Tax Regulations in Ethiopia
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Tax Regulations
1. Income Tax Proclamation No. 286/2002 or 286/1994 (according to the Ethiopian calendar - EC) and its Amendment Proclamation No. 608/2008 or 608/2000 E.C.
2. Value Added Tax Proclamation No. 285/2002 or 285/1994 EC and its Amendment Proclamation No 609/2008 or 609/2000 E.C
3. Excise Tax Proclamation No 307/2002 or 307/1994 EC and its Amendment Proclamation No. 610/2008 or 610/2000 E.C
4. Turn Over Tax proclamation No. 308/2002 or 308/1994 EC and its Amendment Proclamation No. 611/2008.
5. Council of Ministers Income Tax Regulations No. 78/2002 or 78/1994 EC
6. Council of Ministers VAT Regulations No. 79/2002 or 79/1994 EC
The various taxes are dealt with separately in other categories on this website (Value Added Tax (VAT), Income Tax, Turnover Tax (TOT), Withholding Tax, Excise Tax, Capital Gains Tax, Rental Tax, Royalty Tax, Sur Tax on Imported Goods, and Stamp Duty)
Types of Taxes in Ethiopia and their rate in percentage:
Indirect Taxes
1. VAT (Value Added Tax): 15%
2. Excise Tax: varies widely for different goods
3. TOT (Turnover Tax): 2% on goods sold locally; for services 2% (two percent) on contractor, grain mills, tractors and combine-harvesters and 10% (ten percent) on others
Direct Taxes
1. Personal Income Tax: progressive and ranges from 10% to 35%.
2. Rental tax: progressive for persons and ranges from 10% to 35% and 30% flat rate on bodies.
3. Business Profit Tax: progressive for unincorporated businesses and ranges from 10% to 35% and 30% flat rate on incorporated businesses (eg. PLC, Share Company).
4. Withholding Tax: On imported goods at 3% of the sum of cost, insurance and freight (CIF). On payments made to taxpayers at 2% on cost of supply goods involving more than Birr 10,000 in any one transaction or contract and services involving more than Birr 500 in one transaction or service.
5. Other Taxes (Taxes from Royalties, Income from Rendering Technical service, Income from Games of chance, Dividends, Income from Rental of property, Interest Income on deposits gain on trainer of certain In-properly)
Power of taxation in Ethiopia
Power of taxation in Ethiopia is given to the federal government, state government or concurrently for both central (federal) and state government.
Article 96 of the FDRE Constitution provides Federal Power of Taxation:
The Federal Government shall levy and collect custom duties, taxes and other charges on imports and exports.
It shall levy and collect income tax on employees of the Federal Government and international organizations.
It shall levy and collect income, profit, sales and excise taxes on enterprises owned by the Federal Government.
It shall tax the income and winnings of national lotteries and other games of chance.
It shall levy and collect taxes on the income of air, rail and sea transport services.
It shall levy and collect taxes on income of houses and properties owned by the Federal Government; it shall fix rents.
It shall determine and collect fees and charges relating to licenses issued and services rendered by organs of the Federal Government.
It shall levy and collect taxes on monopolies.
It shall levy and collect Federal stamp duties.
Article 97 of the FDRE Constitution states State Power of Taxation:
States shall levy and collect income taxes on employees of the State and of private enterprises.
States shall determine and collect fees for land usufractuary rights.
States shall levy and collect taxes on the incomes of private farmers and farmers incorporated in cooperative associations.
States shall levy and collect profit and sales taxes on individual traders carrying out a business within their territory.
States shall levy and collect taxes on income from transport services rendered on waters within their territory.
They shall levy and collect taxes on income derived from private houses and other properties within the State. They shall collect rent on houses and other properties they own.
States shall levy and collect profit, sales, excise and personal income taxes on income of enterprises owned by the States.
Consistent with the provisions sub-Article 3 of Article 98, States shall levy and collect taxes on income derived from mining operations, and royalties and land rentals on such operations.
They shall determine and collect fees and charges relating to licenses issued and services rendered by State organs.
They shall fix and collect royalty for use of forest resources.
Article 98 of the FDRE Constitution provides cases of concurrent power of taxation:
The Federal Government and the States shall jointly levy and collect profit, sales, excise and personal income taxes on enterprises they jointly establish.
They shall jointly levy and collect taxes on the profits of companies and on dividends due to shareholders,
They shall jointly levy and collect taxes on incomes derived from large-scale mining and all petroleum and gas operations, and royalties on such operations.
Article 99 of the FDRE Constitution has provided the case of undesignated power of taxation:
The House of the Federation and the House of Peoples' Representatives shall, in a joint session, determine by a two thirds majority vote on the exercise of powers of taxation which have not been 'specifically provided for in the Constitution.
Accordingly levying and collection (taking the income) of VAT has been given to the Federal Government.
Income Tax (Regulations, Assessment and Payment)
1. Income Tax Proclamation No. 286/2002 or 286/1994 EC and its amendment Income Tax (Amendment) Proclamation No. 608/2008 or 608/2001 EC Points of interest of the Income Tax Proclamation, Regulation
1) The Proclamation shall apply to residents of Ethiopia with respect to their worldwide income.
2) The Proclamation shall apply to non-residents of Ethiopia with respect to their Ethiopian source income.
Obligation to pay Income Tax
Every person having income as defined in the proclamation shall pay income tax in accordance with this Proclamation
Residence
1. An individual shall be resident in Ethiopia, if he: An individual, who stays in Ethiopia for more than 183 days in a period of twelve (12) calendar months, either continuously or intermittently, shall be resident for the entire tax period.
-has a domicile within Ethiopia;
-has an habitual abode in Ethiopia; and/ or
-is a citizen of Ethiopia and a consular, diplomatic or similar official of Ethiopia posted abroad
2. A body shall be resident in Ethiopia, if it:"Resident person" includes a permanent establishment of a non-resident person in Ethiopia.
-has its principal office in Ethiopia;
-has its place of effective management in Ethiopia; and/or
-is registered in the trade register of the Ministry of Trade and Industry or Trade bureau of the Regional Governments as appropriate
Sources of Income
Income taxable under this proclamation shall include, but not limited to:
1. Income from employment;
2. Income from business activities;
3. Income derived by an entertainer, musician, or sports person from his personal activities;
4. Income from entrepreneurial activities carried on by a non-resident through a permanent establishment in Ethiopia;
5. Income from movable property attributable to a permanent establishment in Ethiopia;
6. income from immovable property and appurtenances thereto, income from livestock and inventory in agriculture and forestry, and income from usufruct and other rights deriving from immovable property is such property is situated in Ethiopia;
7. Income from the alienation of property referred to in (e);
8. Dividends distributed by a resident company;
9. Profit shares paid by a resident registered partnership;
10. Interest paid by the national, a regional or local Government or a resident of Ethiopia, or paid by a non-resident through a permanent establishment that he maintains in Ethiopia;
11. License fees (including lease payments, and royalties paid by a resident or paid by a non resident through a permanent establishment that he maintains in Ethiopia.
Foreign Tax Credit
1. If during the tax period a resident derives foreign source income, the Income Tax payable by that resident in respect of that income shall be reduced by the amount of foreign tax payable on such income.
The amount of foreign tax payable shall be substantiated by appropriate evidence such as a tax assessment, a withholding certificate or any other similar document accepted by the Tax Authority.
2. However, the reduction of the Income Tax provided by Sub-Article (1) shall not exceed the tax payable in Ethiopia that would otherwise be payable on the foreign source income.
3. In the case of a taxpayer subject to Income Tax on Schedule C income, any reduction of tax prescribed by Sub-article (1) shall be limited to the tax that would otherwise be payable in Ethiopia computed as if Article 28 (loss carry forward) of this Proclamation applied separately to each foreign country in respect of profit and losses derived from sources therein.
4. The reduction of tax prescribed by this Article shall be calculated separately in respect of each foreign country from which income or profit is derived.
Schedules of Income
This Proclamation provides for the taxation of income in accordance with four schedules, as follows:
1. Schedule 'A', income from employment;
2. Schedule 'B', income from rental of buildings;
3. Schedule 'C', income from business as defined in Article 2(6), but not including activities covered by the Rural Land Use Fee and Agricultural Activities Income Tax Proclamations issued by regional states;
4. Schedule 'D'.other income including income from:
Royalties
Income paid for services rendered outside of Ethiopia;
Income from games of chance;
Dividends;
Income from casual rental of property;
Interest income;
Specified non-business capital gains.
Foreign Exchange Transactions
All net gains and losses arising from any transactions in foreign exchanges shall be brought to account for tax purposes as additions to taxable income or deductible losses in the year in which they are realized.
Categories of Taxpayers
Category "A", category "B" and category "C" taxpayers are classified as follows:
1. Category "A" which shall include the following persons and bodies:
Any company incorporated under the laws of Ethiopia or in a foreign country, for example Private Limited Companies Share Companies and;
Any other business having an annual turnover of Birr 500,000 (Five hundred thousand Birr) or more;
2. Category "B", unless already classified in category "A", any business having an annual turnover of over birr 100,000 (One hundred thousand Birr);
3. Category "c", unless already classified in Categories "A" and "B", whose annual turnover is estimated by the Tax Authority as being up to Birr 100,000 (One hundred thousand Birr)
Maintenance of Accounts
Category "A" and "B" taxpayers shall maintain the following records and accounts:
1. Category "A" taxpayers shall at the end of the (tax) year submit to the Tax Authority a balance sheet and profit and loss statement and the detail of the following: Category "B" taxpayers shall at the end of the year submit to the Tax Authority profit and loss statement.
Gross profit and the manner in which it is computed;
General and administrative expense
Depreciation; and Provisions and reserves,
2. All entries in the records and account referred to in sub-Article 1 and 2 hereof shall be supported by appropriate vouchers.
Vouchers (i.e, Invoices, Receipts)
1. Taxpayers who have the obligation to maintain books of account shall have to register with the Tax Authority the type and quantity of vouchers they use before having such vouchers printed.
2. Any printing press before printing vouchers of taxpayers shall ensure that the type and quantity of such vouchers is registered with the Tax Authority.
Tax Year
1. Unless otherwise provided, the period for tax assessment ("tax year") shall be the fiscal year, that is, the one-year period from 1st Hamle to 30th Sene.
2. The tax year of a person is:
In the case of an individual or an association of individuals, the fiscal year;
In the case of a body, the accounting year of the body
Declaration of Income
1. Category "C" taxpayer shall within the period prescribed under Article 68(2) of the Proclamation declare to the Tax Authority: The Tax Authority may, on the basis of declaration submitted by category "A", "B" and "C" tax-payers, and on the basis of other information and surrounding circumstances, determine whether the taxpayer shall continue in the same category or his category be changed for the following tax year.
His annual turnover;
The amount derived from a source other than his regular operations;
The type of business carried on is changed;
2. If a non resident person operates his business activity through an agent or agents the non-resident person and the agent or agents shall be jointly responsible for submitting the declaration of income and payment of the tax thereon.
Time of Declaration of Income and Payment of Taxes
1. Category A taxpayers within 4 months from the end of the taxpayer's tax year
For example (as is the case usually), if a taxpayer follows the fiscal year, the one-year period from 1st of Hamle to 30th of Sene (8th of July to 7th of July), the income has to be declared and paid till 30th of Tikimit (that is 9th of November and 10th of November during a Leap year according to the Ethiopian calendar)
2. Category B taxpayers within 2 months from the taxpayers tax year Category C taxpayers shall pay the tax determined in accordance with standard assessment on the 8th of July (1st of Hamle) to the 6th of August (30th of Hamle) every year
For example (as is the case usually), if a taxpayer follows the fiscal year, the one-year period from 1st of Hamle to 30th of Sene (8th of July to 7th of July), the income has to be declared and paid till 5th of Pagume (or 6th of Pagume during a Leap year according to the Ethiopian calendar (that is 10th of September or 11th of September during a Leap year according to the Ethiopian calendar)
What is included in the amendment?
Includes additional 3 sub-articles to article (2) defining 'electronic filing and payment system', 'sales register machine' and 'supplier' 3 new sub-articles to article (91): Penalties for failure to meet requirements of the use of sales Register Machines, Penalties for failure to observe supplier's obligations and Penalties for failure to observe sales Register Machine Service center's obligations 3 new sub-articles to article (97): Violations of the requirements of the use of Sales Register Machines, offenses by Suppliers and offenses by Sales Register Machine Service Centers and their Personnel and more replacements of words and phrases.
Withholding Tax
Withholding tax is the current payments of income tax at time of goods imported and payments made on account of goods and certain services.
Rates of withholding tax
On imported goods at 3% of the sum of cost, insurance and freight (CIF). On payments made to taxpayers at 2% on cost of supply goods involving more than Birr 10,000 in any one transaction or contract and services involving more than Birr 500 in one transaction or service.
In addition, a withholding agent who makes a payment to a person who has not supplied a TIN (Taxpayer Identification Number) is required to withholding 30% of the amount of the payment.
A taxpayer who has not supplied the TIN to the withholding agent, in addition to the above 30% is liable to pay a fine of Birr 5000.00 or the amount of the payment whichever is less.
When the tax is due?
On imported goods at customs clearing time;
During payments made for goods & services;
What is the withholding agent?
Withholding agent is any person with a tax collection obligation as provided in the income tax proclamation N0 286/2002.
Who are withholding agents?
Organization or any company Government Owned Enterprises, Share Co, private Limited Co, partnership, etc incorporated under the law of Ethiopian or abroad, private non-profit organization and Non Governmental Organization (NGO) having legal personality.
Obligations and records of withholding agents
Issue serially numbered official receipt to persons and organizations from whom tax is withheld;
Fill in a form provided, taxpayer identification number (TIN), total payments and tax withhold.
Transferring the tax withhold to the tax authority within ten days from the end of month of transaction.
Withholding agent shall maintain and make available for inspection, records in relation to each fiscal year for payments made and tax withheld.
The withholding agent shall keep the records for five (5) years after the end of the fiscal year to which the records relate.
Which types of services are subject to withholding tax?
Types of services that are subject to withholding tax:
Consultancy
Designs, written materials, lectures and dissemination of information;
Lawyers, accountants, auditors and other services of similar nature
Sales persons, arts and sports professionals and brokers including insurance brokers and other commission agents
Advertisements and entertainment programs for television and radio broadcasts
Construction
Advertisement services
Patents for scientific and intellectual works
Rent for lease of machineries building and other goods including computers
Maintenance services
Tailoring
Printing and
Insurance
What if the withholding agent fails to withhold?
If a withholding agent fails to withhold or under withhold he shall be made to pay the full amount of the tax to the Tax Authority, but the withholding agent is entitled to recover this amount from the payee.
The tax withholding liability imposed by the income tax proclamation shall be treated as a tax liability for purposes of any article providing taxpayers with the right to contest the amount of tax due or to recover tax paid.
An agent who fails to withhold tax shall be liable for a penalty of Birr 1000 for each instance of failure to withhold the proper amount. The above-mentioned penalty of Birr 1000 is imposed on the following individuals.
A manager who knew the failure
A chief accountant or senior officer who is responsible for supervision or control of withholdings
How the Tax Authority accounts for the collection of tax on imports and the withholding of tax on payments?
If the amount of income tax collection on the import of goods and tax withheld on payments to specified person results in underpayment, business income tax actually due for the year, as determined at the time of declaration of income tax, the taxpayer is required to pay the difference with the declaration. If the amount represents overpayment of the tax actually due for the year the Tax Authority shall refund within 90 days.
Ethiopian Capital Gains Tax
Schedule D of the Income Tax Proclamation No. 286/2002.
Rates, exemptions and considerations
Gains obtained from the transfer of the following properties, either by sale or donation will be subjected to Income Tax payable at the following rates:
1. Building held for business, factory, and office 15% (Fifteen percent)
2. Shares of companies 30% (thirty percent). The following exchanges of shares of a resident company, party to reorganization in exchange for share in another resident company, are not considered as transfer of share.
a merger of two or more resident companies;
the acquisition or takeover of fifty percent (50%) or more of the voting shares and fifty percent (50%) or more of all other shares by value of a resident company, solely in exchange for shares of a party to the reorganization;
the acquisition of fifty percent (50%) or more of the assets of a resident company by another resident company solely in exchange for voting participation with no preferential rights as to dividends of a party to the reorganization;
a division of a resident company into or more resident companies; or
a spin-off (a type of corporate transaction forming a new company or entity)
The value of shares given in exchange in the reorganization must be equal to the value of the original shares. And The Tax Authority will investigate the transfer for possible tax avoidance objective.
For individuals, gain obtained from the transfer of residential buildings is exempted from tax. But such building must be fully used for dwelling for two years prior to the date of transfer.
Council of Ministers Regulation No. 78/2002 provide the basis for computation of gains obtained from the transfer of capital assets.
Calculation of Capital Gains
Calculation of capital gains is made as follows:
When calculating the gain realized from the transfer of capital assets, the basis of calculation of the tax is the historical cost of the building or the par-value of the share, as appropriate.
The gain obtained from the alienation of capital assets is the gain realized over the historical cost of the building or the par-value of the share as appropriate, and inflation adjustment at a rate determined by the appropriate authority.
In respect of buildings, taxes paid for the land and the building are allowed as deduction.
When calculating the capital gain realized from the transfer of buildings, the cost registered with the appropriate government body at the time of issuance of permit for the construction of the building is taken to be the cost of constructing the building.
Tax payable on gain realized from the transfer of buildings is applicable only to buildings in municipal areas.
Ethiopian Tax on Royalty Payments
Royalty Tax Payments in Ethiopia - Quick FactsEthiopian Revenue & Customs Authority (ERCA)
Income Tax Proclamation No. 286/2002 is the basis of tax on royalties.
In Ethiopian income tax law royalty is defined to mean, "a payment of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work.
This is including cinematography films, and films or tapes for radio or television broadcasting, any patent, trade work, design or model, plan, secret formula or process, or for the use or for the right to use of any industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience."
Income Tax Proclamation No. 286/2002 is the basis of tax on royalties.
Tax on royalties is a flat rate of five percent (5%). The person who effects payment is required to withhold the foregoing tax and account to the Tax Authority within fifteen (15) days of the end of each calendar month, and each payment must be accompanied by a statement with respect to each taxpayer who received payments during the month.
The obligation of the payer to withhold tax has priority over all other obligations to withhold amounts from payments to a payee (the taxpayer).
Where the payer resides abroad and the recipient is a resident, the recipient will pay tax on the royalty income within the time limit set out in the Proclamation.
Tax on royalty payments is a final tax instead of a net income tax.
Ethiopian Sur-tax on Goods Imported
Everything You Need To Know About Tax in EthiopiaEthiopian Revenue & Customs Authority (ERCA)
An importer has to pay 10% sur-tax on goods imported to Ethiopia. The basis of computation, scope of application and applicable exemptions are as follows:.
1. Surtax on Imported Goods Regulation No 133/2007
These Regulations are issued by the Council of Ministers pursuant to Article 5 of the Definition of Powers and Duties of the Executive Organs of the Federal Democratic Republic of Ethiopia Proclamation No. 471/2005 and Article 4 of the International Convention on the Harmonized Commodity Description and Coding system Ratification Proclamation No. 67/1993.
Article 2. Scope of Application
The Sur-tax levied under these Regulations shall apply to all goods imported into Ethiopia except those exempted under Article 5 of these Regulations:
Article 3. Rate of the Sur-tax:
Without prejudice to Article 5 of these Regulations, Surtax of 10% shall be levied and collected on goods imported.
Article 4. Basis of Computation
The basis of computation for the sur-tax levied under these Regulations shall be the Aggregate of:
1. Cost, insurance, Freight (CIF) value;
2. Customs duty, value Added Tax and Excise Tax Payable on the good.
Article 5. Exemption from the Sur-Tax
1. The following shall be exempted from the Sur-tax: a) goods listed below;
Items exempted from Sur-tax
1. Fertilizers;
2. Petroleum and lubricants;
3. Motor Vehicles for freight and passengers, and special purpose motor vehicles;
4. Aircraft, spacecraft, and parts thereof;
5. Capital (Investment goods). (One has to check with the authority what this exactly constitutes)
b) goods imported by persons or organizations exempted from customs duty by law, directives or by agreement entered into by the Government.
2. The Minister of Finance and Economic Development may at his own discretion increase or decrease the items exempted from the Sur-tax under these Regulations and issue directives for the proper implementation of these Regulations.
Article 6. Effective Date
These Regulations shall enter into force as of 11th day of April 2007.
Ethiopian Stamp Duty
Ethiopian Revenue & Customs Authority (ERCA)
Enforcement of stamp duty is required to have strong system of law enforcement to prevent the increasing incidence, from time to time, of contraband and other commercial fraud crimes which are resulting negative impact to legitimate trade, public security, government revenue and other social and economic development.
1. Stamp Duty Proclamation No.110/1998 and its amendment proclamation No. 612/2008
The legal instrument which regulates Stamp Duty in Ethiopia is Stamp Duty Proclamation proc. No. 110/1998 and its amendment proclamation No. 612/2008.
Article 3 of the stamp duty proclamation lists instruments chargeable with stamp duty:
1. Memorandum and articles of association of any business organization cooperative or any other form of association.
2. award
3. bonds
4. warehouse bond
5. contractor agreements and memoranda thereof
6. security deeds
7. collective agreement
8. contract of employment 9. Lease, including sub-lease and transfer of similar rights.
10. natural acts
11. power of attorney
12. documents
Rates and Mode of Valuation of Stamp Duty
As per Art 4 (1) (2) of Proclamation Number 110/1998: The rates might be flat or they may depend on the value of the property.
Liability, Time and Manner of Payment
Article 6 & 7 of Proclamation Number 110/1998.
Exemptions from Stamp Duty
Article 11-the following are exempt from the liability of payment of same:
Public bodies on which the federal government of Ethiopia Financial Administration Proclamation No. 57/1996 applies.
Goods imported for sale by traders having import license, when first registered in the name of the trader.
Documents that are exempted in accordance with international agreements and conventional approved by Ethiopian government.
Subject to reciprocity embassies, consulates and missions of foreign states may be exempted.
Share certificates are exempt from stamp duty payable on the register of title of property.
Article 12 provides:
Any person:
a) Executing or signing, otherwise than as a witness, a document chargeable with stamp duty without the same being stamped.
b) Who, with intent to defraud the appropriate payment of duty, conceals facts bearing on the true nature of any instrument.
Shall be liable on conviction to a five not less then birr 25,000 and not exceeding Birr 35,000 and to rigorous imprisonment for a term not less than 10 yrs and not more than 15 yrs.
Any person who is:
a) appointed to sell stamps or stamp papers, disobeys regulations issued under this proclamation; or
b) not so appointed, sells or offers for sale stamps or stamped papers.
Shall be liable on conviction to a fine not less than 5,ooo and not exceeding and to rigorous imprisonment for a term not less than 5 years and not more than 10 yrs.
