On October 23, the Supreme Court handed down the much-awaited decision on the petition of the Rwanda Bar Association (RBA) for interpretation of the concept of “exported services” as used under the law establishing the Value Added Tax (VAT Law) which, without defining the concept of exported services, provides that exported services are zero-rated.
In the fullness of its wisdom, the five judge bench dismissed the RBA’s petition on the ground that there is no controversy surrounding the concept of exported services appealing for its authentic interpretation.
In so deciding, the Supreme Court held that treaties to which Rwanda is party (particularly the WTO General Agreement on Trade in Services and the Protocol on the Establishment of the East African Community Common Market can be used to interpret the concept of exported services as used under the VAT law.
The Supreme Court further held that the controversy on the meaning of exported services has been put o an end by the Commercial High Court in a case which opposed ENSafrica with Rwanda Revenue Authority where it was held that exported services are services rendered to non-resident and whose benefit accrues abroad.
The Supreme Court went on to hold that as long as the decision of the Commercial High Court was a last instance decision that has never been challenged, it therefore binds the very same court and other lower courts unless and until its position is changed by the Supreme Court.
Despite the decision of the Supreme Court, the controversy on the concept of exported services remains because although it did not expressly give credence to the approach taken by the Commercial High Court in interpreting the concept of exported services, it held that the same approach will continue to be applied as long as it is not changed by the Supreme Court.
Whether the approach taken by the Commercial High Court passably and suitably settles the issue or not is debatable. For instance it goes away from the provisions of international treaties which the Supreme Court held should be applied in finding the meaning of exported services as under both GATS and the EAC Common Protocol, internationally traded services include services supplied in one country to a service consumer/recipient from another country.
The same approach also seems to depart from the principle of destination promoted by the Organisation for Economic Cooperation and Development and affirmed by the Supreme Court to be a core principle in the application of VAT on internationally traded services, and according to that principle, internationally traded services are taxed in the jurisdiction where their consumption occurs.
In terms of the OECD International VAT/Goods and Services Tax guidelines, the place of consumption for business-to-business (B2B) services and business to customer (B2C) services is the place where the customer is located or has its usual residence.
The OECD guidelines nevertheless provides for an exception relating to the B2C on the-spot-services (i.e. services ordinarily requiring the physical presence of the person performing the supply and the person consuming the service at the same time and place where the supply of such a service is physically performed such as hairdressing, accommodation and restaurant, entry to cinema and theatre performances whose place of consumption, and therefore the place of taxation, is the place of their performance.
The test established by the Commercial High Court is neither prescriptive on how the jurisdiction where the benefit from a service accrues can be determined, yet this lies at the heart of the meaning of exported services, and thus may be inconsistently applied by the tax administration and courts leaving taxpayers in a dilemma.