What you need to know about Rwanda's new tax reforms

In recent times, Rwanda has emerged as one of Africa's fastest-growing economies, attracting widespread attention for its impressive progress in various sectors. To maintain this growth momentum and to create an enabling environment for businesses, the Rwandan government has embarked on a comprehensive tax reform plan.?

On April 20, 2023, the Cabinet approved comprehensive tax reforms following directives issued by the President of the Republic in January 2023 and in line with the revised Medium Term Revenue Strategy (MTRS) passed in May 2022. The approval of these tax reforms by the Cabinet underscores the government's dedication to fostering an investor-friendly climate and encouraging entrepreneurship. The reforms are designed to attract more investments, stimulate economic activities, and reduce the burden on low and middle-income earners, thereby bolstering Rwanda's position as an attractive destination for businesses and investors in Africa.

Throughout this article, I will examine the key components of the approved tax reforms and delve into the reasons behind each reform measure. By shedding light on the intended outcomes of these changes, we gain valuable insights into the government's vision for the country's economic prosperity and growth in the years ahead.

Attracting More Investments

One of the primary reasons behind the tax reform is to attract more investments into Rwanda. A competitive tax regime can be a decisive factor for potential investors when choosing a location for their businesses. To achieve this, the government has focused on reducing corporate income tax and streamlining the tax structure. The corporate income tax statutory rate is set to reduce from 30% to 28%, with a long-term target of reaching 20%. This decrease will make Rwanda more attractive to businesses looking to set up or expand their operations in the country.

Widening Tax Base and Improving Compliance

Widening the tax base is another key objective of the reform. By expanding the range of taxable goods and services, the government aims to enhance revenue collection and reduce reliance on a limited number of revenue streams. The reform includes the removal of Value-Added Tax (VAT) exemptions on processed cereals like maize flour and rice, as well as on special-purpose vehicles and brokers in the capital market.

Moreover, to encourage better compliance with tax regulations, the reform introduces a VAT refund budget increase for the Rwanda Revenue Authority (RRA), which raises the VAT retaining rate from 12% to 15%. Additionally, a Ministerial order will determine the modalities for VAT rebates for the final consumer.

Reducing Tax Rates

To stimulate economic activity and increase disposable income for individuals, the reform seeks to reduce tax rates across various categories. For example, income tax rates for individuals earning between Frw 60,000 and Frw 100,000 per month will decrease from 20% to 10%. This measure aims to ease the tax burden on low and middle-income earners and promote higher spending and investment.

Excise Tax Adjustments

The reform includes targeted changes to excise tax rates on specific products. High-end items like wines and liquors will see a decrease in excise tax. Wine will be taxed at 70% with a cap of Frw 40,000, and liquor will be taxed up to Frw 150,000 in value. This adjustment strikes a balance between generating government revenue and ensuring affordability for consumers. The purpose of these excise tax adjustments is to regulate the consumption of these products while generating government revenue. Higher excise taxes on alcoholic beverages can deter excessive consumption and contribute to public health initiatives. At the same time, the caps ensure that the tariffs remain within reasonable limits for consumers and businesses.

Property Tax Reforms

The tax reform also addresses property taxes to create a fair and sustainable system. Under the new regime, farmlands below 2 hectares will be exempt from taxation. The tax brackets for residential land have been revised, reducing the range from Frw 0-300 to Frw 0-80 per m2.

For residential properties, the tax on the second house will decrease from 1% to 0.5% of the combined market value of the house and land. Additionally, the tax on commercial buildings will be reduced from 0.5% to 0.3% of the market value, with charges capped at Frw 30 billion. These changes aim to incentivize property ownership and encourage investment in the real estate sector.

Local Government Tax and Fees

The tax reform also addresses local government taxes and fees to create a more business-friendly environment. The revised trading license combines trading license fees with market and public cleaning fees. It's important to note that the public cleaning fee is separate from the garbage collection fee collected at the village level.

Several fees will also be waived for decentralized entities, including transfer of ownership on immovable property, certificates of ownership on land, authorizations for rehabilitation or construction of buildings, and various other documents. This streamlining of local fees is intended to reduce bureaucratic hurdles for businesses and encourage entrepreneurship.

In summary, Rwanda's comprehensive tax reform seeks to position the country as an attractive investment destination, enhance revenue collection, and improve the overall business climate. By reducing tax rates, broadening the tax base, and encouraging compliance, the government aims to foster economic growth and create a more prosperous future for its citizens. These reforms demonstrate Rwanda's commitment to staying on its path of sustainable development and economic prosperity.

See the Reforms Document

Emmanuel G. Godfrey?is a final year B.A (Hons) International Business and Trade student at the?The African Leadership University?with great interest helping investors and entrepreneurs do business in Africa. He is the founder of the?Partners for Education - International,?Dobia Consulting Ltd.,?and a content writer and creator at?Entrepreneur's Network --> eprenz.com.