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 cost-effective tool to create jobs, induce investment, or to raise exports because they are not efficiently targeted.
- Only 11% of tax incentive expenditure goes to firms whose investment decisions are more likely to be affected by incentives – covering only 3% of firms. Wholesale and retail, a non-strategic sector for government, receives about the same amount of support as the manufacturing sector.
- To ensure cost-effectiveness, Rwanda’s tax incentives need to be time-bound, transparent, and effectively targeted to export-oriented foreign direct investment (FDI) and employment-intensive firms as well as firms that are essential to strengthening domestic value chains.
- The study also recommends a shift to a tax credit system.