Chapter four Ethiopian tax systems

THE TAX ORGANIZATION SYSTEM

The Federal Inland Revenue Authority /FIRA/

FIRA was established by proclamation no 367/2003.

The authority is a semi-autonomous agent of the
government responsible for the administration of the
federal as well as joint tax revenues
 Cont’d
 The authority which administers a number of taxes
is under the general supervision of ministry of
revenues /MOR/. The list of tax laws administered
by FIRA is mentioned below.
• Income tax procl, no 286/2002
• Mining income tax procl no 53/1993
• Value Added tax /VAT/ procl no 285/2002
• Excise tax procl. No 307/2002
• Turnover tax /TOT/ procl. No 307/2002
• Stamp duty procl. No 110/1998
 Cont’d
Functions of FIRA
• The major functions of the authority are to:
• Assess, collect, enforce and account for federal and
joint revenue lists.
• Administer efficiently and effectively all tax laws of
the government.
• Advise the ministry on the tax issues.
• Safeguard taxes from evasion.
• Improve quality of service to the taxpayers.
 The organization structure
• FIRA is accountable to the MOR, general manager
and one deputy general manager head it.
• The general manager is the chief executive of the
authority. He is responsible for the day to day-
operations subject to general supervision of the
MOR. One DGM and several heads of departments,
services and branches assist the GM
Types of taxes in Ethiopia and
administration
 Tax Nature Taxpayers Administered by
1. Direct Taxes: Income Taxes
I Employment Monthly Individuals ERCA and Regional Revenue
Bureaus
II Rental Annual Individuals Regional Revenue Bureaus

Sole proprietorships Regional revenue Bureaus

Partnerships Regional Revenue Bureaus

Companies ERCA
III Business Annual Sole proprietorships Regional Revenue Bureaus

Partnerships Regional Revenue Bureaus

Companies, Public ERCA

Enterprises
IV Miscellaneous Annual Individuals Regional Revenue Bureaus

Sole proprietorships Regional Revenue Bureaus

Partnerships Regional Revenue Bureaus

Companies, Public ERCA

Enterprises
1. Indirect Taxes
V. Value Added Tax Permanent Individuals
Sole proprietorships
ERCA
Partnerships
Companies
Other non-profit organizations
and association
unless specifically exempted.
VI. Turnover Tax Permanent Individuals
Sole proprietorships
ERCA
Partnerships
Companies
Non-profit organizations
unless exempted
VII. Excise Tax Permanent Individuals
Sole proprietorships ERCA
Partnerships
Companies
VIII Custom duty Permanent Individuals and companies
 Income taxes
• Ethiopian taxes are divided into categories and
schedules. Business income taxpayers in Ethiopian
taxation system are divided into three categories.
These are:
• Category “A” taxpayers;
• Category “B” taxpayers, and
• Category “C” taxpayers.
 
 Category “A” Taxpayers
• This Category of taxpayers includes the following persons
and bodies:
1. Any company incorporated under the laws of Ethiopia or in
a foreign country;
2. Any other business having an annual turnover of Birr
500,000 or more.
• Category “A“ taxpayers are required to file to the Tax
Authority, at the end of the year, a balance sheet and a profit
and loss statement (income statement) for taxation purpose.
It should be noted that companies are categorized under
category “A” regardless of their size of turnover.
 Category “B” Taxpayers
• This Category includes business which has an annual
turnover of over Birr 100,000 but below Birr 500,000. This
category of taxpayers should file to the Tax Authority profit
and loss statement (income statement) at the end of the year.
 Category “C” Taxpayers
• This category of taxpayers includes those who have annual
turnover of less than Birr 100,000 as estimated by the Tax
Authority. Neither balance sheet nor income statement is a
requirement to this category.
• The Ethiopian Tax System also follows the scheduler
system of taxation whereby different types of income are
segregated into different schedules for computing the tax
liability.
 Income taxes
• The function of each schedule is to tax income of that
schedule in accordance with rules and regulations set for the
schedule.
• Different Income is taxed in different schedules because of
difference in the rate to be used and expenses to be allowed.
• Based on this essence, taxpayers are scheduled into different
brackets. These include:
 CONT’D

• Schedule A: Employment Income Tax.

• Schedule B: Properties Rental Income Tax
• Schedule C: Business Income Tax
• Schedule D: Miscellaneous Income Tax
 CONT’D
• Employment Income Tax (Schedule A): every taxable
individual who generates income from employment is liable
to pay tax from its taxable income. In the Ethiopian
employment income tax proclamation, the following items
are classified as taxable income and non-taxable incomes.
 CONT’D
• Any payment received in cash or in kind in the course of
employment by an individual is taxable. This provision
includes the following:
• salaries, allowances, bonuses, car benefits, and housing
benefits
 CONT’D
• The following payments made to employees are not
taxable:
• amount paid by the employer for medical expenses;
• transportation allowance up to 25% of the
employee salary or birr 800 whichever is less;
• hardship allowance;
• reimbursement of traveling expenses incurred on
duty and upon employment;
 
 CONT’D
• allowances paid to the members and secretaries of
boards of public enterprises;
• allowances paid to members and secretaries of
study groups set up by the Federal or Regional
 Cont’d
Properties Rental Income Tax (Schedule B):
• This schedule is used to tax income earned on rental of
properties. Income under this schedule is payable by both
business organizations and individuals who have rental of
properties. Taxable income on rental of properties is gross
income less expenses. The income from rentals of properties
is taxed based on the following rates.
 Cont’d
• Taxable income from schedule B income is
determined by subtracting the allowable deductions
from the gross income. Allowable deductions
include the following;
– If the lessor does not maintain books of accounts his
allowable deductions include taxes paid on land and
buildings being leased and 20% of the gross income
received as an allowance for repairs, maintenance and
depreciation of such buildings, furniture and equipment.
– If the lessor maintains books of accounts the allowable
deductions (deductible expenses) include (but not limited
to):-
 Tax on land and buildings being leased
 Cont’d
» Repairs, maintenance and depreciation of
building (and furniture and equipment if
furnished) per income tax proclamations
article 23.
» Interest on bank loan if any
» Premium paid on insurance of building.
 
• It is important to keep proper accounts for
period of times when the building was not leased
(kept idle).
 Cont’d
• The short cut method of computing the income tax
is:
 Annual Taxable Income   Rate Deduction

0.00 1,800 0 Nil

1,801 7,800 10% 180

7,801 16,800 15% 570

16,801 28,200 20% 1,410

28,201 42,600 25% 2,820

42,601 60,000 30% 4,950

60,001 & above 35% 7,950

 Cont’d
• Example 1
• Total Rental Income of MTZ is Br. 40000 for year 1
costs and expense related to the rental include.
• Repair and Maintenance Br. 2000
• Premium paid on insurance Br. 1000
• Calculate the income tax payable by Mr. X
 Cont’d

• Solution
• Total Taxable rental income is Br. 37, 000 i.e. 40000
minus Allowable deductions Br. 3000.
• Short Cut
• (Total taxable rental Income x Rate) – Deduction
• (Br. 37000 x25%) – Br. 2820
• = Br. 9250 – 2820
• = Br. 6430
 
 Business Income Tax (Schedule C)
• Profits (income) earned from business activities are taxed under
Schedule C. This schedule is used to tax income earned from business
activities by:
• Sole Proprietorships, Partnerships, and Companies.

 The tax rates for sole proprietorships and partnerships, and companies
(corporations) are different. The following schedule shows the tax
rates used to tax the annual income of sole proprietorships and
partnerships.
• The short cut method of computing business income tax is provided
below.
Taxable Income Deduction

From To Rate

0 1,800 o Nil

1,801 7,800 10% 180

7,801 16,800 15% 570

16,801 28,200 20% 1,410

28,201 42,600 25% 2,820

42,601 60,000 30% 4,950

60,001 and above 35% 7,950

 Cont’d
• N.B: Companies (corporations) businesses income
is taxed at a constant rate of 30% per annum
(annually).
 CONT’D
• Based on the Ethiopian taxation system, allowed
expenses include:
• direct cost of producing the income, such as the
direct cost of manufacturing, purchasing,
importations, selling and such other similar costs;
• general and administrative expenses connected with
the business activity;
• insurance premium payable on business activity;
• business promotion expenses incurred inside and
outside the country subject to limit;
 CONT’D
• commission paid for services rendered to the
business subject to certain conditions;
• foreign parent /holding company services fee
subject to conditions;
• donations to registered welfare organization,
government, non-commercial education or health
facilities up to 10% of taxable income; and
• employee Provident Fund Contribution up to 15%
of Employee’s Basic salaries.
 Miscellaneous Income tax (Schedule D):
• Taxable incomes under this schedule include:
• Royalties: royalties shall be liable to tax at the flat
rate of 5%
• Interest income on deposits taxed at 5%
• Dividend income tax taxed at 10%
• Tax on income from games of chance taxed at 15%
 Cont’d
• Income from casual rental of property: every person
deriving income from casual rental of property including
any land, building, or movable property not related to a
business activity, taxable under Schedule B, shall pay tax on
the annual gross income at the rate of 15%.
 Cont’d
• Capital gains tax: income tax shall be payable on gains
obtained from the transfer (sale or gift) of the following
properties based on the associated rates:
• Building held for business 15%
• Factory 15%
• Office 15%
• Shares 30%
 Consumption taxes
• Value Added Tax (VAT) Indirect taxes concern commodities.
VAT is an indirect tax on commodities expenditure. This means VAT
is generally a tax on consumption of goods and services. It is a broad
based tax on the consumption of goods and services. It is collected in
the production and distribution process beginning with importers and
producers of raw materials and ending with retailers. Even though the
VAT is collected by and remitted to the government by business
enterprises like importers, manufacturers, providers of services,
wholesalers and retailers, the tax likely will move forward to the final
consumer.
 Cont’d
• The end impact and burden of VAT rests on the final
consumer. The proclamation of VAT no. 285/2002
officially replaced sales tax in Ethiopia. In Ethiopia, there
are two rates applied to taxable supplies: the standard rate
and zero-rate. As per this proclamation, value added tax is
levied and collected at the flat rate of 15% on the value
added of every taxable transaction by registered persons and
imported goods other than exempt ones.
 Cont’d
• Assume the factory produces pills and sold them to
wholesalers for birr 1,000 per pack. The wholesalers sold
the pills to retailers for birr 1,200. The retailers retail the
packed pills to consumers and earn birr 1,800 per pack.
 Cont’d
• The VAT under each stage is:
• Factory = birr 1,000 x 15% = birr 150
• Wholesaler = birr (1,200-1,000) x 15% = birr 30
• Retailer =birr (1,800-1,200) x 15% = birr 90
• Total VAT = birr 270
 Turnover Tax (TOT):

 Turnover tax is an indirect tax imposed on the turnover or sales value

of goods and services. It is a tax on expenditure. In Ethiopia, turnover
tax would be payable on goods sold and services rendered by persons
not registered for Value Added Tax.
 It is levied on locally supplied goods and rendered services on taxable
turnover of transactions by taxable persons not registered for VAT.
According to the turnover tax proclamation no. 308/2002, the
turnover tax shall be:
 CONT’D
 2% on goods sold locally;
 for services rendered locally:
• 2% on contractors, grain mills, tractors and
combine-harvesters, and
• 10% on others.
 CONT’D
• the following would be exempted:
o sale or transfer of dwelling used for a minimum of two
years, or the lease of a dwelling;
o rendering of financial services;
o supply of national or foreign currency and of securities;
o rendering by religious organizations of religious or other
related services;
o supply of prescription drugs specified in directives issued
by the relevant government agency, and the rendering of
medical services;
 CONT’D
o rendering of educational services provided by educational
institutions;
o supply of goods and rendering of services in the form of
humanitarian aid;
o supply of electricity, kerosene and water;
o provision of transport;
o permits and license fees;
o supply of goods or services by a workshop employing
disabled individuals (if more than 60% of the employees are
disabled), and
o supply of books.
 Excise Tax:
• The other type of indirect tax adopted in Ethiopia is
excise tax. Excise tax is, also known as selective
tax, an indirect tax imposed on luxury goods, goods
that are hazard to health and basic goods which are
demand inelastic such as vehicles, jewelers,
perfumes, alcoholic products, tobacco products, salt,
textile products, etc.
 CONT’D
• Some governments impose excise tax to achieve some
specified objectives such as curving undesirable wants and
avoidance of hazardous products like cigarettes, and
alcoholic beverages. Ethiopia also introduced and imposed
excise tax on selected imports and domestically produces
goods.
 Foreign trade taxes
Customs Duty:
• Custom duty refers to the tax or tariff imposed on the
activities of imports and exports of goods and service.
• The purpose of the custom duty is mainly designed to raise
revenue to the government and to prevent illegal imports and
exports.
• In accordance with custom duties regulation NO. 280/2002
the customs duty shall apply to all goods imported to Ethiopia
and exported from Ethiopia except those exempted by the
law.
 Customs Duty:
• The custom duty paying value at any importer or exporter
goods, which is the base to compute customs duty, shall be
the actual total cost of the goods.

Rates of customs duty

• According to the customs proclamation 60/1989, article 47,
duties of customers are levied on goods imported or
exported from Ethiopia at the tax rates range from 0 – 35%
to different either imported or exported.
 CONT’D
Example
• The tax rate for live animals is 5%

• The tax rate for machinery, equipment and

mechanical appliances 5% - 35%, the tax rate for
vehicle 30% etc.
Good luck