RWANDA TO ABOLISH VAT BREAKS FOR INVESTORS

An irrigation project in Eastern Rwanda. Agriculture is one
third of GDP but contributes less than 6 per cent of taxes.

Rwanda’s standing as East Africa’s most attractive foreign investment destination will be tested as the government implements reforms that will abolish some tax exemptions to businesses in the next financial year.

In the new investment code awaiting signing by President Paul Kagame, the Cabinet will no longer grant a blanket discretionary incentive package, and investment certificate holders will no longer get value added tax exemptions, The EastAfrican has learnt.

All incentives related to Customs duties will be reformed in line with EAC regulations, and general investment thresholds will no longer apply and will instead be granted to specific sectors.

Investors will no longer get profit tax discounts depending on the number of employees hired.

Stringent measures

Although the new investment code offers tax holidays and zero rates for the country’s strategic sectors, stringent measures have been put in place for investors to qualify for the incentives.

The decision to abolish some generous tax exemptions comes in the wake of concerns raised by the International Monetary Fund that the country is forgoing too much revenue in its bid to woo investors. Over the years, Kigali has dished out a raft of tax exemptions that experts warn are denying the country revenue.

They argue that tax holidays and similar advantages have served to undermine public finances without necessarily increasing the level of foreign direct investment.

Rwanda’s private investment portfolio, estimated at 12 per cent of GDP, is relatively low, with government still the largest investor and employer.

The experts argue that cutting down exemptions will help the government reduce dependence on donor aid and create the fiscal space for development spending.

Tax revenue in Rwanda, estimated at 14 per cent of GDP, is still low by several standards — including the East African Community convergence criteria of 25 per cent of GDP. The target is to increase this to 17 per cent of GDP in the 2015/16 financial year.

Over the last six months of 2014, tax and non-tax revenue collections were Rwf406.3 billion ($589.7 million), five per cent below the Rwf427.9 billion ($621.1 million) target. Experts say the targets are too ambitious, and higher than what the economy can afford.

The economy has registered impressive growth over the past decade, with an average of over seven per cent, but this has been largely driven by government expenditure as opposed to private investment.

The issue in Rwanda is not so much about raising the tax rate, but collecting from the sectors that are not contributing.

“For instance, agriculture, which is one third of GDP, contributes less than 6 per cent of taxes; real estate and immovable property tax contributes less than it should,” an economist who did not want to be named told The EastAfrican.

The government has now undertaken feasibility studies to facilitate the introduction of new tax regimes for mining, agriculture, and immovable property.

New incentives to private sector to boost exports

In the new code, the government plans to offer incentives such as tax holidays for up to seven years for large scale investors bringing in a minimum of $50,000,000, and contributing at least 30 per cent of the investment in form of equity to priority sectors like export oriented projects, manufacturing and energy.

Investors in products used in export processing zones will be exempted from Customs taxes and duties, according to the provisions of the East African Customs Protocol.

“If the incentives are to encourage exports, energy, manufacturing, it will be the right move because what the country needs is more exports than imports, and there are stringent rules to qualify for the incentives,” said Paul Frobisher Mugambwa, a senior manager for tax services at PricewaterhouseCoopers Rwanda.

Rwanda’s traditional exports including tea, coffee, pyrethrum and minerals continued to dominate the sector in 2014, representing 55.2 per cent of total exports, down from 62 per cent in 2013.

This dependence on a few primary commodities remains one of the main challenges as the country seeks to reduce the high external trade deficit.

In 2014, export revenue increased by 4.7 per cent to $599.8 million, lower than 18.7 per cent in 2013, as a result of poor performance in the mining and tea sectors. Imports, however, rose by 6.8 per cent, increasing the country’s trade deficit by 7.5 per cent from $1,674.38 million to $ 1,799.54 million.

The government is especially keen to attract investors in export-oriented projects in service sub-sectors, including the information and communications technology and financial sectors.

Investors in the microfinance sector will get up to a five-year tax holiday. In addition, the country has slashed its corporate income tax rate of 30 per cent to 15 per cent for strategic sectors; the investor has to export at least 50 per cent of turnover of goods and services produced in Rwanda, including business processing outsourcing and the energy sector, in order to qualify.

To encourage value addition in the export sector, an export company will only benefit from the 15 per cent corporation tax if it has added value of at least 30 per cent to its exports.

The East African