APRIL 2014

RIFC SmartLessOnsInItsNoIlusonaYuianPanTxe

ABOUT THE AUTHORS

is a consultant with the BankGroup's Global Tax SimplificationThe Rw anda Caseteam.

In 2008, the government of Rwanda embarked on a series ofsweeping investmentis a consultant with the BankGroup's I - Climate reforms with the support of the Wod Bank Group. One program pillarProgram. He has also workedwithfocused on tax reforms aimed at simplifying the tax regime for micro, small, andUnit of the Bank Group'sAdvisorymedium enterprises and, overall, improving the tax system for businesses byThe authors would like to thank facilitating administrative procedures related to the value added tax (VAT) andLaurent Corthay and MosesKajubi for reviewing this

- income tax. This SmartLesson captures the challenges of streamlining Rwanda'sSmartLesson.

tax system and the specific steps that led to a reduction in the overall tax burdenfor enterprises, a dramatic rise in the number of taxpayers, and a lighter and less

Richard Stern, Program Manager,Global Tax Smplification Program. cos nationa tax aministration.Laurent Corthay, RegionalCoordinator Background The range of improvements was far-Taxation, Investment Climate, World reaching. The project identified 10 processes,

in the push for tax reform, there was a involving 98 changes to policies, procedures,twofold guiding principle: 1)to lowerthe cost and practices, as eligible for streamlining-inof compliance for taxpayers, reduce the cash- registration, de-registration, filing of returns,flow burden by allowing quarterly rather audits, assessments, refunds, enforcementthan monthly tax payments and expediting and recovery, administrative appeals,refunds, and minimize points and frequency internal investigations, and tax clearance.of contact between taxpayers and the taxauthority; and 2) to safeguard government The TP exercise also included a desk reviewrevenue by protecting collections and of tax laws and statutory instruments; detailedreducing administrative costs. The ultimate observation and walk-throughs of tax-objective was to encourage businesses to pay administration processes; and consultationstaxes via a more attractive system. involving key stakeholders at each project

milestone to ensure that the client and theSince 2008, the government of Rwanda Bank Group were in agreement.has emphasized Doing Business reforms toimprove Rwanda's attractiveness to local By the end of 2012, two-thirds of theand international investors. In response, the recommendations from the TP exerciseWorld Bank Group launched its investment had been adopted and implemented swiftly.climate reform project to support the Examples include having registration forms innational reform agenda. the local language (Kinyarwanda); merging

or dropping steps in the tax administrationTo begin streamlining the tax system, the process to reduce bureaucracy and increaseproject conducted a tax process mapping efficiency; using e-mail, fax, or registered mail(TPIV) exercise, a step-by-step technique to to notify taxpayers that they are de-registered;analyze process functions and rationalize and redesigning forms for small taxpayers.procedures carried out at the Rwanda The results were soon tangible. (See Box 1.)Revenue Authority ( The mapping However, some of the reforms recommended,covered RRA's Domestic Tax and Legal such as work on the leasing environment, taxdepartments. incentives, and the small and medium taxpayer

regimes, were ongoing and required more

T ompbeging stroeln T htax sysem the.

Soe t and extensive discussion and hands-on assistance.

SMARTLESSONS -APRIL 2014

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Box 1: Surfing the Wave introduced by RRA in September 2012, simplifies compliancefor micro and small enterprises. It ranges from RF60,000 to

The global momentum for reform in Rwanda provided the RF300,000 for taxpayers with turnover between RF2 millionenabling environment for tax reforms to achieve optimal and RF12 million. For small taxpayers (with a turnoverimpact. ranging between RF12 million and RF50 million) a flat tax

During the period covered bythis project, Rwanda passed atotal of seven Doing Business reforms and saw its global rankingadvance from 143 to 67, a unique performance in Sub-Saharan "The investor community mostly appreciated the online taxAfrica. (Doing Business, 2010) filing services that could be done at taxpayer premises, the

quarterly VAT payments, and the Tax Issues Forum."The success of the tax reform project can also be attributed to -Vivian Kayitesi, Head, Investment Promotion Agencyimprovements in other sectors of the business environment in Rwanda Development BoardRwanda.

*Reduction in the time to obtain a tax-clearance certificateBreaking new ground from one week to less than 24 hours occurred, once RRA

installed computer software that analyzes taxpayer data.The Rwanda Revenue Authority estimates that between2009 and 2012 the number of domestic taxpayers grew by A broad range of online services, including electronic tax400 percent, from 20,000 to 100,000,2 in part thanks to the registration and tax clearance, was introduced, along withreforms, which also reduced taxpayer visits, opportunities an online onboarding program for new taxpayers.for rent seeking by tax authorities, and the volume ofpaperwork. * A number of tax-filing innovations, introduced by RRA,

permit taxpayers to make self -declarations and pay taxAccording to an independent evaluation' covering 2008- liabilities. They include the following:2010, improvements in tax clearance, VAT filing, and * Regulatory changes that now allow SMEs to file andpayment systems alone saved approximately $500,000 in pay VAT returns on a quarterly basis;time and funds. A further $2.4 million in cost and time * Filing electronically or by registered mail;savings can be attributed to reforms in business registration. * Provision of downloadable filing forms on RRA'sRoughly 5,000 new businesses have become operational, website;and the country's private sector has attracted as much as * A software application, provided on RRAs website,$46 million in investments. enabling taxpayers to calculate and verify liability

bef ore f iIi ng tax retu rns;Related reforms in trading across borders also contributed * Promotion of the use of certified tax accountantsto a more conducive investment climate, with Rwanda and consultant services to improve tax compliancejoining the East African Community Customs Union; the and collection efficiency;24-hour one-stop border point and simplified trade regime * Translation into the local language, Kinyarwanda, ofthat reduced time to clear consignment in customs; online tax-filing forms for SMEs;tax calculators for VAT as well as personal and corporate * Development and introduction of tax declarationincome taxes; and increased service delivery points where and payment by mobile telephone in cooperationRRA continues to decentralize its services by opening more with MTN, the country's leading telephone serviceoffices in new areas such as licensing and construction provider.permits.

"Quarterly VAT payments were popular mainly because SMEsKey significant outcomes include the following: regardedthem as loanswithout interest. Quarterly ratherthan

monthly payments, with corresponding reduction in time and* Merging tax registration and business registration transport costs to RRA offices, increase SME cash flows."allows both processes to be completed on the premises -Gerard Mukubu, Deputy Chief Executive Officer,of the Rwanda Development Board (RDB), the national Private Sector Federationinvestment-promotion authority. A liaison between RRAand RDB (to avoid duplication) was achieved with minimalfuss, because RRA had permanent staff on the premises installation of a computer-based audit selection systemof RDB, and the latter had already begun to install enables effective risk management through bettersoftware that created a single number for both taxpayer identification and evaluation of risks. The system replacedidentification and business registration. a process that required full review and approval, and it

reduced audit approval from 13 to 2 steps.* A forfeit regime of fixed amounts for micro taxpayers,

2 Source: Pierre Celestin Bumbakare, Commissioner for Domestic Taxes, tribunal, a teedratinghfathenecessrynleislatoneanRRA.3 Evaluation by Economisti Associati, an independent consulting firm rules, was accepted by the government, following the TPMbased in Italy. exercise. The tribunal will permit taxpayers to appeal tax

2 SMARTLESSONS - APRIL 2014

assessments to an independent and impartial body. are often more important-and without them, the wholereform process may have no impact. Some highlights of

* A 30-day window for taxpayers to appeal an assessment the streamlining that spurred the reform momentum wereis provided by RRA. Perhaps the most critical impact of the the online services-where tax and business registrationBank Group's work is its contribution to the cultural shift were merged and the time for obtaining a tax-clearanceregarding taxpayer compliance. In a dramatic turnaround, certificate was reduced to less than 24 hours. Initially, tothe taxpayer in Rwanda is now more compliant than not. 4 obtain a tax-clearance certificate, a taxpayer neededThis has contributed to expanding the tax base and tax approvals from three different departments: customs,collections; the challenge now is detecting tax-avoidance' domestic taxes, and revenue protection. With Bank Groupschemes, as opposed to blatant tax evasion. support, RRA streamlined and expedited interdepartmental

access and exchange of taxpayer information. The tax-"RRA's educative campaigns made me understand the clearance process was then unified to avoid duplication,negative impact of tax evasion and the importance of which not only enabled faster clearance but also freed upavoiding arrears and declaring exact amounts. Today, I comply human and logistical capacity.to qualify for bank loans and to expand my business. I alsowantto play mypart in supportingthe RRAeffortsto improve Oftentimes, the impact of an intervention cannot betax payment for businessmen like me." measured until long after project completion. Therefore,

-Francois Ngoboka, Shop Owner, Nyabugogo Market establish milestones that are realistic and suitable for(Kigali) the client. Address the easily fixable first, to provide an

the_streamincentive for further reforms.

Lesson 1: Exploit synergies across the range of In response to the Bank Group's recommendation toinvestment-climate products to more effectively meet consider designing utility software to calculate taxes andclient needs. fines and to validate tax submissions, RRA needed more

time to carry out a feasibility study and to source funds forinformation needed to register a business was essentially implementation. Nonetheless, it is now operational.the same as that required for tax-registration purposes,which provided a compelling rationale to unify both Lesson 3: Catalyze the voice of the pridvate sector nprocesses. Previously, the procedures were performed byseparate entities, RDB and RRA, with business registration Enacting regulation is time-consuming. Interaction withoccurring first. Following the setup of an interface between regulatory authorities should start early and be regular.the two agencies' registration systems, RRA automatically To push passage of the Tax Appeals Tribunal bill, the teamissues a taxpayer identification number, which is also used began engaging with client representatives at the mappingby RDB as the business registration number. The process is stage, when onerous processes and procedures were beingcompleted in six hours! This improvement was achieved identified and possible solutions conceived. The teamthrough the collaborative efforts of the government of met frequently with RRA, the Ministry of Finance's taxRwanda and the Investment Climate ICT facility, policy team, the Ministry of Justice, and the Private Sector

nFederation to monitor progress and generate momentum

"Implementing recommendations of the Tax Processet

Mapping exercise allowed faster services to RRA client due to Lesson 4: Go the extra mile, if necessary, to convince thereduced processes and procedures. Today, top management dient of a solution's value and to ensure that capacityis no longer required do a quality check for all audit files andenforcement cases; these are handled bythe relevant heads ofwcproied a ompellig Celestin Bumbakare, Following introduction of a tax-appeal mechanism, the tax-

-PmissoerfrDmsi Txs R reform team recommended that RRA also adopt an internalprocess to eliminate steps and enable taxpayers to appealdirectly to the Office of the Commissioner General. Theteam brought in experts to share their experiences from

Lesson 2: Low-hangingfruits feed you only for so long. previous interventions. For the proposal to establish a tax-appeal tribunal, the team used as regional models Tanzania

As we know, quick wins are good for gathering momentum. and Uganda, both of which have had tax tribunals for someBut some deeper or more difficult issues take more time and time.

4 The numbers in the taxpayer registry grew fourfold in the period2009-2012-mainly owing to taxpayers' confidence resulting from The private sector already felt strongly about the tax-awareness of their rights and obligations-from approximately 20,000 appeal process in Rwanda, and the World Bank Group'staxpayers to over 100,000, according to Commissioner Bumbakare. introduction of a specific tribunal for tax matters catalyzed5 Given that the taxpaying community is more educated and sensitized the reform momentum. Also helpful were trainings in theto tax obligations, the tendency to evade taxes has decreased, andmore businesses now indulge in complex schemes where they plan theirbooks to the letter of the law but engage experts to avoid payment of effect seamless implementation and ensure quick adoptionthe required tax.

SMARTLESSONS - APRIL 2014 3

"IT management of VAT refund will be long to complete. Also, some tax filing formsbeneficial. The introduction of electronic have not yet been translated into the localtax registers would allow at least 60 percent language. Moreover, tax accountant fees aretraceability of business transactions in the too high for SMEs.country and also create a level playing field,since many taxpayers currently dodge VAT Given the rapid opening of the economy topayment to the detriment of those who pay." investments, it is crucial that international

-Benjamin Gasamagera, Head, taxation techniques to substantiate domesticChamber of Manufacturers Private Sector tax reform be adopted. Tax experts are

Federation undergoing training in the detection oftransfer-pricing practices. Training of taxofficers through a joint initiative of the Bank

by staff. Rwanda's experience confirms Group and OECD began in May 2013.widespread knowledge that programs relynot only on the client's appetite for reformbut also on its ability to absorb and to benefitfrom technical assistance.

The Rwandan government quickly cameonboard with reforms, once it was clear theywould improve and simplify doing business.

Challenges Ahead

Three years into project implementation,with over a dozen major pieces of legislationenacted or amended, Rwanda has madesignificant progress in reducing unnecessary The Bank Group continues to work withregulations and establishing a legal RRA to improve tax compliance throughframework conducive for doing business. implementation of a mobile telephoneReform momentum remains very high across solution, dubbed M-declaration, launchedall government agencies, and the government on October 5, 2013. (Photo by Aliceis committed to addressing the remaining Umuhoza, IFCs Kigali office)barriers to business entry, business operation,and business expansion. This commitment isevidenced in the strides attained by Rwandain the Doing Business 2013 report. RRA needs to continually reevaluate its

internal processes and innovate ways toIn spite of the overall success of reform, gain efficiency for itself and for taxpayers.challenges remain. According to the Private This will require cooperation with businessSector Federation, the requirements for associations, government agencies, andsecuring VAT refunds still have room for Rwanda's major external trading partners.improvement, and tax audits still take too

4 SMARTtooShigh- AoRISM201

Givenrora the rapid opening ofeheecoometinvestments,i iteiscrucaletat-inernaionataxationisor technique tod subsantatedomsti

transfer-pricingons praties Traiingnfgtaofficerstrpettins thrug acjinniititiesfitenanGroupsse and OECD began ine Mayo013

The~o Bank Group(s cotiue to wokoit

implementation off aec mobil telephonesolution, dube M-ecartin launchedaiztins

Umuoza IFC'siv Kigalior office)

gain~Wol effcinc for itsel andvfrrtaxayersThis~~he willsnt reqir cooeraio wihouinsassociations govrnen agencies,lit andthRwanda'setees majo external train patnrs

improvement,nt andas tax audit stilraketo

smartLessons is cat wardprogram t sharetlessons@ileared

4~i development-oriented201