IPAR report puts tax incentives under scrutiny

Highlights of the report It urges government to;Develop an efficient and effective personal and corporate tax system that is transparent and fair Publish 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 Put in place mechanisms to monitor and evaluate tax incentives Carry out a cost-benefit analysis of tax incentives for business Review the tax incentives that it offers and the list of goods that are exempt from VAT Work with the other members of the EAC to harmonise taxes including tax incentives and exemptions. Rwanda forfeited US$234m in 2008 and 2009 As the treasury seeks to increase domestic revenues, a new report has raised questions over the effectiveness of tax breaks and other tax-free incentives mainly targeting foreign investors. The report by the Institute of Policy Analysis and Research—Rwanda (IPAR) dubbed “East African Taxation Project: Rwanda Country Case Study” has cast doubts over gains from tax incentives. Rwanda rolled out a host of tax incentives and exemptions to attract private sector investments which are vital to further the country’s long term strategy of sustainable economic growth, transformation, and job creation to eradicate poverty. Due to the tax policy, however, Rwanda forfeited revenues in excess of $234m (Rwf139.5b) in 2008 and 2009. Experts warn the policy could holdback the country’s efforts to become self reliant. Despite the treasury’s push to increase domestic revenues from about 13.6 per cent of GDP in 2011/2012 to about 14.8 per cent by 2014/2015, it forgoes half of its potential tax revenue every year in tax incentives and exemptions. The IPAR report, which was commissioned by Tax Justice Network–Africa and Actionaid International, describes Rwanda as the “most generous” of the EAC countries in providing tax incentives for investment. In 2006, the amount of revenue foregone to tax incentives was 3 per cent of GDP, the report said citing the International Monetary Fund statistics. The figure rose to 3.6 per cent and 4.7 per cent in 2008 and 2009, respectively. This compares with 2.8 per cent, 1 per cent and 0.4 per cent for Tanzania, Kenya and Uganda respectively in 2008/2009. “The money lost to tax breaks in Rwanda would more than double spending on health, education and food security,” said Josephine Uwamariya, the Country Director of Actionaid Rwanda. However, a closer look shows significant growth in investments, especially in the finance sector, energy, hotels, tourism and telecommunications since 2005 when government initiated a new fiscal regime. The country has since attracted huge investments including Contour Global LLC—which pledged a substantial investment in Methane Gas extraction in Lake Kivu— KCB and Tigo among others that created jobs, export diversification and increased imports. Although statistics suggest that FDI inflows rose from US$14m in 2005 to US$173m in 2010 as the new fiscal regime came into force, the report says that the increase is not necessarily due to the tax incentives and exemptions but to other factors making Rwanda a more attractive country to invest in. Experts and civil society activists are pushing for more business reforms while encouraging Rwanda and her EAC counterparts to scrap tax incentives. By scrapping the tax incentives, they hope that EAC governments will gradually trim reliance on foreign aid and borrowing for budgetary support. “Whilst aid is absolutely critical to African nations, on its own, it will not put an end to poverty. This is why it is essential that African governments look for innovative sources of funding closer home, like effective tax systems,” Uwamariya said. Ben Kagarama, the Commissioner General of Rwanda Revenue Authority (RRA)—which within its mandate is supposed to advise government on tax policy issues told Business Times that they will seek to strike a balance. “By and large, the policy (tax incentives and exemptions) is good but we need to monitor its effectiveness,” Kagarama said, adding that Rwanda also implemented other business reforms to attract investment. The World Bank ranks Rwanda as one of the top reformers in doing business and one of the most business friendly nations. The IPAR report was released in Nairobi, Kenya, recently during a regional roundtable on harmful tax competition. It is part of other studies conducted in Uganda, Kenya and Tanzania to assess the impact of tax incentives in EAC’s development policy. The regional reports warned that East Africa nations were at a risk of failing to truly tackle poverty and take charge of their economies. Kenneth Bagamuhunda, the Director Customs at the East African Community Secretariat said that: “We are in the process of undertaking a study and take stock of these studies and assess the sectors they have impacted. Some incentives may have contributed to the development of some sectors.” Ends

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IPAR report puts tax incentives under scrutiny