Rwanda: Understanding general anti-avoidance provisions in new tax treaties

Rwanda has recently inked a series of double taxation agreements, including two groundbreaking deals with Qatar and the Democratic Republic of Congo that feature general anti-avoidance provisions. In a recent interview with CNBC Africa, leading commercial lawyer Dieudonne Nzafashwanayo shed light on the implications of these provisions. General anti-avoidance provisions are clauses in tax laws that empower revenue authorities to disregard transactions lacking commercial substance and established solely to secure tax benefits. Nzafashwanayo explained that these provisions are crucial for preventing tax evasion and abuse of double taxation treaties. The specific anti-avoidance rule utilized in the recent treaties with Qatar and the DRC is the principle purpose test-based provision. This rule denies tax treaty benefits to transactions primarily established to exploit specific treaty advantages. The inclusion of anti-avoidance provisions in Rwanda's tax treaties is in line with international efforts to combat tax evasion, as spearheaded by the OECD and G20 project against base erosion and profit shifting. The latest model conventions from the OECD and the United Nations, adopted by developing countries like Rwanda, now mandate the inclusion of general anti-avoidance provisions in double taxation agreements. Nzafashwanayo emphasized that the introduction of anti-avoidance provisions in these treaties is a proactive measure aimed at ensuring that tax treaty benefits are enjoyed within legitimate contexts, discouraging inappropriate use of treaty advantages. While the anti-avoidance provisions herald a new era of transparency in Rwanda's tax landscape, there are complexities surrounding their application. Determining the principle purpose of a transaction can pose challenges, raising doubts about consistent enforcement. Some countries, such as the US and the UK, have adopted a cautious approach to such rules, citing concerns that stringent anti-avoidance measures may hinder legitimate tax planning. Nzafashwanayo acknowledged these potential challenges but underscored the importance of safeguarding the integrity of tax treaties. He highlighted the risk of abuse by holding companies and emphasized the need for responsible tax planning to align with the spirit of these agreements. As Rwanda paves the way with its progressive tax treaties incorporating anti-avoidance provisions, the global tax landscape stands poised for transformation. The country's commitment to combating tax evasion and ensuring fair taxation for foreign investors underscores its dedication to ethical financial practices and sustainable economic development.