Income Tax Law of Burundi: Overview of the Recent Reform

For nearly half a century, Burundi maintained the income tax system that it inherited from the colonial period. Recently, this tax system has been reformed to modernise it and make it conducive to the business community. However, the reform process has been challenged by the failure to sustain enough collection of tax revenue. Some measures which had been removed to make the system friendlier to the conduct of business have unfortunately been reintroduced within one year.

BACKGROUND OF THE TAX REFORMS IN BURUNDI

Following the end of its civil war in 2005 (which lasted more than a decade) and its admission into the East African Community (EAC, comprised of Burundi, Kenya, Rwanda, Tanzania, and Uganda) in July 2007, Burundi embarked on the process of modernisation of its tax system.

Thus far, this process has led to the creation of the Burundi Revenue Authority (the Office Burundais de Recettes (OBR)) in 2009[1] (in replacement of the then Department of Tax Administration of the Ministry of Finance), the enactment of a new income tax law in 2013,[2] the introduction of the Value Added Tax (VAT) in 2009[3](and its revision in 2013, in replacement of the then tax on consumption of goods and services (or the transaction tax law)),[4] , the enactment of a new Investment Code (providing for, among other things, tax incentives) in 2008,[5] the creation of an Investment Promotion Agency (the Agence Burundaise de Promotion des Investissements ((API), charged with, among other things, the administration of various tax incentives) in 2009,[6] and the introduction of a Tax Procedures Code in 2013.[7] Two additional laws which are still in preparation include one on excise taxes and another on the fiscal system of local entities so as to support the policy of decentralization. Currently, excise taxes are provided for in the budget law, which is passed in December of each year and revised in July of the following year.

This brief paper aims at highlighting the material changes introduced to the income tax law of Burundi through those reforms. These changes relate to (1) the move from the typical schedular income tax system towards the combination of elements of global income tax system with elements of the schedular system (semi-global system), (2) the move from the source nexus as the exclusive basis for imposition of income tax to the combination of the source and the residence bases for income taxation, (3) the move from the principle of territoriality in the definition of income tax liability to the combination of the worldwide income tax liability (for resident taxpayers) and the territoriality principle (for non-resident taxpayers), (4) the introduction of measures to alleviated international double taxation, (5) the application of simplified the tax rates structure, and (6) the introduction of new anti-avoidances provisions.

1.     From a typical schedular (or analytical) income tax system towards a semi-global (or semi-synthetic) system

The income tax law that was applied in Burundi until the reform of January 2013 was inherited from the Belgium colonial authority and dated back to 1963.[8] This law classified income into three categories, along with the type of activities from which it is derived, namely, (i) rental income,[9] (ii) investment income, and (iii) business income.[10] Business income was itself divided into four subcategories, (a) income from employment, (b) profits from commercial and industrial activities, (c) income from self-employment and freelance activities (also called non-commercial profits), and (d) profits from any other business (catchall subcategory).[11] The subcategory of employment income also differentiated between income derived from fulltime employment and part-time employment. For part-time employment, the income so derived was further divided between income earned from the education and health sectors and the income from all other sectors of the economy.

For an individual, each of the aforementioned categories of income constituted a separate schedule for which separate and different rules were applied in the ascertainment of the chargeable amount and the rates and the mode of tax collection, without any room for aggregation of the income from the different sources. Even for corporate tax, the capital gains were taxed separately and attracted a much reduced tax rate (20%, whereas the corporate tax was fixed at 35%). This system was a typical schedular or analytical income tax system.

The new law on taxation of income, enacted on 24 January 2013, introduced material changes towards a semi-synthetic income tax system.

Income is classified into four categories, namely, the employment income, the business income    (or profit), the investment income (including capital gains), and rental income.

For individuals (personal income tax as opposed to corporate tax), the annual income tax is aggregated into two different schedules, one comprising the employment income and business income, and the other made of the investment income (including capital gains).

A progressive income tax rate structure applies on the first schedule (0%, 20%, or 30%) while the second schedule is subject to a proportional income tax rate (15%). Rental income is still taxed separately, and its proceeds are allocated to the decentralized territorial entities (called communes in rural areas) or the Bujumbura capital city authority.

For corporate tax, all its profit is aggregated from the different sources of earnings or income and taxed as its business profit. Thus, the new law introduced a semi-global income tax system.

As a collection method for tax revenues, the employment income is taxed through monthly Pay as You Earn (PAYE), the investment income (e.g. dividends, interest, or capital gains) is collected through withholding tax, and some elements of business income are also collected through the withholding method (these elements relate to the income paid by a resident person to a non-resident person who does not have a permanent establishment in Burundi). The withholding taxes apply to both individuals and companies.

2.     From the source nexus as the exclusive basis for imposition of income tax to the combination of the source and the residence bases for income taxation

A basis of income taxation is understood as the ‘genuine link between the income and the taxing state.’[12] It can be a residence basis, a source basis, or a nationality/ citizenship basis.[13]

Before the enactment of the new income tax law of 2013, Burundi taxed only income derived from or accrued in Burundi, irrespective of the residence, citizenship, and/or domicile of the beneficiary of the income or taxpayer. The new income tax law still provides for the source nexus only for non-resident taxpayers, while resident persons (individuals and companies) are taxed on the basis of their worldwide income or profit.

3.     From the principle of territoriality to the combination of the worldwide and territoriality principles in the definition of income tax liability

The source nexus applied before the income tax reform of 2013 provided that the tax liability of a taxpayer was assessed on the basis of the territoriality principle. This means that income tax liability was restricted to the amount of income of the taxpayer connected to the territory of Burundi, regardless of whether the taxpayer was a resident or a non-resident. Now (post reform), the principle of territoriality in the definition of income tax liability applies only to resident taxpayers, while the tax liability of resident taxpayers is assessed on the basis of the worldwide principle.[14]

4.     Introduction of measures to alleviated international juridical double taxation

International juridical double taxation occurs in three different scenarios of income tax law conflicts, namely, where there is conflict between the ‘worldwide versus source,’ the ‘worldwide versus worldwide,’ and the ‘source versus source’ conflicts.[15] These are situations in which the income of the same taxpayer is taxed twice by two (or more) different jurisdictions for the same tax period as a result of conflicting tax provisions on the definition of the source of the income or the residence of a taxpayer.

Before the tax reform, Burundi did not have any provision to alleviate potential international double taxation. Following the reform, Burundi applies the limited tax credit mechanism for income tax paid abroad in order to alleviate the adverse effect of international juridical double taxation.

5.     The application of simplified tax rates structure and reduced tax rates

Before the reform, the income tax structure of Burundi was very complicated and very difficult to understand for taxpayers; there were separate tax rates depending on the source and schedule of income and combination of proportional and progressive tax rates, with marginal tax rates as high as 60%, with the ceiling at 35% for individuals. For companies, the tax rate was fixed at 35% in cases where they had profits, and 1% of their annual turnover in the case of losses. Most tax revenues from businesses were collected through advanced tax and instalments.

Currently, the tax rate structures have been very much simplified.

1. For individuals:

The first schedule (employment income + business income) is taxed at the rates of 20% or 30% above the monthly threshold of 150,000 BIF (equivalent to approximately $93.75)[16] as follows:

• If the gross remuneration comprises housing allowance, the amount of housing allowance which does not exceed 60% of the basic salary is exempted;
• If the gross salary comprises transport allowance, the amount of transport allowance which does not exceed 15% is exempted;
• If the gross salary comprises employee contribution to the national pension scheme, the amount of such contribution which does not exceed 18,000 BIF ( equivalent to $11.25) is deducted from the taxable amount;
• If the employee makes a contribution to a supplementary pension scheme, the amount so contributed which does not exceed 20% of his or her gross remuneration is deducted from the taxable amount; and
• The remaining income (chargeable income) is then taxed as indicated below:
  – From 0-150,000 BIF : 0%
  – From 150,001-300,000 BIF : 20%
  – From 300,001 and above  :  30%[17]

 The second schedule (investment income, including capital gains) is taxed at the proportional tax rate of 15% [18]

1. For entities:

• The corporate income tax rate has been reduced from 35% to 30% ;[19] and
• Capital gains are treated as any other profit and subject to the same tax rate of 30%;[20]

The 1% minimum tax rate on business income (for both individuals and companies) in the case of losses has been reinstated within only one year of its removal. This was done through the budget law, and was motivated by the reduction of income tax receipts purportedly caused by the fact that many taxpayers had declared to have suffered losses.

It is also worth mentioning that a number of advanced taxes on the goods and services which had been removed by the reform of 2013 have now been reinstated through the budget law of 2014. This was due to the difficulty suffered by the Ministry of Finance to mobilize more tax revenues on business income.

• Withholding taxes for Individuals and Entities:

For individuals and entities, the following withholding tax rates apply:

• Dividends : 15% for individuals and non-resident entities – they are exempted from tax if they are paid and received by a resident company, but taxed as normal earnings of a company (at 30%) in other cases;
• Interest: 15% for individuals and non-resident entities, but taxed as normal earnings of a resident company; and
• Royalties: 15% for individuals and non-resident entities; they are taxed as normal earnings of a resident company at 30%.

6.      The introduction of new anti-avoidances provisions

The other material changes worth mentioning relate to anti-avoidances provisions. These are:

• Transfer Pricing Provision: The transactions that are carried out between or among related parties must be at arm’s length. The guidelines for implementation of this new provision is still under development, and the Tax Administration has been granted the power to issue legally binding advanced transfer pricing rulings.
• Thin Capitalization Provision: This provision applies to interest on loans provided by related parties. This interest is excluded from deduction if the amount exceeds 30% of taxable profit, except where this amount is less than two times the capital owned by the company and its reserves and provisions.

• Anti-Loss Trafficking Provision: Normally, losses are carried forward for five years         (six years for mining companies). To avoid losses from trafficking, no loss will be carried forward where there has been a change in the ownership of the company of more than 25% of shares or voting rights.

• General Anti-Avoidance Provision: This provision has been introduced by the tax procedures law enacted on 6 September 2013. It gives the Tax Administration the powers to requalify any transaction carried out by a taxpayer for the sole purpose of avoiding or reducing the tax otherwise due.[21]

Conclusion

The income tax system of Burundi that it inherited from the colonial period has been recently reformed. Key changes have been introduced. The reformed tax system is much simplified, modernised and conducive to the business community; however, the failure to mobilise enough tax revenues has given way to the reintroduction of unpopular tax measures, such as the minimum business tax (applied in the case of losses), and the advanced taxes on a number of goods and services.

[1] Law N°1/11 of 14^th July 2009 on the Creation, Organisation and Functioning of the Revenue Administration Agency (Office Burundais des Recettes, OBR)

[2] Law N°1/02 of 24^th January 2013 on income tax.

[3] Law N°1/02 of 17^th February 2009 on the Establishment of the Valued Added Tax (VAT)

[4] Law N° 1/12 of 29 July 2013 on the Revision of Law N°1/02 of 17 July 2009 on the Establishment of the Valued Added Tax

[5] Law N° 1/24 of 10^th September 2008 on the Investment Code of Burundi

[6] Decree N° 100/177 of 19 October 20089 on the Investment Promotion Agency of Burundi

[7] Law N°1/18 of 6th September 2013 on tax procedures

[8] Law of 21th September 1963 on income tax. This law has been repealed and replaced by Law N°1/02 of 24 January 2013 on income tax.

[9] Income derived from the rent or sublease of real estate (namely land and buildings), including the related furniture or livestock, see articles 1 and 4 of the Law of 21 September on Income Tax.

[10] See Article 1 of the Law of 21 September 1963 on Income Tax.

[11] See Article 27 of the Law of 21 September 1963 on Income Tax.

[12] Rust, Alexander, “ Double Taxation”, in Rust, Alexander (ed.), Double Taxation within the European Union, Kluver Law International BV, The Netherlands, 2011, pp. 1-2.

[13] Ibid.

[14] See Article 20 of the Law N°1/02 of 24 January on Income Tax.

[15] Alexander Rust, “ Double Taxation”, in Alexander Rust (ed.), Double Taxation within the European Union, Kluver Law International Bv, The Netherlands, 2011, pp.1-2.

[16] See Article 21 of the Law N°1/02 of 24 January on Income Tax.

[17] See Article 21 of the Law N°1/02 of 24 January on Income Tax.

[18] See Article 23 of the Law N°1/02 of 24 January on Income Tax.

[19] See Article 94 of the Law N°1/02 of 24 January on Income Tax.

[20] See Article 89 of the Law N°1/02 of 24 January on Income Tax.

[21] See Article 50 of the tax procedures law.