Ethiopian Tax Laws

Tax Laws in Ethiopia

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Brief note on the various tax laws of Ethiopia. In Ethiopia there are two types of tax. These are direct and indirect tax.


I. Direct Tax


According to proclamation No 286/94 any person whose permanent residence is in Ethiopian, has to pay tax from the income that he gets within Ethiopia or abroad. If the person is not resident of Ethiopia gets his income which has its source in Ethiopia also should pay tax.


This is direct tax, which a person pays from any income he gets. Article five of the proclamation, defines resident as follows:


A. The one who has permanent residence address in Ethiopia; or

B. If the person has a place in Ethiopia that he frequently resides in; or

C. If the person is an Ethiopian citizen but lives abroad for the purpose of councilor office, diplomatic or for any other similar purposes; and

D. If the person was present for 183 days in Ethiopia within 12 months permanently or other way, the law regards him as an Ethiopian resident and imposes him an obligation of paying tax from any income he gets.

According to Art 8 of Proclamation No 286/94, there are certain types of income which are treated under direct tax.


These are:


A. Income from Employment

B. Income from rent of house

C. Income from business (trade) activities

D. And others


Under other we can find many sources of income such as:


- Income from Rent of Patent and Copyright

- Income from Winning Lottery

- Income from Share in Company, etc.

So, any employed person should pay tax from his salary according to table A of the proclamation.

Employers should deduct the appropriate tax from the salary of their employees and should submit to the tax authority.

In the same way an income from rent of house is treated under direct tax.

If the income is from legal persons, the owner should pay 30% of the income if it is from an individual, it should be paid according to table B of the proclamation No 286/94.

Income tax shall impose on taxable business income realized from entrepreneurial activity.


Taxable business income of bodies is taxable at the rate of 30%. If the tax is from an individual it will be taxed according to table "c" of proclamation. 286/02 Accordingly:


1. An income from royalties or an income which come from rent of copyright shall be liable to tax at a flat rate of five percent.

2. Income from hindering of technical services will be taxed at a flat rate of ten percent.

3. Income from games of chance (e.g. Lottery) shall be subjected to tax at the rate of 15% except from winning less than 100 birr.

4. Any person who derives an income from dividends from a share company shall be subject to tax at the rate of 10%.

5. Income from Rental of property (any land, building or movable asset) not related to a business activity shall be taxed on the annual gross income at the rate of 15%.

6. Every person deriving income from interest on deposits shall pay tax at the rate of 5%.

These are some of sources of income that should be treated under direct tax. The implementation of the tax proclamation and shall be the duty of the tax authority.


II. Indirect Tax


Indirect tax is a kind of tax which the tax payer collects it from the customers indirectly and not from his own income.

This means, the tax money comes from the customers. The tax payer adds selling price on the service or product he renders so that the customers may pay the tax indirectly.

There are three types of indirect tax:


Value Added Tax (VAT)

Ethiopian Revenue & Customs Authority (ERCA)


Value Added Tax (Registration, Rates, and Exemptions) in Ethiopia


Value Added Tax is a recent addition to the tax regime in Ethiopia.

On this page, you can find the rate of VAT in Ethiopia, voluntary and Obligatory registration of VAT in Ethiopia, zero rate VAT in Ethiopia, and VAT on imported goods.

1. Value Added Tax Proclamation No. 285/2002 or 285/1994 EC and the amendment Proclamation No. 609/2008.

2. Council of Ministers VAT Regulations No. 79/2002 or 79/1994 EC.

Points of Interest of the Value Added Tax Proclamation, Regulation:


Imposition and Rate of Tax


For every taxable transaction by a registered person, every import goods other than an exempt import, and an import of services, 15% of the value or zero rate of the value (as specified below) shall be applied as value added Tax.

Time and value of the Imports of Goods

Time of the Imports of Goods

An import of goods takes place when the goods are entered into the customs declaration.


Value of a Taxable Import


1. The value of a taxable import is the customs value of the goods, determined in accordance with the customs legislation of Ethiopia, plus the sum of duties and taxes payable upon the import of the goods into Ethiopia, excluding VAT and income tax withholding.

2. In the case of services considered part of an import under Article 5, Sub-Article (2) of the VAT Proclamation, their value, without VAT, is added to the value as defined list no. 1 above.


Zero Rate Tax


The following taxable transactions shall be charged with VAT at a rate of zero percent.

1. The export of goods or services to the extent provided in regulation.

2. The rendering of transportation or other services directly connected with international transport of goods or passengers as well as the supply of lubricants and other consumable technical supplies taken on board for consumption during international flights;

3. The supply of gold to the National Bank of Ethiopia.

4. A supply by a registered persons to another registered person is a single transaction of substantially all of the assets of a taxable activity or an independent functioning part of taxable activity as a going concern, provided a notice in writing signed by the transferor and transferee is furnished to the authority within 21 days after the supply taxes place and such notice includes the details of the supply;


Exempt transactions


For transactions exempted from value added tax, please see Article 8 of the VAT Proclamation and chapter 2 articles 19-23 of the VAT Regulation.


VAT Registration


Obligatory Registration

A person who carries on taxable activity and is not registered is required to file an application for VAT registration with the Authority if

1. at the end of any period of 12 calendar months the person made, during that period, taxable transactions the total value of which exceeded 500,000 Birr; or

2. at the beginning of any period of 12 calendar months there are reasonable grounds to expect that the total value of taxable transactions to be made by the person during that period will exceed 500,000 Birr.


Voluntary Registration


A person, who carries on taxable activity and is not required to be registered for VAT, may voluntarily apply to the Authority for such registration, if he regularly is supplying or rendering at least 75% of his goods and services to registered persons.


According to Proclamation No 285/94 the following persons are bound to pay VAT are the registered payers or the one who should be registered for VAT:


- Registered, according to Art 17, means one who voluntarily registered for VAT;

- The one who should be registered is a person who carries on taxable activity and is not registered, if the person:- at the end of any period of 12 calendar months made during that period, taxable transaction to the total value of which exceeded 500,000 birr; or

- At the beginning of any period of 12 calendar months there are reasonable grounds to expect that the total value of taxable transactions to be made by the person during that period will exceed 500,000 birr.

The ministry of finance and Economic Development may be directive increase or decrease the threshold. The rate of VAT is always 15% of the income.

When we come to turn over tax the following persons are liable for payment of TOT according to Art 3 of proclamation. No 308/95 for goods and services they sell in Ethiopia for value added tax shall pay turn over tax unless exempted under Article 7.


The exemptions are as follows:


- The sale or transfer of dwellers used for a minimum of two years, or the lease of a dwelling;

- The rendering of financial service;

- The supply of national or foreign currency and of security;

- The rendering by religious organizations of religious or other related services;

- The rendering by religious organizations of religious or at her related series;

- The supply of prescription drugs specified in directives issued by the relevant government agency and the renderings of medical services;

- The rendering of educational services provided by educational institutions, as well as child care services for children at pre-school institution;

- The supply of goods and rendering of services in the form of humanitarian aid

- The supply of electricity, kerosene and water;

- The provision of transport;

- Permits and license fees- the supply of books; and

- The supply of goods or services by a worker shop employing disabled individuals if more than 60% of the employees are disabled.

The minister of finance and economic development may, by directive, exempt other goods and services so an income from every goods treated under turn over tax, if they are sold within Ethiopia, shall be taxed by 2% and services rendered in Ethiopian such as construction, miles and tracker services shall be taxed 2% for any other services the tax will be 10%.

Turnover Tax (TOT)

Turnover Tax (Rate, Computation, Obligation and Exemption) in Ethiopia

Ethiopian Revenue & Customs Authority (ERCA)


1. Income Tax Proclamation No. 286/2002 or 286/1994 (according to the Ethiopian calendar - EC) and its amendment Proclamation No. 608/2008.

Points of Interest of the Turnover Tax Proclamation, Regulation


The Rate of Turnover Tax and Exemption


Note: If VAT is charged over goods or services, then TOT will not be charged. Filing of Tax Return and Payment of TOT can be done either at the end of each Ethiopian calendar month or once in at the end of every quarterly year of the tax year (that is every three months starting from 8th of July (Hamle 1).


Rate of Turnover Tax


The Turnover Tax shall be:

(two percent) on Goods sold locally

For services rendered locally:

2% (two percent) on contractor, grain mills, tractors and combine-harvesters;

10% (ten percent) on others.


Base of Computation of the Turnover Tax


Base of computation of the Turnover tax shall be the gross receipt in respect of goods supplied or Services rendered

Obligation to Collect and Transfer the Turnover Tax

A person who sells goods and services has the obligation to collect the Turnover Tax from the buyer and transfer it to the Tax Authority. Hence, the seller is principally accountable for the payment of the tax.


Exemption


1. The following shall be exempted from Turnover Tax: The Minister of Finance and Economic Development may, by directive, exempt other goods and services.

The sale or transfer of a dwelling use for a minimum of two years, or the lease of a dwelling:

The rendering of financial services;

The supply of national or foreign currency (except for that used for numismatic purposes) and of securities;

The rendering by religious organizations of religious or other related services:

The supply of prescription drugs specified in directives issued by the relevant government agency, and the rendering of medical services;

The rendering of educational services provided by educational institutions, as well as child care services for children at pre-school institutions:

The supply of goods and rendering of services in the form of humanitarian aid:

The supply of electricity, kerosene, and water;

The provision of transport;

Permits and license fees;

The supply of goods or services by a workshop employing disabled individuals if more than 60%of the employees are disabled; and

The supply of books.

2. The Minister of Revenue may, by directive, determine the scope and manner of exemptions provided for in this Article.

Excise Tax


1. Excise Tax Proclamation No 307/2002 or 307/1994 EC and the amendment 610/2008.


Rate of Excise Tax


The excise tax shall be paid on goods mentioned under the schedule of the proclamation (and also found below)

1. When imported

2. When produced locally at the rate prescribed in the schedule.


Base of computation of excise Tax:


1. In respect of goods produced locally, the cost of production;

2. In respect of goods imported, cost, insurance and freight (CIF value)


Payment of Excise Tax


The excise tax shall be paid within the time prescribed according proc307 Sub-Article/2/

1. In respect of goods produced locally, by the producer;

2. In respect of goods imported, by the importer


Time of Payment


According to the excise tax proclamation, excise tax on goods shall be paid under the schedule

1. When imported at the time of clearing the goods from customs area;

2. When produce locally, not later than 30 days from the date of production.

The amendment includes some replacements of words and phrases and new added sub-article (4) under Article 27 of the Proclamation

S.N.


Type of Product


Excise Tax Rate (%)


Any type of sugar/In solid form excluding Molasses

33

Drinks

All types of soft drinks/except Fruit/ Juices

40

Powder soft drinks

40

Water bottled or canned in a factor

30

Alcoholic drinks

All types of beer & stout

50

All types of wine

50

Whisky

50

Others alcoholic drinks

100

All types of pure Alcohol

75

Tobacco & Tobacco products

Tobacco leaf

20

Cigarettes, Cigar, Cigarillos, pipeTobacco snuffs and other tobacco products

75

Salt

30

Fuel-Super Benzene, Regular Benzene, Petrol, Gas-online and other motor spirits

30

Perfumes and toilet waters

100

Textile and Textile products

Textile fabrics, knitted or woven of natural silk, Rayon, nylon wool or other similar material

10

Textile of any type partly or wholly made from cotton which is gray, white, dyed or printed, in pieces of any length or width /except mosquito net and "Abudgedid"/ and including blankets, bed sheets, counterpanes, towels, table clothes and similar articles

10

Garments

10

Disk washing machines of a kind for domestic use

80

Washing machines of a kind for domestic purpose

30

Video decks

40

Television and video cameras

40

Television broadcast receivers whether or not combined with gramophone, radio, or sound receivers and reproducers

10

Motor passenger cars, station wagons, utility cars, and land rovers, tips pickups, similar vehicles/including motorized caravans/ whether assembled, tighter watt gaur appropriate initial equipment.

Up to 1,300 C.C

30

From 1,301 C.C up to 1800 C.C

60

Above 1,800 C.C

100

Carpets

30

Asbestos and Asbestos products

20

Clocks and watches

20

Dolls and toys

20


III. Obligations of Tax Payers


Any tax payer should pay his tax on time. This includes:


- If he is obligated by law to have registered account he should do the same and

- He should notify his income timely.

- If the tax payer is an employer he should withhold the appropriate amount tax from the employees and pay to the tax authority.

- Every tax payers, when asked by the tax authority, has an obligation:- to give information.

- To submit records and documents.

- If necessary to show the stock record for the authority when asked.


IV. Penalties


There are two forms of penalties that entail if the person does not comply with his obligation of tax payment:


(1) Administrative penalty; and

(2) Criminal penalties.

The administrative penalty includes the sell or seizure of tax payer's property and pays the tax. The criminal penalty includes Imprisonment and fine.

Fikadu Asfaw Law Office