Resolving the current economic and social problems facing East Africa requires a multi-faced approach, with a positive fiscal regime being one of the most important interventions. For local and international investors alike, committing to a country can only be desirable when it makes economic sense. Therefore, to boost the economy and much needed government revenues, it is essential that attractive tax incentives are put in place.
The most common forms of tax incentives include exemptions of certain incomes from tax. Alternatively, another way could be reducing the tax rates on personal income tax and the corporate income taxes. As the name implies, personal income tax (PIT) is levied on income earned by individuals. It is progressive in nature, meaning that higher income earners pay more vis-à-vis low income earners. Specifically, there are three tax rate bands in Rwanda—0 per cent, 20 per cent and 30 per cent, which is the highest under Rwanda’s current tax system. The law on income tax stipulates that any individual who stays in Rwanda for 183 days or more automatically becomes a tax resident and is liable to pay PIT. Comparably, the neighbouring East African countries such as Kenya and Tanzania have 30 per cent as their highest rate band on personal income tax, similar to Rwanda’s highest rate band.
While countries such as the United Arab Emirates, Oman, Saudi Arabia and Qatar do not tax personal income, in many Nordic countries the highest marginal tax rate on personal income is over 50 per cent. The high margins can, however, be arguably justifiable given the fact that social amenities such as healthcare and education services are provided to the citizens without charge.
While many of the countries that do not tax personal income have a wealth of natural resources such as oil, having natural resources does not always guarantee personal income tax exemption. A resource rich country like the Democratic Republic of Congo has a PIT rate of 40 per cent as its highest rate band, which is considerably higher than that in the East Africa region.
East African countries, which do not endowed with natural resources need PIT to balance their budgets and keep their economies running. This poses a number of challenges for policymakers who on one hand require resources to provide social amenities while on the other they are under pressure to adjust the tax bands frequently to cushion the taxpayers against the impact of inflation on their income.
Additionally, globalisation and the digitisation of international commerce makes it possible for individuals to provide services globally without being physically present. This presents opportunities for such individuals to base their operations in countries with attractive PIT regime, at the expense of countries that have high personal income tax rates.
On the business front, reducing the corporate income taxes has the potential to deliver a great economic deal for East African countries. The hope is that lower tax rates will trigger a virtuous cycle of increased investments which in turn will drive the structural transformation of the economies, leading to better paid jobs. The impact of lower tax rates and tax incentives has been debated at length with some arguing that if the potential for profit exists then investors will come. However, it is important to note in regions where countries have similar economic profiles, every small advantage counts. This is the reason why favourable tax rates, efficient public services, and a ready market are powerful tools in winning the regional race for investment. Substantial precedents include countries like the US where President Trump proposed the reduction in the tax rates with primary objective to perhaps boost the economic growth in the US and respond to the current mobility of investors and companies. In the sa
me spirit, East Africa could follow suit and perhaps earn a new title as “Africa’s preferred investment hub while simultaneously enhancing the quality and sustainability of its economic growth and development outcomes.
However, there is need for caution as countries consider the most appropriate tax rates and tax incentives. For the East Africa countries that aim to one day create a monetary union and eventually a political federation, it is important to guard against the ‘race to the bottom’ where countries compete to offer the lowest tax rates and most attractive tax incentives, and in the process destroy their tax base. For policy makers, the dilemma lies in finding the right mix of accelerators, combining regulatory frameworks and government incentives that will create an investors heaven and in the process generate an economic boom that lifts the region.
Aimée Dushime is a Tax Advisor with KPMG Rwanda. The views expressed herein are personal and do not necessarily represent the views and opinion of KPMG.