NATIONAL TAXATION POLICY AND LOCAL GOVERNMENT REVENUE COLLECTION

1. NATIONAL TAXATION POLICY AND LOCAL GOVERNMENT REVENUE COLLECTION PRESENTED BY BEN KAGARAMA BAHIZI COMMISSIONER GENERAL-RRA OCTOBER 18th, 2013

2. Contents • Taxation background in Rwanda • Tax structure in Rwanda • Collection against budget:1998-2013 • Strategies to mobilize tax revenues • Tax Incentives granted to investors • Trade facilitation initiatives • Local government revenue collection • Key Challenges • Mobilize tax revenues: a collective responsibility

3. Taxation background in Rwanda • Taxation in Rwanda dates way back in 1912 when property tax was introduced; • After independence, taxes were formally introduced in Rwanda by the law of the 2nd June 1964 concerning Profit Tax; • Customs and Excise duties were also introduced by the law of 17th July 1968; • Law on profit tax and law on tax procedures were introduced 1997 • In 2001 VAT law was introduced requiring taxpayers to start paying Value Added Tax.

4. Taxation background in Rwanda The Central Government through the Ministry of Finance was responsible for tax collection. The Rwanda Revenue Authority was established under the law n°15/97 of 8 November 1997 as a quasi-autonomous body with the mission of assessing, collecting, and accounting for tax, customs duties and other specified revenues.  

5. Rwanda Taxation policy In general, Rwandan national taxation policy focuses on mobilization of revenue for economic development through efficient and equitable services that promote business growth.” The fundamental tax policy has seen the old tax systems reformed and replacing them with completely new tax laws and regulations inline with the following objectives:

6. National taxation policy Cont’d • Raising more revenue in the short term, • Ensuring that the tax burden is distributed equally, • Broadening the tax base to reflect the changing structure of the economy, • easing the tax burden on the general population, creating favourable conditions for the development of the private sector and furthering the ongoing adaptation of the tax structure to fit a market economy.

7. Tax policy Cont’d Rwandan national tax policy is reflected in the among others the most important indicator which is Ratio of tax revenues to GDP. This in many ways the single most significant indicator of national fiscal development and revenue performance and this in 2001 it was 10.1% and in 2012 -2013 is 14.2% which gives us a better hope of “ Kwigira” in the years to come.

8. TAX STRUCTURE IN RWANDA Our structure is more than 90% progressive hence breaching the economic gap between the low income earners and high income earners hence being fair.

9. Taxation structure cont’d • Taxation is considered central to the building of our state capacity in different sectors as “ as it is always considered as the price to pay if you are to live in an organized society.” say Rwanda with well developed infrastructure in all sectors. It has the following benefits to play in our Rwandan economy.

10. Local government revenues fulfill multiple functions • Building accountability •Increasing citizen engagement with public affairs •Stabilising the economy •Incentivising /discouraging particular types of investment •Regulating economic activity •Redistributing wealth •Discouraging dangerous/undesirable activity •Decreasing dependence on aid/increasing autonomy •Even if the intention of a tax relates to just one of these, it may affect some of the others as well

11. Taxes TYPES OF TAXES COLLECTED BY RRA • There are three major categories of taxes in Rwanda: direct taxes, taxes on goods and services, taxes on international trade.

12. Taxes 1. Profit taxes • Corporate Income Tax : The corporate income tax is levied on business profit of entities. • Tax on profit made by self employed persons The personal income tax is levied on income received by an individual. The taxable income is composed by: • Business income • Employment income • Investment income

13. Taxes This tax is calculated either on the basis of the real incomes or by using the presumptive tax regime (lump sum taxation regime). • Withholding tax on imports and on Government purchases The amount of tax withheld is treated as a tax prepayment of the payee to be offset later against his final liability. These are:

14. Taxes • 5 % to be imposed on all imports, calculated on the CIF value. • 3 % on Government purchases as a down payment on profit tax of the total amount on income.

15. Taxes 2. Taxes on income • Pay As You Earn (PAYE) PAYE is a tax on income derived from employment. The base is the income from employment activities including wages, salaries, bonuses, leave pay; sick pay, medical allowances, etc… and all kinds of allowances. The employment income includes also all benefits in kind.

16. Taxes • Taxes on investment income Taxes on investment income include taxes on loans, dividends, interests, royalties, lottery and other gambling proceeds. The tax rate is 15 % of total realized income.

17. Taxes 3.Taxes on goods and services • Value Added Tax (VAT) Rwanda government after recognizing that many African countries have adopted VAT system as a foundation for their economic growth, it introduced VAT in its taxation system in order to pursue the tax reforms by establishing a fair and suitable tax system.

18. Taxes • The merits of VAT system are as follows: • Broaden the tax base: VAT is a multistage tax for all registered suppliers. This concept of broadening the tax base aims at having more people and more products/ services to pay and have each contributing less. • Self-policing mechanism: the purchase of one taxpayer is the sale of another one hence, the tax involved is the input for the last and output for the first taxpayer.

19. Taxes • Avoid cascading effect: this is a situation whereby a tax is imposed to another. • Export promotion: exported products are zero-rated. Since all the VAT inputs on exports are refunded, our exports will be competitive on international market. • Cash flows: through refund mechanisms, traders acquire cash for running their business

20. Taxes • Excise duties Excise tax or excise duty is a tax imposed on goods or services considered to be luxuries rather than necessities and luxury taxes may be levied with the aim of taxing the rich or in a deliberate effort to regulate consumption of some goods or services, either for moral reasons, national emergency or revenue productivity

21. Taxes • Excise tax is levied on locally produced beers, lemonades, mineral water, juices, liquors, wines, fuel, vehicles, powdered milk as well as on cigarettes and their imported counterparts and on telephone communication

22. Taxes • Taxes on international trade : Import duty Import duties are paid on imported goods coming from out of EAC. At the customs point, the tax administration collects some taxes and duties like VAT, Customs duties and excise duties.

23. Rwanda Tax structure (Con’t) OTHER COLLECTIONS • Non fiscal revenues: fees for services rendered by other government institutions • RSSB contributions ( health and pension): in 2010 the Government decided to transfer the collection activities of Rwanda Social Security Contributions and Medical Insurance Contributions to Rwanda Revenue Authority).

24. Tax collection against Budget 1998-June 2013

25. Tax collection against Budget 1998-June 2013

26. Strategies to mobilize tax revenues (1) Taxpayer Education • We have invested in tax education across all sectors, using seminars, dialogues with stakeholders and media to address taxpayer problems related to tax matters. This has strongly helped in: • Tax mobilization, • Reducing errors committed by taxpayers that brings about uncalled for penalties • reducing tax evasion, • increasing compliance • And other issues that are tax related

27. Strategies to mobilize tax revenues (2) E-Solutions RRA introduced various online facilities with the aim of: • Simplifying the process of paying taxes • Reduce the cost of paying taxes, doing business in Rwanda • Reduce the time taken by taxpayers while trying to declare and pay taxes • Increase domestic investment and competitiveness of Rwanda compared to other EAC and regional countries

28. Strategies to mobilize tax revenues 2. E-Solutions (cont’) (i) E-Filing and E-payment of taxes and RSSB contributions: this was introduced in 2011. Using the system, taxpayers are able to file and pay their returns on line, but payment is made through their respective banks. • By last month (September, 2013 )there were 24,638 taxpayers using the system.

29. Strategies to mobilize tax revenues (ii)Rwanda Electronic Single Window: • This system was introduced in 2012 and it is being used by customs and its agencies such as clearing agents, RDB, Ministry of Health, RBS, and other organs that deal in handling taxpayer goods. • The implementation of Electronic Single Window solved the problem of clearing agents moving from one place to another in the clearing process. • The system allows traders to lodge information with a single web-based portal to fulfill all import or export related regulatory requirements. The system has been rolled out at all border posts • It has been rolled out to all boarder posts.

30. Strategies to mobilize tax revenues 3. E-Solutions (Con’t) (iii) M-declaration • M-declaration is a newly introduced online system of declaring and paying taxes for Micro and small enterprises with an annual turnover below Rwf50million (classified as small enterprises) using mobile phones. (e.g. Motorcyclists, small business owners) • Taxpayers are required to register their TIN and mobile phones by dialing *800# to avail the services and follow instructions. It is the easiest and convenient method of effecting payment and saves time for other activities.

31. Strategies to mobilize tax revenues 3. E-Solutions (Con’t) (iv) Online Tax Clearance certificate: This assists taxpayers to access bank loans, bidding for tenders, transfer of property etc more easily and hence promote doing business. Using this, the Tax Clearance Certificate is obtained within 2 days.

32. Strategies to mobilize tax revenues 3. E-Solutions (Con’t) (v) Electronic Billing Machine. • These are authorized electronic devices that are used by VAT registered taxpayers in issuing certified tax invoices to clients. They are basically meant for • Combating sales suppression • Combating corruption • Data protection • Provide taxpayer sales data to RRA servers • Provide market balance and equality for every entrepreneur.

33. Strategies to mobilize tax revenues 3. E-Solutions (Con’t) (vi) Online Payment of Non fiscal revenues. • Non fiscal online payment is a system used by the general public & foreigners to pay for public services like; passport, VISA, driving license fees, Resident permit, Criminal record certificate fees, various fines penalties by court, purchase flag fees, examination fees for O’ level & A' level, Publication of official journal fees, RBS fees. • The client has to go to the Rwanda Revenue Authority website, and fill the required information. After having the reference number of payment advice ticket.

34. Strategies to mobilize tax revenues (3) Flat Tax Regime for SMEs • In order to promote SMEs’ development, the government introduced a flat tax regime for Taxpayers with an annual turnover of between 2,000,000million-50,000,000million have a special tax rate for profit tax.

35. Tax Incentives granted to investors • Training and research expenses are deductible from taxable profits • Loss carried forward • Profit Tax Discount

36. Trade facilitation initiatives • Reduction of import related documents. Only three documents are required: Commercial Invoice, Packing List, Bill of Lading/Airway Bill • Pre-clearance System: • Compliant trader scheme(Blue-Channel • Mobile Cargo scanners • Simplified Certificate of Origin to facilitate small scale cross-border traders; for the goods imported by small scale cross border traders with a commercial valuenot exceeding US$2000.

37. LOCAL GOVERNMENT REVENUE COLLECTION The Government of Rwanda has embarked since 2000, on decentralization process as an instrument of people‘s empowerment, a platform for sustainable democratization, a structural arrangement for mobilization for economic development energies, initiatives and resources and as a means for reconciliation, social integration and well being.

38. Certain taxes which were formerly collected by the Central government have been transferred to Local Governments. They include: • The property tax • The trading license tax • The rental income tax

39. Property Tax • Property tax‖ is a tax levied on immovable property: parcels of land, buildings and improvements. Currently, the property tax is the single most important local tax in developing countries.

40. Rental Income Tax Rental Income Tax‖ is a tax for individual persons, who earn income from rented immovable properties located in Rwanda. Currently, this type of tax is a potential source of revenue for urban authorities where the demand for accommodation and commercial activities will always be higher than supply.

41. Trading License Tax Trading license Tax is a tax paid every year by the individuals who has decided to undertake any profit-oriented activity in Rwanda. Legally registered organizations or companies which are liable to the corporate tax should also pay the trading license tax annually.

42. The basic trading license is fixed each year by the Council of the District or Town where taxpayers are based . • Trading licence tax is paid according to type of business activity and area, but for VAT registered taxpayers, trading licence will be paid according to their annual turnover and the basis will be the turnover realized during the previous tax year revised by RRA.

43. Fees/charges in the local governments of Rwanda User fees/charges are prices charged for specific services to cover all or part of cost of providing such services. The fees are supposed to cover the costs of Administration and supervision of the public service, but in Local Government where own revenue especially from local taxes are limited, fees perform a revenue-raising function

44. The fees limits are fixed by the District or Kigali City Council. Such fees should not exceed the real or estimated limit as specified in the Presidential order no 02/01 of 31/03/2008 establishing the list of fees charged by Districts and determining their limits • Fees limits are set annually because the costs of providing a service may vary from year to year, therefore, user fee levels should be reviewed annually and, if needed, revised to reflect changes in costs

45. Performance of the 3 decentralised taxes • 1) Trading licenses .These have performed best & most consistently: 70-80% of businesses are registered and pay this tax. • 2) Rental income tax. Has been increasing fast in all districts (both in terms of registered taxpayers and absolute sums collected).Report are inconclusive regarding whether districts or RRA are more effective in collecting this tax •It’s difficult to distinguish rental from other income.

46. Performance Cont’d 3) Property tax •Remains the most limited: amounts to around 12% of the three decentralised.

47. Key challenges faced • Low tax paying culture among taxpayers; • Large informal sector • Ignorance of some taxpayers especially SMEs regarding tax information. • The structure of the Rwandan economy largely dominated by subsistence Agriculture • Businesses are still largely done manually

48. Indicators on the way forward • The size of the tax gap. The bottom line with respect to tax administration in many ways is the size of the ‘tax gap’, the difference between the potential tax revenue if all taxes were fully enforced and the actual taxes collected. • The corruption index. This indicator helps in assessing the size of the tax gap. • The size of the hidden economy as a percent of GDP. This is another helpful indicator • to assess the size of the tax gap

49. Mobilize tax revenues: a collective responsibility RRA has been working hand in hand with the local government in mobilizing, sensitizing and enforcing tax revenues in the following ways: • TAC meetings: Tax Advisory Council meetings were introduced in 2002 with the aim of strengthening joint efforts between RRA, PSF and local government in sensitizing, mobilizing and increasing tax base as well as addressing challenges faced at all levels in the process of collecting tax.

50. Mobilize tax revenues: a collective responsibility • Tax Issues Forum (TIF): this forum was established in 2007 between RRA and PSF with the following objectives: • Strengthen partnership between RRA and PSF • Jointly identify and address tax issues that are affect both parties. • Discuss and recommend new approaches for addressing tax issues such as proposing amendment of tax laws etc.