by Rwanda has been credited for the World Bank and various international bodies for putting in place an enabling environment for investor facilitation like tax incentives and exemptions and friendly business and financial laws. It is also worthwhile to say that from January 1, 2013, nationals from all African countries travelling to or transiting through Rwanda are issued with an entry visa upon arrival at any Rwandan entry point. This has also opened more doors for investors, tourists and other ordinary African workers that wish to enter Rwanda.
On a flip side, Rwanda is land locked and largely depends on donor support to meet its budgetary expenditure. Rwanda is also aspiring to become self-reliant by relying on its domestic tax collections to avoid donor dependency as contained in its Vision 2020 program. As much as this is a great idea, can a less developed country like Rwanda register economic development to the extent of being self-reliant while much of its tax revenues are still lost in form of tax incentives and exemptions? How can Rwanda strike a balance between reducing current incentives and exemptions offered to investors perceived as too generous without losing income earned through Foreign Direct Investment at the same time? Are tax incentives and exemptions targeted at the right groups? Why can’t this money lost in form of tax incentives and exemptions be spent on other priorities like education or health? This article shall explore some of these pertinent issues mostly faced by developing countries like Rwanda and come up with some recommendations.
According to 2013 World Bank Doing Business report, Rwanda was in the top 10 global reformers out of 183 countries assessed by the bank. It is the fourth easiest place to do business in sub-Saharan Africa after Mauritius, South Africa and Botswana, and second after Georgia among the countries with the highest number of reforms over the last five years globally. Rwanda has the best business laws and legal framework on the continent. It now takes only six hours for one to register a company and 24 hours to get an investment certificate in Rwanda. This is all attributed to strong political leadership committed to private sector growth and development.
Rwanda offers a safe and peaceful environment, with very low levels of crime and very little corruption in the country. Rwanda is an exceptionally beautiful country with a temperate climate which would be very appealing to most foreign investors as a place to live in.
According to the World Bank, starting a business and registering property is much easier and faster in Rwanda than it is in any of its neighbors. There are no sectors that are barred to foreign investors and no restrictions on the percentage of equity they might hold. The Rwandan Constitution of 2003 also guarantees investors against expropriation, except in the public interest and with fair and prior compensation, which may be repatriated.
Rwanda offers investment opportunities on local and foreign market. There are opportunities in manufacturing and agriculture especially in the processing and export of coffee and tea, as well as in unexploited potential in horticulture and herbal products, where the terrain and climate are strong advantages. In tourism, the great asset is the mountain gorillas in Virunga Mountains but there is also a great diversity of fauna and flora and Lake Kivu in the west. In information technology, the Government has made it a high priority and is in the process of developing a TechnoPark near Kigali to facilitate investment in this area.
To register a local enterprise or a foreign subsidiary, the Rwanda Development Board (RDB) One Stop Center provides a quick and efficient registration service allowing you to have your business incorporated within 6 hours. RDB is the principal Government Agency responsible for helping investors to realize their investment projects in Rwanda.
Business registration process in Rwanda involves simultaneously obtaining the certificate of incorporation (business registration), Tax Identification Number (tax registration) and the Social Security registration for employee pension submission. Rwandan businesses can be registered as an individual business, local or foreign company. The Companies Act of Rwanda recognizes four types of companies: company limited by share, company limited by guarantee, company limited by both shares and guarantee, unlimited company. The four types of companies follow the same registration procedure (although requirements vary) which can be completed at RDB’s Business Registration Unit within the Office of the Registrar General of Companies. Enterprise (or Individual trader) is the simplest way to start and conduct business in Rwanda. It is also the most inexpensive and easiest business form to maintain.
Once a business among eligible priority sectors is registered and has a capital investment equal to or more than US$250,000 for foreign promoters and equal to or more than US$100,000 for local and COMESA Citizens, It is encouraged to register for an investment certificate at the RDB One Stop Center that entitles access to both fiscal and non-fiscal incentives. The investor certificate entitles an investor to a variety of incentives. To obtain an investor certificate takes 48hours at most after submitting all documents required by RDB which include an application letter, business plan, memorandum of association, copy of incorporation certificate etc.
Tax incentives are offered to both foreign and local investors. The investment code and tax laws and East African Community tax regulations make provisions for tax incentives. Among these incentives are exemption capital goods and raw materials; hotel equipment; as well as a flat rate of 5% in lieu of taxes and duties for property and real estate developers. The 5% flat rate applies to imported building materials for investments of over USD 1.8m
Investment incentives can be both fiscal and non-fiscal. Fiscal incentives include paying only a flat fee of 10% of the CIF (cost, insurance and freight) value of building and finishing materials instead of import duty, VAT and other taxes. There are several other tax exemptions on imported goods including: machinery and raw materials; privileges on movable property and equipment such as personal car, personal and household properties; equipment in the education field; specialized vehicles; tourist chartered airplanes; medical equipment, medical products, agricultural equipment and livestock; equipment meant for tourism and hotel industry.
Non fiscal incentives include free initial one-year work permits for foreign workers and the acquisition of permanent residency (granted to an investor if he deposits an amount of at least USD 500,000 on an account in a Rwandan commercial bank for a period no less than six months).
To apply for incentives, an investor must first be registered as an investor by obtaining an investment certificate issued by Rwanda Development Board (RDB). To obtain the investment certificate, applicants must prove that they will invest more than USD 250,000 for foreigners and more than USD 100,000 for local investors
Rwanda is the most generous country amongst all its partner states in East African Community in providing tax incentives for FDI and domestic investment, foregoing about a quarter of its potential revenue each year in tax incentives from businesses alone, 14 per cent of its potential budget. The revenue foregone would be sufficient to more than double spending on health or nearly double that on education.
The investment code of Rwanda has it that for someone to obtain an investor certificate, the investment project should be worth $100,000 for local, EAC and COMESA investors and $250,000 for foreigners.
In addition, for an investor to have their headquarters in Rwanda, they should have fixed assets worth $2million in addition to providing employment and training to Rwandans. They must also spend at least $1 million per year locally as well as have the capacity to make international financial transactions of at least $5,000,000 a year through a local commercial bank.
Currently, when an investor invests at least $100,000, the code recommends free initial work permit and visa for investors and foreign workers with a maximum of three expatriates. There are also tax relief options for investors who export goods worth $3-$5 million to claim a tax discount of 3%.
Investors in the tourism transport sub-sector are also currently benefiting from the investment code’s declaration that enables firms to import into the country duty free aero-planes and tourist travel cars as long as they are engraved with the official registered name of the project.
Research has shown that the amount of taxes foregone in Rwanda in incentives and exemptions to businesses is amounts to 25 per cent of potential government revenue and 14 percent of the potential government budget. This could be used to reduce reliance on external borrowing or increase spending on health or education.
Tax exemptions and concessions given to business in Rwanda are seen as an integral element of government policies for developing an economy led by the private sector, part of a package of policy measures to attract local and foreign direct investment but is this worth for a country which is aspiring to become self-sufficient and donor aid free.
As a member of the East African Community (EAC), the government is committed to removing or at least harmonizing harmful taxes. The expert review of taxes undertaken for the EAC concluded that there was a need to review all tax exemptions and concessions in member states, to harmonise them and to remove a number.
The main question that needs to be considered is if the benefits of giving tax incentives and exemptions outweigh the costs. Is the tax revenue foregone or to put it a different way the money spend by government on attracting private sector investment, compensated for by other factors. In other words, is the money being well spent?
There are five main factors in Rwanda that may account for increased investment other than tax incentives: the investors would have invested without incentives; post-conflict recovery; improved infrastructure and training; anti-corruption; and, the Doing Business reforms.
Furthermore even if an investor was attracted by tax incentives and exemptions there may well have been other investors who would have invested without the incentives.
Different schools of thought have developed divergent ideas on tax incentives and exemptions. Some schools of thought think that tax incentives are important whereas others suggest that they are important for attracting new investment but not of benefit to existing businesses. Various academic researchers assert that factors like infrastructure are more important and one said they had had no influence on their decision to invest.
In a nutshell, taxation is essential for sustainable development; it supports the basic function of a sustainable state and sets the context for economic growth. It is also essential for responsive government.
There is no doubt that introduction of a number of tax incentives for foreign and domestic investors, as well as some more broadly targeted at the private sector and process in achieving government objectives. There has been economic growth, an increase in investment in new businesses, an increase in employment in the formal sector, an increase in tax revenues and a diversification and increase in exports. However, the increase in investment may not be due to the availability of incentives but to other factors making Rwanda a more attractive country in which to invest. Most notable is the dramatic improvement in Rwanda’s rank in the Doing Business Index.
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. The Government should also develop an efficient and effective personal and corporate tax system that is transparent and fair to all, put in place mechanisms to monitor and evaluate tax incentives and also work with the other members of the EAC to harmonise taxes including tax incentives and exemptions.
