COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF ACCOUNTING AND FINANCE

RESEARCH PROPOSAL ON

FACTORS AFFECTING TAXATION OF ELECTRONIC COMMERCE

EFFECTIVENESS IN ADDIS ABABA SELECTED COMPANIES

BY: MOHAMMED SEID

ID NO. GSR/2380/15

SUBMITTED TO: TEKALIGN (PhD)

JANUARY, 2023

ADDIS ABABA, ETHOPIA

Contents
List of Tables.............................................................................................................................................III
List of Figures............................................................................................................................................IV
LIST OF ABBREVATION........................................................................................................................V
Abstract......................................................................................................................................................VI
CHAPTER ONE..........................................................................................................................................1
1. INTRODUCTION............................................................................................................................1
1.1. Background of the Study...................................................................................................................1
1.2. Statement of the problem..................................................................................................................2
1.3 Objectives of the Study......................................................................................................................3
1.3.1 General objective.........................................................................................................................3
1.3.2 Specific Objectives......................................................................................................................3
1.3.3 Research Questions.....................................................................................................................4
1.4. Significance of the study...................................................................................................................4
1.5. Scope of the study.............................................................................................................................4
1.6 Limitations of the Study.....................................................................................................................4
CHAPTER TWO.........................................................................................................................................5
LITERATURE REVIEW............................................................................................................................5
2.1 Theoretical Literature Review...........................................................................................................5
2.1.1 The Concept and Nature of E-Commerce...................................................................................5
2.1.2 Challenges to E-Commerce Taxation Effectiveness...................................................................5
2.1.3 E-commerce in Ethiopia..............................................................................................................6
2.1.1 The Decomposed Theory of Planned Behavior (DTPB).............................................................6
2.2 Empirical Literature Review..............................................................................................................7
2.3 Research Gaps....................................................................................................................................7
2.4 Conceptual Frame Work of the Study................................................................................................7
CHAPTER THREE.....................................................................................................................................8
RESEARCH METHODLOGY...................................................................................................................8
3.1 Description of the Study Area............................................................................................................8
3.2 Research Design.................................................................................................................................8
3.3 Research Approach............................................................................................................................8

I
 3.4 Sample Design...................................................................................................................................8
3.4.1 Population....................................................................................................................................8
3.4.2 Sampling Frame A sampling frame.............................................................................................8
3.4.3 Sampling Techniques..................................................................................................................8
3.4.4 Sample Size.................................................................................................................................9
3.5 Sources of data...................................................................................................................................9
3.5.1 Primary data sources...................................................................................................................9
3.5.2Secondary data sources................................................................................................................9
3.6 Method of Data Collection, Analysis& interpretation.......................................................................9
3.7 Econometrics Model Specifications...................................................................................................9
3.8 Reliability and Validity Test............................................................................................................10
WORK PLAN AND BUDGET.................................................................................................................11
Work plan...............................................................................................................................................11
Budget....................................................................................................................................................11
References..................................................................................................................................................12

II
 List of Tables

Table 3. 1: Reliability Statistics.................................................................................................................10

III
 List of Figures

Figure 2. 1 Conceptual Framework of the Study.........................................................................................7

IV
 LIST OF ABBREVATION

CFA Committee on Fiscal Affairs

DHL Dalsey Hillblom Lynn
E-COMMERCE Electronic Commerce
FDRE Federal Democratic Republic of Ethiopia
MCIT Computer and Information Technology
NBE National Bank of Ethiopia
OECD Organization for Economic Cooperation and Development
UNCTAD United Nations Conference on Trade and Development
USD United States Dollar

V
 Abstract
Even in developing and least developed nations, electronic commerce is one of the sectors of the global
economy that is expanding the quickest. Ethiopia has a huge online viewership. The nation's internet
users and mobile connections are both expanding quickly. The study sets out factors affecting taxation of
e-commerce effectiveness in Addis Ababa selected e-commerce companies. So, the objective of this study
will be to identify factors affecting taxation of e-commerce effectiveness in Addis Ababa. To this end, the
researcher will be employed mixed research approach with descriptive research design where the effect
caused by the independent variable on the dependent variable is observed through regression analysis.
The simple random sampling techniques will be employed by researcher to give equal chance for
respondents and to save resources. The primary data will be collected using structured questionnaire.
Then, inferential statistics analysis will be employed by SPSS version 23.0 in order to get reliable
research findings. This research incorporated six variables such as legal policies, economic factor,
infrastructure, current practice of e-commerce taxation, legal framework and potential implications for
business in the model.

Keywords: E-commerce, Legal policies, Legal framework, Infrastructure,

VI
 CHAPTER ONE

1. INTRODUCTION
1.1. Background of the Study
Electronic-taxation is an effort to improve an efficient tax system and has been successful in some
countries such as the USA, Japan, Australia, etc. It involves the use of technology or electronic devices
to calculate taxes, pay taxes, and keep track of tax payer databases (Chaturvedi, 2009) as cited by (Liganya,
2020). B2B (Business-to-Business), B2C (Business-to-Consumer), B2G (Business-to-Government), and
occasionally G2C are included in the market category of e-commerce (Government to citizen) (Basu S. ,
2003).

Kenya was the first East African country to introduce e-commerce taxation in 2013. A supply of e-
services, broadcasting and telecommunication services made by a foreign supplier to a non-VAT-
registered customer is deemed as taking place in Kenya Kenya” (Liganya, 2020).

Ethiopia has a huge online viewership. The nation's internet users and mobile connections are both
expanding quickly. In January 2020, there were 46.75 million mobile connections, or 41% of the world's
population. By then, there were 21.14 million internet users with internet penetration of 19 per cent in
the country (Wakgari, 2022). Ethiopia's Proclamation No.1205/2020 stated that it is necessary to provide
equal treatment to users of paper and computer-based information. This creates a more secure legal
environment, which enables and facilitates the use of electronic transactions by citizens and private
entities, and public bodies (FDRE, 2020).

Ethiopia's tax laws on their current form provides for the imposition of business income tax on
digitalized products. There is a recent move by the Ethiopian government to enact an e-transaction law.
However, the proclamation has neglected the most important aspects of e-commerce i.e. taxation (Basu S.
, 2008). The internet has no location and this makes the application of source and residence principle
difficult. As taxes are the main source of government revenue, e-commerce taxation would be a critical
component of Ethiopia's tax system. Some researchers examine the prospects and potential challenges in
electronic commerce from a legal perspective (Wakgari, 2022) and (Yared, 2020) E-commerce can be
carried out in a virtual environment free from or with little regard for geography, physical location, and

1
territoriality. There are more than 16 e-commerce companies in Addis Ababa, such as Mekina,
Megebeya, Deliver Addis, Addis Merkato, Brundo, Zmall, Asbeza, Hello Market, DHL Africa eShop,
Fetan Mart, Qefira, Deamat, Merkato Online, Utopia, FloMart, Sheger, etc (allaboutETHIO, 2023). This
is the major motivating factor to study this topic in Ethiopia, specifically Addis Ababa.
1.2. Statement of the problem
Digital commerce has the potential to be one of the great economic developments of the 21st Century.
While e-commerce specialists like Google, Facebook, and Alibaba continue to prosper, ordinary
businesses are beginning to migrate their transactions online. It enables businesses to sell more quickly,
reach a large audience, and lower administrative expenses (Yared, 2020). E-commerce also challenges
the conventional Source and Residence rules of determining income tax jurisdiction and also Origin and
Destination rules of determining consumption tax jurisdiction as the rules are strongly territorial and e-
commerce is not (Pinto, 2002). E-commerce has dominated today's world and is utilized for a variety of
transactions. In order to enhance government revenue and promote economic growth, it should be
governed by the law and taxed.
Limited researchers have highlighted some of the challenges of e-commerce taxation around the world.
According to a study by (McLure & Charles, 2001), the vendor's ability to collect the tax of the country in
which the consumer resides presented a challenge because the vendor may not always be aware of the
location of their customers. The inadequacy of the Ethiopian VAT Proclamation to define what
constitutes a 'permanent establishment' for e-commerce purposes, the absence of guidelines on
acceptable records where goods are delivered and invoices issued and payments made by electronic
means are identified as major challenges (Abdulkarim, 2022). The VAT Proclamation's inadequacy in
defining PE for e-commerce purposes and the lack of standards for acceptable records are factors to
consider. Inadequate resources used by the Tax Authority to monitor online transactions are another
factor to consider (Andualem, 2018). According to (Yared, 2020), there is no clear and comprehensive
legal framework in Ethiopia that e-commerce has become the normal and is utilized for a wide range of
transactions, so taxing it would leave the government short of funds. Sources on the area indicate that e-
commerce is growing with 31% per year with a capacity of generating huge money significant for tax.
However, whether the legal and institutional framework related to tax applies in the context of e-
commerce has not been adequately studied. The recent situational analysis on e-commerce in Ethiopia
conducted by the MCIT indicated that e-commerce generates 60 million USD per year and is growing
with 0.03 rates per year (UNCTAD, 2015) as cited by (Yared, 2020). This clearly shows the promising
2
growth of E-commerce. Besides, the report of the NBE demonstrated that tax is the largest source of
government revenue in the country. Internet will therefore make it difficult for the Ethiopian taxing
authority to confirm the specifics of transactions and the income generated from trading activities; as a
result, the government may incur a tax loss. There is very little literature on e-commerce taxation
effectiveness in the country as a whole; however, there are some studies on e-commerce VAT taxation. 
Ensuring the effectiveness of taxation of e-commerce in Addis Ababa selected e-commerce companies
is important. However, applying taxation to e-commerce is a burning issue that has not yet been solved
in Ethiopia due to different factors.
The prior studies ignored identifying the effect of economic factors such as the availability of credit and
access to capital and the cost of all of these on e-commerce taxation and did not detail the effect of the
availability of infrastructure in Addis Ababa for e-commerce, such as internet access, payment
processing systems, and delivery services. There are no enough studies regard to taxation of e-commerce
effectiveness in Ethiopia as well as in Addis Ababa. The study aimed to determine factors affecting the
taxation of e-commerce effectiveness in Addis Ababa for selected companies and to fill the literature
gap.
1.3 Objectives of the Study
1.3.1 General objective
The main objective is to identify the factors affecting the effectiveness of the taxation of electronic
commerce in Addis Ababa for selected e-commerce companies.
1.3.2 Specific Objectives
The specific objectives can assess the following:

a) To determine the effectiveness of Addis Ababa's current taxation policies in relation to e-

commerce at selected e-commerce companies
b) To measure the effect of economic factors on e-commerce taxation effectiveness in Addis Ababa
at selected e-commerce companies.
c) To determine the effect of infrastructure on e-commerce taxation effectiveness in Addis Ababa at
selected e-commerce companies.
d) To examine the effectiveness of the Ethiopian legal framework and regulatory framework on the
taxation of income from electronic commerce
e) To determine the potential implications for businesses operating in Ethiopia.

3
1.3.3 Research Questions
Based on the specific objectives stated above, the empirical evidences and theories related with topic
under the study, the following research questions are developed:
i. What are the current taxation policies and practices related to e-commerce in Addis Ababa?
ii. Are there any specific challenges related to the taxation of e-commerce in Addis Ababa for
selected companies?
iii. How does the infrastructure affect the taxation of e-commerce in Addis Ababa?
iv. How effective are the Ethiopian legal framework and regulatory machinery in taxing electronic
commerce in Addis Ababa?
v. What are the potential implications for businesses operating in Addis Ababa?
1.4. Significance of the study
This study will contribute to the implications of the electronic commerce framework in Ethiopia. The
study aims to fill a gap in the literature for researchers in this field, as well as inspire further interest
among researchers.
1.5. Scope of the study
The study will focus on the factors affecting the effectiveness of the taxation of e-commerce in Addis
Ababa for selected companies. The study will be restricted to assessing factors affecting the taxation of
e-commerce effectiveness in selected companies, including Mekina, Megebeya, Deliver Addis, Addis
Merkato, Brundo, Zmall, Asbeza, Hello Market, DHL Africa eShop, Fetan Mart, Qefira, Deamat,
Merkato Online, Utopia, FloMart, Sheger, Telebirr, and other stakeholder organizations (the Federal Tax
Authority, Addis Ababa revenue authority, and INSA). The report of this study will focus on cross-
sectional data collected from respondents randomly selected from 16 e-commerce companies and 2
sectors during 2023.
1.6 Limitations of the Study
absence of local publications and textbooks on the subject being studied. There is no other option than to
rely on the foreign resources that are available because it is extremely difficult to find a study in this
area, particularly in the case of Ethiopia. There are a large number of e-commerce companies in
Ethiopia; however, the scope of this study is limited to Addis Ababa.

4
 CHAPTER TWO
LITERATURE REVIEW
2.1 Theoretical Literature Review
2.1.1 The Concept and Nature of E-Commerce
The term e-commerce has been used to refer to the sale or purchase of goods or services conducted over
computer networks. The payment and ultimate delivery of a product or service do not have to be
conducted online, according to the OECD (Organization for Economic Co-operation and Development)
(OECD, 2013). The scope of e-commerce law in Ethiopia can be seen in line with the Commercial Code
article 5 and the Commercial registration and business licensing proclamation of 980/2016. The goods
and services are ordered over networks, but the payment and the delivery of goods or services may be
conducted on or offline (Yared, 2020).

2.1.2 Challenges to E-Commerce Taxation Effectiveness

2.1.2.1 The Understanding on Permanent Establishment

The OECD Model Tax Convention says that a non-resident enterprise with an internet web site alone
would not be regarded as having a place of business in the jurisdiction of its consumers. The U.S.
Department of Treasury has rejected this view stating that the server is like the owner of a warehouse,
which is a passive activity (Wakgari, 2022).

2.1.2.2 Legal challenges

There is a global consensus that any taxation of global e-commerce must be fair, equitable and neutral in
its application, but the dilemma that subsequently arises is the establishment of a taxation framework
that actually is able to meet these criteria.

2.1.2.3 The Definition of the Place of Consumption

Consumption taxes are intended to be borne by consumers and are dependent upon retailers acting as tax
collectors. With the development of e-commerce, there will be discrepancies where foreign suppliers
may be tax-exempted, whereas local suppliers would be required to charge VAT or sales taxes.
(Wakgari, 2022).

5
2.1.2.4 Identification of Taxpayers: Withholding Tax as an Alternative
Taxation of e-commerce is one of the major challenges facing the sector. Making the virtual stores to
collect taxes on behalf of the destination State would substantially increase the cost of compliance. A
withholding tax model for taxing electronic commerce could be operationally possible with the use of
new technologies.

2.1.2.5 Institutional Challenges in Tax Administration

Committee on Fiscal Affairs (CFA) had formulated the Taxation Framework Conditions that were
welcomed by OECD Ministers at Ottawa. Tax administrations should continue to monitor new standards
from standard setting bodies, best practices. So the following problems are encountered in Ethiopian tax
administration institution and stakeholders ahead of ecommerce taxation (Yared, 2020).

2.1.3 E-commerce in Ethiopia

As e-commerce is an aspect of commercial matter, the federal government enacted electronic transaction
law. In addition, the country has introduced the National Payment System Proclamation. The definition
excludes places of taxable activity that are mobile in their nature. This true for websites, which does not
have specific premises, equipment, machinery or like (Wakgari, 2022).

Most companies, associations, individuals, organizations in Ethiopia have set up websites which
provides information about the organizations and their products. Majority of the platforms are Business
to Consumer E-commerce sites. Main reasons for low e-commerce transactions are due to the absence of
legal framework for completing electronic business or financial payment system. There is a digital
transformation draft strategy of 2025 and to realize this, the ministry of innovation and information
technology has started working on 18 months of project. Proclamation number 1205/2020 is established
primarily to create more secured legal environment, which facilitates the use of electronic transactions
by citizens (Yared, 2020).

2.1.1 The Decomposed Theory of Planned Behavior (DTPB)

This theory is vital and relevant in as far as the explanation of electronic commerce is concerned
(Hansen, Jensen, & Solgaard, 2004). it was concluded that this theory of planned DTB rose out of the
theory of planned behavior. This theory is relevant to this study given its application in the field of e-
commerce, and most specifically, in the case of online acquisition normally undertaken by a company
(that is, judicial person).

6
2.2 Empirical Literature Review
This part reviews the empirical literature in the study area; however, not much has been written in
Ethiopia with regard to taxation of e-commerce effectiveness. (Wakgari, 2022), Ethiopia's focus has to
be on how to levy and collect appropriate tax fairly and efficiently. The challenges include, verifying the
details of taxable transactions, identifying tax payers engaged in e-commerce etc. However, the study
concentrated on legal perspectives, without looking at the general picture of taxation effectiveness.

2.3 Research Gaps

The impact of electronic commerce on the social and economic environment has been extensively
discussed. Very few deals with the fiscal and accounting issues and risks of transactions on the
economies. This study covered factors affecting taxation of e-commerce effectiveness in Ethiopia's
capital, Addis Ababa.

2.4 Conceptual Frame Work of the Study

Figure 2. 3 Conceptual Framework of the Study

Independent Variables Dependent Variable

Legal Policies

Economic Factors

Regulatory Framework

Taxation of E-commerce Effectiveness

Infrastructure

Current practice

Implications for Business

Source: Own construction based on different literature 2023

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 CHAPTER THREE

RESEARCH METHODLOGY

3.1 Description of the Study Area

Population of Addis Ababa estimated to be 3,273,000. It has shown an annual rate of population growth
of 2.1% (Abnet, Dawit, Imam, Tsion, & Yonas, 2017). There around eleven sub-cites and E-commerce
companies were concentrated in the city

3.2 Research Design

The purpose of this research is to determine factors affecting taxation of e-commerce effectiveness in
Addis Ababa. A descriptive research design will be used to describe the effect of the variables.

3.3 Research Approach

There are quantitative, qualitative and mixed research approach (Creswell, 2009). Mixed methods
research is an approach to an inquiry involving collecting both quantitative and qualitative data,
integrating the two forms of data, and using distinct designs that may involve philosophical assumptions
and theoretical frameworks. The research approach that will employed in this study is the mixed
approach because of the nature of the data.

3.4 Sample Design

3.4.1 Population
According to (allaboutETHIO, 2023) The target population of the study consists of (16) sixteen e-
commerce companies in Addis Ababa followed by federal tax authority, telecommunication and INSA.
3.4.2 Sampling Frame
It's a complete list of everyone or everything you want to study. The difference between a population and a
sampling frame is that the population is general and the frame is specific. For this study the sampling frames
will the list of (16) sixteen e-commerce companies. The sampling units for this study will be selected e-
commerce companies in Addis Ababa.

3.4.3 Sampling Techniques

For this study the researcher will used probability sampling techniques to identify the respondent’s 16
e-commerce companies in Addis Ababa, the researcher used a simple random sampling technique.

8
3.4.4 Sample Size
To determine sample size from the total 16 e-commerce companies in Addis Ababa, the researcher used
a simple random sampling technique. The scientific formula of (Yamane, 1967) takes 95% of the
confidence interval for the sample size selected of the population. This is calculated as follows:

Where: n = sample size

N = population size
e = Precision level or sampling error =0.05
n = 16/1+(0.05)2 *16 = 15
After obtaining 15 sample sizes by the aforementioned formula.
3.5 Sources of data
3.5.1 Primary data sources
The type of data used to prepare the report of this research is primary sources. Hence, the structured
questionnaire is used as the means of data collection from the targeted group of respondents. Thus,
sources of primary data are e-commerce companies.
3.5.2Secondary data sources
The secondary data will be used to develop the background of the study, statement of the problem, and
literature review.
3.6 Method of Data Collection, Analysis& interpretation
After accomplishment of the data collection procedure, the researcher used both descriptive and
inferential statistics for data analysis using with the SPSS version 23.
3.7 Econometrics Model Specifications
The dependent variable Taxation of E-commerce Effectiveness (TEE) is a linear function of Legal
Policies (LP), Economic Factors (EF), Regulatory Framework (RF), Infrastructure (I), Current practice
(CP), Implications for Business (IB) are independent variables incorporated in the model and the
dependent variable are Taxation of E-commerce Effectiveness (TEE). The independent variables are
LP, EF, RF, I, CP, IB, and the error- by u, the model is given by the following Equation as:
TEE = β 0 + (β 1 * LP) + β 2 * EF) + (β 3 * RF) + (β 4 * I) + (β 5 *CB) + (β 6 *IB) + Ü
Whereas:
TEE = Taxation of E-commerce Effectiveness
9
β0 = Constant term
β1, β2, β3, β4…β6 refers to coefficients
LP = Legal Policies
EF = Economic Factors
RF = Regulatory Framework
I= Infrastructure
CP= Current practice
IB= Implications for Business
Ü = Error term
3.8 Reliability and Validity Test
Reliability: The reliability test of the questionnaire will be measured by using a pilot test. Reliability
refers to random error in measurement. To measure the consistency of the questionnaire particularly the
Likert-type of scale the reliability analysis is essential in reflecting the overall reliability of constructs
that it is measuring.
Table 3. 4: Reliability Statistics

Cronbach's Alpha N of Items

.930 35

Source: Questionnaire, 2023

The data incorporated in SPSS are believed to be reliable under a given circumstance. This is because
the responses generated for all of the variables 'used in this research were reliable enough for data
analysis. Compared with the minimum value of alpha 0.70 advocated by Cronbach's (1951), then the
answers generated in this study were above the scientifically accepted threshold.
Validity Test
According to Creswell (2014), validity measures the degree to which the research or study achieves
what it sets out to do. To pre-test the research questionnaire, 15 questionnaires will be distributed to all
the selected companies. Validity was established using a pilot test by collecting data from 15 questions.
The instrument will be adjusted, and the findings of the pre-test are not included in the main findings of
the study. Besides, Cronbach's alpha will have been tested through SPSS version 23.0.

10
WORK PLAN AND BUDGET

Work plan
Serial Number Activities Months

December January April June

1. Problem identification
2. Proposal preparation
3. Questionnaire preparation
4. Data collection
5. Data editing
6. Data analysis
7. Report and present

Budget
Serial Number Item ETB
1 All required stationary (paper, ink…) 5000
2 Transport 2000
3 Telephone bill, internet, other utility cost and per diem, 8000
4 Data collection costs 6000
5 Total 21,000

References
11
Abdulkarim, H. A. (2022). The Legal and Practical Challenges of Applying Ethiopian VAT on
Electronic Commerce Transaction. International Journal of African and Asian Studies.

Abnet, G. B., Dawit, B. E., Imam, M. H., Tsion, L. M., & Yonas, A. S. (2017). City Profile Addis
Ababa.

allaboutETHIO. (2023). Retrieved from https://allaboutethio.com/16-of-the-best-ecommerce-in-

ethiopia.html

Andualem, T. (2018). A Critical Assessment of the Application of Ethiopian VAT on E-Commerce.

Basu, S. (2003). Taxation of E-Commerce from A Global Perspective.

Basu, S. (2008). International Taxation of E-Commerce: Persistent Problems and Possible

Developments. Journal of Information, Law and Technology.

Chaturvedi, S. (2009). Financial Management: Entailing Planning for the Future Global India
Publications.

Creswell, J. (2009). Research design, qualitative, quantitative and mixed method, 3rd edition Thousand
Oaks, CA: Sage.

FDRE. (2020). Federal Negarit Gazette. Addis Ababa: Federal Negarit Gazette.

Hansen, T., Jensen, J. M., & Solgaard, H. S. (2004). Predicting online grocery buying intention: a
comparison of the theory of reasoned action and the theory of planned behaviour. International
Journal of Information Management.

Liganya, S. B. (2020). Taxation of E-Commerce: Prospects and Challenges for Tanzania.

McLure, E., & Charles. (2001). Taxation of Electronic Commerce inthe European Union. Hoover
Institution, Stanford University, .

OECD. (2013). Organization for Economic Corporation and Development. Electronic and Mobile
Commerce . OECD Digital Economy Papers.

Pinto, D. (2002). E-Commerce and Source-Based Income Taxation.

UNCTAD. (2015). Information Economy Report: Unlock the Potential of E-Commerce for Developing
Countries.

Wakgari, K. D. (2022). Taxation of Electronic Commerce: Prospects and Challenges for Ethiopia.
Innovations.

Yamane, T. (1967). Statistics An Introductory Analysis 2nd ed. .

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Yared. (2020). A Critical Analysis ofBusiness Income Taxation of Electronic Commerce in Ethiopia in
Light of the OECD Taxation Framework Conditions.

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