Investor performance and tax incentives

The focus to attract additional private-sector investment, both domestic and foreign, has long been a key priority for the Government of Rwanda, and a critical policy focus for economic development. This has commonly taken the shape of targeted support for priority sectors, such as manufacturing, agro-processing and ICT, and has occurred, in part, through prioritised infrastructure through the Kigali Special Economic Zone. In addition, Rwanda makes extensive use of tax incentives.

However, to date, the Government of Rwanda has limited channels to evaluate the effectiveness of such sectoral support measures in a more strategic way. In particular, it currently lacks a systematic way to compare the cost of investor incentives (e.g. foregone government revenue) to the firm-level benefits (e.g. higher employment, output and exports).

This project, which builds on previous work conducted with MINECOFIN, MINICOM and RRA and responds to a formal request to the IGC by the RDB, is made up of two components:

  1. Conduct research on investor performance and the role of tax incentives. By researching historical trends in investor performance for the period of 2013-2016, the study will focus on the RDB list of registered investors. In addition, it will consider breakdowns in investor performance across different sectors, firm sizes, location, investors using Foreign Direct Investment (FDI) and types of firm ownership (private vs. public-private partnerships). To provide some indications of the effectiveness of tax incentives, the study makes use of key metrics, such as the cost of tax incentives in terms of exports and per additional job created for each sector.
  2. Develop a tracking system for investors that the Government of Rwanda will use to monitor investor performance on a more regular basis. This will further ensure tax incentives are well-targeted and ensure a high economic return for Rwanda’s development.

The study aims to include a discussion on the quality of different types of tax incentive instruments (e.g. specific deductions, discounts and exemptions), which will show that with some adjustments and better targeting, there may be scope for raising the return to tax incentives, while at the same time raising more revenue.

Outputs

  • Publication - Policy Brief

    Improving the cost-effectiveness of Rwanda’s tax incentives

    Over the years, Rwanda has deployed a menu of tax incentives to attract investors. In 2015, total tax incentives amounted to about 0.9% of gross domestic product (GDP). A transparent and targeted strategy for giving out tax incentives is critical to ensure that they do not erode the domestic tax base. This study finds that Rwanda’s tax incentives are not a...

    11 Oct 2019 | Victor Steenbergen, Erik Von Uexkull, Anna Twum