Fiscal Incentives should be crucial for Rwanda’s economic growth.

For the past decade, Rwanda has achieved impressive economic growth through structural transformation. Its political and macroeconomic stability, friendly business environments, and attractiveness for investors are all contributing factors to Rwanda’s economic growth.  

Rwanda aspires to attain an upper-middle-income economy by the year 2035 and to a high-income economy by 2050. To achieve this the Government of Rwanda (GoR) must continue to attract and encourage additional private sector investment from both domestic and foreign investors.

 

One of the ways the Government uses to attract investors is through fiscal incentives such as preferential corporate tax rate, tax holidays, accelerated depreciation, exemption of capital gains tax, and exemption of customs tax for products used in Export Processing Zones among others. These fiscal incentives motivate the beneficiary to invest, produce, employ, export, and save more than they would if they had not received these fiscal incentives. These incentives lead to high investment in the country as it activates increased production which leads to a higher gross domestic product (GDP) of the nation.

 

According to statistics published by the Rwanda Development Board (RDB) in January 2020, investments in Rwanda rose from $2.01 billion (2018) to $2.46 billion (2019) which represents a 22 per cent increase.  The investments were made up of local and foreign joint ventures (44 per cent), domestic investment (19 per cent), and foreign direct investments (37 per cent). The increase in investments is the result of the measures put in place by the GoR to transform its business environment and improve on the ease of doing business.  

 

On the other hand, the global pandemic Covid-19 has slowed down most sectors of the economy which may lead to a decrease in investment. In order to reduce the impact of Covid-19, the GoR has set up fiscal and financial support to private sector investors affected to ensure faster recovery from the crisis. The support includes the Economic Recovery Fund (ERF), the advance tax payment to be based on the current year profit from basing to the previous fiscal year profit and allowing partial payment of the tax obligation.    

In addition to the fiscal incentives, the GoR should also enter into attractive concessions including signing double treaties agreements (DTAs) with many countries. Tax treaties are agreements through which Governments agree to limit double taxation of economic activities that span between both countries. The DTA’s specify the reduced tax rates at which a country can levy taxes on income sourced by a resident from either signatory state. They also enforce co-operation between tax authorities in the form of information exchange and assistance in the collection of taxes and dispute resolution. In this respect, DTA’s are some of the tools that encourage investment, by ensuring investors from one country continue to operate in another country without being taxed twice on the same income. Further, DTA’s ensure a transparent and predictable tax environment which in return builds the foreign investors’ confidence in the country’s tax system.  According to the Organisation for Economic Cooperation and Development (OECD) foreign direct investment decreases by 3.7 % for every 1% increase in the tax rate. Therefore, signing DTA’s with many countries will help GoR increase the much need capital inflows into the country.

Currently, Rwanda has signed DTAs with Singapore, Barbados, Belgium, South Africa, Jersey, Mauritius, and Morocco.  

In essence, fiscal incentives are germane to the economic growth of an economy by accelerating investment in the country and building a competitive advantage to attract private sector investment. In return, high investment leads to significant job creation and innovation that raise the living standards of the citizens.

The government should therefore consider extending the use the fiscal incentives to small and medium enterprises (SMEs) as most of the available incentives are only enjoyed by the big enterprises and multinationals. 

editor@newtimesrwanda.com

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