Tax holidays will attract more investors, says RDB

As competition for Foreign Direct Investment (FDI) gets stiff among countries, investors will quite naturally go where they expect the best facilitation; in Rwanda, the new investment code promises just that.

Rwanda Development Board (RDB), the government agency charged with facilitating and promoting investments, is upbeat about the new code, which according to the chief operations officer Clare Akamanzi, will come into force within the next two months.

On Thursday, Akamanzi addressed a group of 40 investors representing European firms, mostly from United Kingdom and made a presentation that drew heavily from the upcoming investment code.

She told the investors who were in the country for a three-day trade and investment exploration mission, about investment opportunities currently untapped in sectors such as infrastructure, housing, mining and logistics.

Rwanda is keen on attracting British firms whose presence in the country is still minimal despite being described as one of ‘our closest development partners since 1994’ by Trade Minister Francois Kanimba.

According to Akamanzi, there are less than 20 registered British firms in Rwanda worth about $200 million.

“We would like to have more, especially in the area of financial services where British firms are quite strong,” she said.

The investment mission was a follow up of last October’s UK-Rwanda Trade and Investment forum held in London where President Paul Kagame invited investors to come and check out opportunities here.

With one of the best doing business environments on the continent, Rwanda is without a doubt suited for investment but its attractiveness is yet to actualize into major Foreign Direct Investments (FDI).

Last year RDB registered investments worth $500million; not large enough to help create the targeted 200,000 jobs a year. Experts also say that given the stiff competition for FDI, rankings in international reports alone may not be enough for countries; they have to give more to investors, a survival for the most generous, if you like.

An Ernst & Young’s report titled, ‘Africa 2014: executing growth’ South Africa, Egypt and Morocco, respectively, topped the list of 15 countries on the continent that have enjoyed a dominant share of FDI between 2007 and 2013.

Rwanda made it to that list in 15th place behind its East African counterparts Kenya, Tanzania and Uganda which were ranked 6th, 10th and 11th, respectively.

According to the report, Rwanda’s share of FDI in that period was 1.7 per cent which was 0.6 per cent of the total amount invested and 0.5 per cent of all jobs created but with a compound annual growth rate (CAGR) of 6.3 per cent.

Kenya’s share on the other hand was 5.4 per cent, representing 1.7 per cent of the total amount and 2.7 per cent of all jobs created with a 40.1 per cent CAGR.

Tanzania’s FDI share of 3 per cent accounted for 1.6 per cent of the total amount invested and 1.8 per cent of all jobs created contributing to its 22 per cent FDI annual growth rate.

Oil rich Uganda enjoyed a share of 2.8 per cent of all FDI which accounted for 2.9 per cent of all the capital invested and earned the country 1.8 per cent of all jobs created translating to an annual FDI growth rate of 20 per cent.

Juicy carrots

Experts note that as a land locked located far from the sea port and with a relatively smaller population, Rwanda has to do more in order to off-set some its natural disadvantages if it’s to swim favorably in a sea of FDI sharks.

For instance, although Rwanda’s investment environment is ranked ahead of that of its counterparts, Kenya, Tanzania and Uganda, the share of those countries’ FDI was boosted by major oil and gas finds that have attracted several billion dollars’ worth of investments.

But the handsome incentives in the new investment code are tipped to help Rwanda attract other types of investments especially in services, ICT and infrastructure and boost its minimal share of FDI in future.

Tax holidays for firms investing more than US$50 million is one of the incentives included in the new investment code.

By definition, a tax holiday is a temporary reduction or elimination of a tax granted by the government at national level to particular tax payers, the government also chooses which type of tax to be affected by the holiday.

Some voices of caution have been heard saying Rwanda should be careful not to give away too much but RDB Chief Executive Francis Gatare believes the incentives will deliver results.

“When we speak of investment promotion, we are speaking of lowering the costs of doing business in Rwanda which will attract domestic and foreign investment, and that’s what we are doing,” Gatare told parliamentarians in defense of the new investment code.

The government is also dangling a 15 per cent preferential flat corporate tax charge for investors in critical sectors of the economy such as housing, energy and manufacturing.

A corporate tax is, by definition, a levy placed on the profit of a corporation normally applied to companies’ operating earnings, after expenses.

Now, federal tax rates on corporate taxable income varies among countries, for instance in the United States, it varies from 15 per cent to 35 per cent but Rwanda is offering a flat tax rate of 15 per cent which is generous by all accounts for a country with such a limited taxable base.

“Are tax incentives effective at attracting investment or are they a waste of resources?” That’s one of the most widely studied questions by investment analysts.

The latest research by the World Bank Group’s investment climate advisory services on the efficacy of investment incentives says that the answer to that question depends on the policies used and the sectors where investment is sought.

In Rwanda’s case, officials have said that the investment code is aimed at attracting more investment in the critical sectors of the economy whose performance will help create more jobs and reduce poverty through improved incomes, all key targets in the government’s vision 2020 and EDPRS II work plan.

But beyond tax incentives, John Small, the chief executive of the Eastern Africa Association which organized the delegation of the 40-man investment mission said Rwanda’s low corruption levels and relatively transparent government are quite rare on the continent.

“These are very important elements to which our members attach great value,” said Small whose association has a membership of 400 European firms with business interests in Kenya, Uganda, Tanzania, Rwanda, Burundi, Ethiopia, Eritrea, South Sudan and Seychelles.

Source: New Times