Avoiding Tax Competition and the “Race to the Bottom”

"The main purpose of this report is to raise the issue of tax incentives and exemptions. Are they too generous for a country like Rwanda that is struggling to raise money to fund its development strategy? Are they targeted at the right groups? Are they achieving the government’s objectives for them? Would the money be better spent on other policy priorities like education or health? Why are the amounts foregone not made publically available? Why is there no monitoring and evaluation of their effectiveness and why has there been no cost benefit analysis of tax incentives for attract investment? Should the amount foregone be considered as part of the Government’s budget so that it becomes transparent expenditure? As a member of the East African Community, the government is committed to removing or at least harmonising ‘harmful taxes’. The expert review of taxes undertaken for the EAC concluded that there was a need to review all tax exemptions and concessions in member states, to harmonise them and to remove a number. There was a danger, the report warned, of a ‘race to the bottom’. Rwanda has in place a complex system of tax incentives and exemptions and there is evidence of a significant increase in private sector investment following the introduction of the revised tax code in 2005. This has resulted in the creation of new jobs. Exports have increased and there is some evidence of a beginning of export diversification into areas prioritised by the government as well as an increase in revenues from tourism."