offered Rate (LIBOR) at the beginning of a tax period with an increment of one percent (1 %). the last paragraph of that article which serves the defence of Rwanda Revenue Authority provides that interest paid on loans and advances from related entities is not deductible to the extent that the total amount of the loans and/or advances in respect of which the interest is paid exceeds four (4) times the [11] The last paragraph of that article which serves the defence of Rwanda Revenue Authority ptovides that interest paid on loans and advances is not deductible to the extent that the total amount of the loans and/or advances in respect of which the interest is paid exceeds on average during the tax period four (4) times the amount of equity (…). This paragraph does not apply to commercial banks and insurance companies. [12] The Court finds that the drafting of article 22 of the law referred to above list non- deductables expenses from taxable bisiness profit while the last paragraph i an exception which provides that interests may be deducted from those taxable so long as the requirements set by the last paragraph of the very article are fulfiled. With regard to PEMBE FLOUR MILLS Ltdtherefore, the Court finds that it must not be waived 12.150.126 Frw in the interests of taxation since it does not fulfil the requiremnts set by the last paragraph of that article which includes the fact of not being individual, commercial bank of insurance company. [13] The Court finds that the statements made by PEMBE FLOUR MILLS Ltd asserting that if every debt’s interest was computed separately, the tax of 12.150.126 Frw would not have been imposed have no merit because during the fiscal period, Rwanda Revenue Authority assess the integrality of the loans that were acquired by the taxpayer so that the taxable business profit can be figured out. 2. Whether 1.880.000 Frw of the tax on personal income on the year 2008 and 3.927.360 Frw on tax on employees salary on the year2009 must be deducted from taxable income. [14] Counsel for PEMBE FLOUR MILLS Ltd asserts that 1.880.000 Frw and 3.927.360 Frw had to be deducted from taxable income on the years 2008 and 2009 since it is the business expenses for the empleyees benefit in kind of car and housing, but it is not is not tax on the employees salaries which was paid by its employees as confirmed by the Commercial High Court. [15] Counsel for Rwanda Revenue Authority contends that such amount must not be deducted from taxable interests pursuant to article 22 of Law Nº 16/2005 of 18/08/2005 cited above because they benfit in kind comprised of car and accommodation to its employees. It means that such amount had to be increased to the taxable income as provided for by article 15 of that Law. He asserted further that another evidence that the amount of money in question must not be deducted from traxable interests is that the cars and houses owened by PEMBE FLOUR MILLS Ltd are depreciable by virtue of article 24 of the Law Nº 16/2005 above cited.

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THE VIE OF THE COURT [16] Article 13 (1° and 3°) of Law nº 16/2005 of 18/08/2005 2005 on direct taxes on income provides that subject to without prejudice to provisions of points 1°, 2° and 3°, of this article, benefits in kind received by an employee are included in taxable income in consideration of market value as follows: 1° there shall be added to the taxable income an amount meant for the availability and use of a motor vehicle to an employee during a tax period, valued at ten percent (10%) of the employment income excluding benefits in kind; 2° income on a loan including advance on a salary exceeding a three (3) months salary given to an employee is valued at a difference between: a. 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 commercial banks by the National Bank of Rwanda; b. the actual interest paid by the employee in that month; 3° There shall be added to the taxable income an amount meant for use or availability for use of premises including or excluding any household equipment of other contents by an employer for residential occupation by an employee during a tax period, valued at twenty percent (20%) of the employment income excluding benefits in kind. [17] Based on the provisions of that artucle, the Court finds that the benefit in kind includes accommodations as well as vehicles that PEMBE FLOUR MILLS Ltd allocated to its empoyees in connection to their employment, those benefit amount to 1880 000 Frw and 3.927.360 Frw and cannot be considered as business expenses which are deductible from taxable interests as listed above,2 but, instead must be taxed because it is an income which is benefit in kind which was allocated to its employees instead of granting to them fees for transport and accommodation while would otherwise be levied for tax on income as provided for by article 15 of the aforementioned Law. This means that Rwanda Revenue Authority committed no fault when it imposed that tax on income as confimed by the Commercial High Court. 3. Whether 105.265.830 Frw is a bad debt to the extent that it may be excluded from taxable business profit of the year 2009. [18] Counsel for PEMBE FLOUR MILLS Ltd states that 105.265.830 Frw mjust be excluded from taxable business profit of the year 2009 since he did his best to get paid by Nkurunziza Eric through the Professional Court bailiff but he remained insolvent. [19] Counsel for Rwanda Revenue Authority replied that that amount of money must be exlcuded from taxable business profit of the year 2009 since there is no evidence given by PEMBE FLOUR MILLS Ltd to justify that that Nkurunziza Eric would tatlly fail to pay. He stressed further that it is the Professional Court Bailiff in charge of confirming insolvency, instead it is in the competence of court. Further, PEMBE FLOUR MILLS Ltd did not submit the certification issued by the competent organs justifying that Nkurunziza Eric is a destitute. THE VIEW OF THE COURT 2 In determining profits on business activities, a deduction for all expenses shall fulfill the following, if: 1° they are incurred for the direct purpose of, and in the normal course of the business; 2° they correspond to a real expense and can be substantiated with proper documents; 3° they lead to a decrease in the net assets of the business; 4° they are used for activities related to the tax period in which they are incurred. 4° they are used for activities related to the tax period in which they are incurred.

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[20] Article 28 (3º) of Law nº 16/2005 of 18/08/2008 on direct tax provides that in the determination of business profit, a deduction is allowed for bad debts if the following conditions are fulfilled: if the taxpayer has taken all possible steps in pursuing payment and has shown concrete proofs that the debtor is insolvent. [21] The casefile demonstrates that on November 25, 2008, the Professional Court Bailiff issued a writ requesting Nkurunziza Eric to pay PEMBE FLOUR MILLS Ltd the amount of money equivalent to108.265.830 Frw as due prior to the hearing of the case. The Court Bailiff also informned him that his failure to pay within 15 days, the case would be referred to the competent courts to as to condemn him to payOn december 19, 2008, the Court Bailiff reminded him in writing requesting him to pay the debt no sonner than December 23, 2008 but he did not pay. [22] The case file demonstrates further that in his statement of dated December 27, 20011thge Professional Court Bailiff explained that he demanded Nkurunziza to pay 108.265.830 Frw as ordered on the judgment nº RCOM 0077/10/HCC and that he conducted the investigation in different banks, Land Center and in Rwanda Revenue Authority and in Local Goverment but found that he could nt get the payment since he was insolvent. [23] Based on the expnantions above, the Court finds that the writ issued of the Court Bailiff dated November 25, 2008 as well as his statement of December 27, 2011 as mentioned above cannot be considered as conclusive evidence to prove that Nkurunziza Eric is insolvent to pay 108.265.830 Frw to PEMBE FLOUR MILLS Ltd for the debt it has for it since those papers are not accompanied by the documents issued by the Competent Authorities in conformation of the findings of the Court Bailiff that Nkurunziza Eric was insolvent. This implies that 105.265.830 Frw must not be excluded from taxable business profit as held by the Commercial High Court. 4. Whether the Commissioner General on his own initiative could confirm PEMBE FLOUR MILLS Ltd investment allowance of 88.232.316 Frw. [24] Counsel for PEMBE FLOUR MILLS Ltd states that based on article 26 of Law nº 16/2005 referred to above, the Commissioner General of Rwanda Rvenue Authority had on his own initiative waive 50% for investment allowence equivalent to 88.232.316 Frw because, normally that Institution usually used to grant that allowence because it is registered as investor but that the Commercial High Court confirmed that such allowence could not be granted since it did not demonstrate it to the Commissioner General and give evidence thereto. [25] Counsel for Rwanda Revenue Authority states that such amount must not be exluded fromraxbel profit because PEMBE FLOUR MILLS Ltd did not give evidence of its registration in its appeal as provided for by Rwanda Development Board and that it dideither raise that issue at the time of audit nor before the Commissioner General as provided for by aricle 20 of Law nº 25/2005 of 04/12/2005 on tax procedures. THE VIEW OF THE COURT [26] Article 18 of Law N° 26/2005 of 17/12/2005 relating to investment and export promotion and facilitation provides that a holder of a certificate of registration of an investment project shall

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benefit from what is provided for by the law on Direct Income tax in the framework of promoting investment in the country. Incentives to investors regarding direct income taxes are attached on the annex II to this law. [27] That annex provides that an investment allowance of forty per cent (40%) of the invested amount in new or used assets may be depreciated excluding motor vehicles that carry less than eight (8) persons, except those exclusively used in a tourist business is accepted to deduct from a registered investor in the first tax period of purchase or of use of such an asset if: 1° the amount of business assets invested is equal to at least thirty million (30,000,000) Rwandan francs; and, 2° the business assets are held at the establishment for at least three (3) tax periods after the tax period in which the investment allowance was given. The investment allowance shall be fifty per cent (50%) if the investor carries out operations in rural areas outside the City of Kigali or invests money in priority sectors as mentioned in law establishing Rwanda Investment Promotion Agency. The investment allowance reduces the item value or construction cost, as well as the basic depreciation value of pooled business assets. The provisions of this annex match with the provisions of article 26 of Law nº 16/2005 of 18/08/2008 on direct tax on income. [28] Based on article 18 of the aforementioned Law, the Court finds that PEMBE FLOUR MILLS Ltd cannot be granted investment allowence of 50% equivalent to 88.232.316 Frw because it failed to give evidence that it meets the requirements so that it could be grantted. Hence, no fault was committed by that Court when it decided that such amount cannot be deducted from the taxable business profit. 5. Whether both parties can be awarded damages they request in this proceeding [29] Counsel for PEMBE FLOUR MILLS Ltd claims that Rwanda Revenue Authority must give it 1.000.000 Frw for Advocate fees. He asserts further that it cannot pay to Rwanda Revenue the moral damages in its cross appeal because since it is entitled to refer the case to for sort out the problem of its injustice. He declared further that it cannot pay the fees for advocate in that cross appeal since its lawyers are paid from the National Budget. [30] Counsel for Rwanda Revenue Authority cannot be awarded the damages for advocate fees it requests in this proceeding because its appeal has no merit. Instead, it asserted, based on the provisions of article 258 of the Civil ode Book III, in its cross appeal, PEMBE FLOUR MILLS Ltd would pay 2.000.000 Frw for damages of being dragged into court proceedings and for all expenses on this proceeding. THE VIEW OF THE COURT [31] PEMBE FLOUR MILLS Ltd cannot be awarded the damages for advocate fees it requests in this proceeding because its appeal has no merit [32] The Court further notes that Rwanda Revenue Athority cannot be awarded moral daages and that of procedural fees as to its request because there is no proof that PEMBE FLOUR MILLS Ltd brought it to Court with full knowledge of the truth and with intention of causing harm, instead it was entitled to appealing against the judgment by which it felt prejudiced as

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provided for by article 162(1) of Law 21/2012 of 14/06/2012 relating to civil, commercial, labour and administrative procedure.\ III. THE VIEW OF THE COURT [33] Decides that appeal filed by PEMBE FLOUR MILLS Ltd has no merit. [34] Decides that cross appeal filed by Rwanda Revenue Authority has no merit. [35] Upholds the judgment n° RCOM 0036/12/HCC decided by the Commercial High Court onApril 12, 2012. [36] Rules that the security for the court fees deposited by PEMBE FLOUR MILLS Ltd for appeal is equivalent to the expenses incurred in this proceeding.