TJN-Africa and ActionAid Report on Impact of Tax Incentives in Rwanda

One of the tax policy issues that TJN-Africa is focusing on this year is harmful tax competition within East Africa (we blogged the Nairobi Policy Roundtable here

Now TJN-A and Action Aid International Kenya have conducted country studies on tax incentives for all East African Community (EAC) member states except Burundi.

The Rwanda country study is complete. The report titled "Policy Brief on Impact of Tax Incentives in Rwanda" is available here, and the "East African Taxation Project: Rwanda Country Case Study" here.

The Policy Brief poses the question:

Tax Incentives for Investors: Investment or Growth or Harmful Taxes? In just 2008 and 2009 Rwanda lost over $234millions due to tax incentives. Was the investment return worth it?

And observes:

Every year Rwanda foregoes about a quarter of its potential tax revenue through tax incentives and exemptions given to businesses to attract private sector investment. Is this money well spent? This policy brief looks at the issue of providing tax incentives and exemptions for investors:

• Are they too generous for a country like Rwanda that is struggling to raise money to fund its development strategy?
• Are they targeted at the right groups?
• Are they achieving the government’s objectives for them? Would the money be better spent on other policy priorities like education or health?
• Why are the amounts foregone not made publically available?
• Why is there no monitoring and evaluation of their effectiveness and why has there been no cost benefit analysis of tax incentives for attracting investment?
• Should the amount foregone be considered as part of the government’s budget so that it becomes transparent expenditure?

Whether tax incentives and exemptions work or not, there is a need for transparency, public scrutiny and dialogue; equity and bargaining are essential to building a culture of tax compliance. Accountability of government to citizens is essential, and taxation encourages citizens to make claims on governments and hold them accountable for public expenditure.

The amount lost in tax incentives is staggering, and rising:

In 2006, according to the International Monetary Fund, the amount of revenue foregone in Rwanda to tax incentives was three per cent of GDP. Calculations from our research suggest that by 2008, this had risen to 3.6 per cent and 4.7 per cent by 2009. This compares with 2.8 per cent of GDP in Tanzania in 2008/9; one per cent of GDP in Kenya and 0.4 percent in Uganda.

The report concludes:

Our analysis of the costs of benefits of providing tax incentives for businesses including attracting FDI and domestic investment is inconclusive, but there is a growing consensus that tax incentives may not work, or to the extent they do they have to be used selectively and for a limited period

And recommends:

The government needs to balance supporting investment by providing a competitive tax environment and ensuring that investors pay an appropriate share of the fiscal revenue. There is a need to protect the tax base against sophisticated tax planning, that is, businesses avoiding taxation by taking advantage of incentives and then moving when they are no longer entitled to them. It should also be noted that once they are introduced, it is difficult to remove tax incentives. The Rwandan government should consider:

1. developing an efficient and effective personal and corporate tax system that is transparent and fair to all;
2. publishing comprehensive information on all tax exemptions in an annex to the annual budget giving details of the amount of revenue foregone due to tax incentives and exemptions;
3. putting in place mechanisms to monitor and evaluate tax incentives;
4. carrying out a cost-benefit analysis of tax incentives for business
5. reviewing the tax incentives that it offers and the list of goods that are exempt from VAT;
6. working with the other members of the EAC to harmonise taxes including tax incentives and exemptions.

Keep abreast of news on the TJN-Africa website.