CHAPTER 7: TAX ON OTHER INCOMES (Schedule D )

7.1. Introduction
So far in the last chapters, you have seen the taxation of income from employment, rental income
of buildings, and business income tax under schedule A, B, and C of proclamation 285/2002.
In this chapter, you will see other types of income and the rate that applies to them that provided
under schedule D of proclamation 285/2002.
7.2. Accounting for schedule “D” income taxes
This is the last and residuary Schedule of income. Any income, which is taxable under the
Income Tax Proclamation but does not find place under any of the remaining three Schedules of
income (i.e., Schedules A, B and C) will be taxable under this residuary Schedule “D” Other
Incomes. This Schedule D income includes;
o Royalties income rendering of technical services
o Income from games and chances
o Dividends
o Income from rental of property
o Interest income from deposits
o Gains on transfers of certain investment property.
This section covers the determination of taxable income, tax rate and payment of tax with respect
to the above listed types of incomes.
7.2.1. Royalties
The term "royalty" means 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, including cinematography films,
and films or tapes for radio or television broadcasting, any patent, trademark, 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.
 Royalties shall be liable to tax at a flat rate of five percent (5%).
The withholding agent who effects payment shall withhold the foregoing tax and account to the
Tax Authority within fifteen (15) days of the end of each calendar month, and each payment
shall be accompanied by a statement with respect to each taxpayer who received payments

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during the month. The statement referred shall be in the form and furnished in the manner
prescribed by the Tax Authority, and shall contain the following information:
(a) The name, address, and TIN of each taxpayer;
(b) The amount of payments subject to tax under Schedule D;
(c) The amount of the tax withheld from the payments
 Where the payer resides abroad and the recipient is a resident, the recipient shall pay tax on the
royalty income within the time limit set out in Proclamation 286/2002
 This tax is a final tax in lieu of a net income tax.
Example 1,
On Hamle 01,1998, DSTV, broadcasting Channel in South Africa gave right to Multi choice
Ethiopia plc, to broadcast soccer and other entertainments to Ethiopian pro soccer's for a royalty
of birr 2.4 million birr per annum to be paid equally on 12 months.
Required: Determine,
1. How much tax Multi choice Ethiopia withholds for such transaction
2. When Multi choice Ethiopia is supposed to pay such withholding tax on royalty to Tax
authority?
3. Record the amount withhold in respect of income tax from said payments.
Solution
Multi choice Ethiopia agreed to pay on 12 installment basis, thus, monthly payment is birr
200,000 (i.e. 2,400,000/12). Royalties shall liable to tax at a flat rate of five percent. Therefore,
the firm has to withhold birr 10,000 as a royalty tax when payment is made to DSTV.
The withholding Agent (Multi choice Ethiopia) which effects payment shall withhold the
foregoing tax and account on the Tax Authority within fifteen (15) days of the end of each
calendar month.
Broad casting service expense 200,000
Royalties’ income tax payable 10,000
Cash 190,000
Up on payment of said taxes to the Tax Authority, the liability accounts debited and cash
credited.
Royalties’ Income tax payable 10,000
Cash 10,000

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7.2.2. Income paid form rendering of Technical Services
 The term "technical service" means any kind of expert advice or technological service
rendered.
 All payments made in consideration of any kind of technical services rendered outside
Ethiopia to resident persons in any Form shall be liable at a flat rate of ten percent (10%)
which shall be withheld and paid to the Tax Authority by the payer. This means a 10%
income tax must be deducted from income earned by any person, organization for abroad
for services rendered to any person or organization in Ethiopia. The taxpayer's citizenship
and residence does not matter to the determination of origin of income. As long as service
is rendered in Ethiopia, the income is said to have originated within Ethiopia.
Example 1,
MIDROC Ethiopia has got technical service from VARNERO-Italia in abroad with 15,000 US
dollar. The average exchange rate while such technical service delivered was (1USD = 19.0Birr)
Required:
1. How much tax MIDROC Ethiopia withholds for such transaction?
2. Record the amount withhold in respect of income tax from said payments.
Solution
The technical service is given for birr 285,000. Thus, MIDROC has to withhold and paid to the
Tax Authority 10% of 285,000, which is birr 28,500.
The withholding Agent (MIDROC Ethiopia) which effects payment shall withhold the foregoing
tax and account to the Tax Authority within fifteen (15) days of the end of each calendar month.
Technical service expense 285,000
Service income tax payable 28,500
Cash 256,500
Up on payment of said taxes to the Tax Authority, the liability is account debited and cash
credited.
Service Income tax payable 28,500
Cash 256,500

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7.2.3. Tax on Income from Games
1. Every person deriving income from winning at games of chance (for example, lotteries, tom
bolas, and other similar activities) shall be subject to tax at the rate of fifteen percent (15%),
except for winnings of less than 100Birr.
2. The Ethiopia National Lottery Administration shall withhold or collect the tax and account to
the Tax Authority with declaration form and submit within two months from the end of the
Ethiopian Fiscal year.
3. This tax is a final tax in lieu of income tax.
Example 1
Dr. BefikaduTamene has won birr 300,000 in ENKUTATASH Lottery, which drawn on
September 10th 2006.
Required: How much tax on such chances the Ethiopia National Lottery Administration
withholds?
Solution
Ethiopia National Lottery Administration withhold 15% of 300,000, which is birr 45,000 (i.e.
0.15 x 300,000)
Charge
Where the National Lottery Administration authorizes other persons to carry out tom bola or
sport betting, it shall collect a charge of fifteen percent (15%) from the intended total income to
be derived from the sale of tom bola or sport betting. However, the following tombolas are
exempted from such charge:
1) When the total income to be derived from the sale of tickets does not exceed Birr 50 (fifty
birr), or
2) When the total to be derived from the sale of tickets for welfare purposes does not exceed
Birr 500 (five hundred birr)
Example 2, Coca-Cola Company promoted itself by delivering 10,000 bottles of coca and an
automobile worth of birr 80,000 with free to customers in a game basis. National Lottery
determined the price of such game birr 90,000
Required: How much tax on such games the Ethiopia National Lottery Administration
withholds?
Solution

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Ethiopian National Lottery Administration should withhold 15% of 90,000, which is birr 13,500
(i.e. 0.15 x 90,000)
7.2.4. Tax on Dividend
1. Every person deriving income from dividends from a share company or withdrawals of
profits form a private limited company shall be subject to tax at the rate of ten percent
(10%).
2. The withholding Agent shall withhold or collect the tax and account to the Tax Authority.
3. This tax is a final tax in lieu of income tax.
Note: Stock dividends are exempted from tax.

Example, Dashen Bank Board of Directors declared dividend on Megabit 15, 2005 an amount of
birr 2 million to be distributed for outstanding shares. The total number of outstanding shares at
dividend record date was 10,000 shares. AtoFelekeAyalew owned 500 shares on the same date.

Required: Determine,

1. How much dividend is paid to AtoFeleke?

2. How much after tax cash proceeds he will receive from such dividend?
3. Record the amount withhold in respect of income tax from total dividend payments.
Solution

The total dividend declared is distributed for each outstanding shares and dividend per share is
2,000,000 divided by 10,000 shares, which is birr 200 per share. Thus, AtoFelekeAyalew is
entitled for dividend amount birr 100,000 (i.e. Br. 200 x 500 shares)

After tax cash proceeds that is going to be paid to AtoFeleke is calculated as follows:

After tax proceeds dividend = Total amount of dividend - Tax on dividend

= 100,000 - 10% (100,000) = 90,000

The withholding Agent (Dashen Bank) which effects payment shall withhold the foregoing tax
and account to the Tax Authority within fifteen (15) days at the end of each calendar month.

The total dividend income tax payable is 10% of 2,000,000 and the journal entry is recorded as
follows:

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 Dividend 2,000,000

Dividend Income tax payable 200,000

Cash 1,800,000

Up on payment of said taxes to the Tax Authority, the liability account is debited and cash
credited.

Dividend Income tax payable 200,000

Cash 200,000

7.2.5. Tax on Income obtained from Rental of Property

Every person deriving income from the casual rental of property (including any land, building, or
moveable asset) not related to a business activity taxable under Schedule C shall pay tax on the
annual gross income at the rate of fifteen percent (15%). This tax is a final tax in lieu of a net
income tax.

Example,AtoMehariAlemnew has got an amount of 2,000 gross income renting a car and such
income is referred as casual rental income by tax expert, determine how much he has to pay on
such casual rental income?

Solution

Rental income tax expense = 15% x 2,000 = Birr 300

If this individual has a record book, he might record as follows:

Cash 2,000

Rental income tax payable 300

Rental income 1,700

Up on payment of said taxes to the Tax Authority, the liability account is debited and cash
credited.

Rental income tax payable 300

Cash 300

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7.2.6. Tax on Interest income of Deposits

1. Every person deriving income from interest on deposits shall pay tax at the rate of five
percent (5%).
2. Banks shall withhold or collect the tax and account to the Tax Authority with declaration
form and submit within two months from the end of the Ethiopian Fiscal year.
3. This tax is a final tax in lieu of income tax.
Example 1. W/ro Mulunesh Gebeyaw has deposited money in NIB bank on which she is eligible
to get interest income of birr 2,400 in the current year.

Required: 1. How much interest income tax does the bank from her account withhold?

Solution

Interest income tax withhold by the bank is 5% of Interest income, which is birr 120 (5% x
2,400)

Example 2, AtoMelaku deposited birr 5,000 for one year in Bank A. The bank compounded at
annual 3% simple interest. How much tax on interest income he would pay?

Solution

Interest = P.R.T

= 5000 x 0.03 x 1 = 150

Interest income tax = 5% x 150 = 7.50

7.2.7. Capital Gains Tax (Tax on gain at transfer of certain investment

property):

Income Tax shall be payable on gains obtained from the transfer (sale or gift) of property
described in this Article at the following rates:

(a) Building held for business, factory office 15% (fifteen percent)
(b) Shares of companies 30% (thirty percent)
Gains obtained from the transfer of building held for residence shall be exempt.

Example 1, AtoBelete bought a house located at Bole road, Addis Ababa for birr 2.5 million. He
used the house for business and sold it for birr 3 million.

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Required:

Determine the capital gain tax that AtoBelete would pay totax authority ?

Solution

The rate of levied on gains realized form the increase in the value of capital assets is 15%.
Therefore, capital gain tax = 15% (Selling price - Purchase price).

= 15% (3,000,000 - 2,500,000) = 15% (500,000) = 75,000

Example 2,Walia Share Company bought a house located at Kaliti, Addis Ababa for birr 5.5
million. The company used the house for factory and sold it for birr 7.5 million.

Required: Determine the capital gain tax that Walia Share Company would pay to the tax
authority?

Solution

Capital gain tax = 30% (Selling price - Purchase price).

= 30% (7,500,000 - 5,500,000) = 30% (2,000,000) = 600,000

7.3. Declaration and assessment of schedule D income

o Every taxpayer who has Schedule D income, not subject to withholding at source constituting
a final tax, shall prepare a declaration of that income in a form prescribed by the Tax Authority.
Taxpayers shall submit this declaration to the Tax Authority within two (2) months from the end
of the Ethiopian Fiscal Year.
o The tax calculated in accordance with the declaration, after the amounts paid during the year
with respect to the Schedule D income subject to declaration having been reduced, shall be
transferred by the taxpayer to the Tax Authority simultaneously with the declaration.
o The amount of tax due for the year, as stated in the declaration, shall be the amount assessed
by the tax Authority unless the Tax Authority determines that an error or omission has been
made.
7.4 Withholding of Schedule “D” Income Tax on Payments
The payer of any payment subject to tax under Schedule “D” shall withhold from the payment
the amount of tax required by Schedule “D”.

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o The obligation of the payer to withhold tax has priority over all other obligations to withhold
amounts from payments to a payee (the taxpayer).
o A payer shall pay the withheld tax to the Tax Authority within fifteen (15) days of the end of
each calendar month, and each payment shall be accompanied by a statement with respect to
each taxpayer who received payments during the month.
o The statement referred shall be in the form and furnished in the manner prescribed by the Tax
Authority, and shall contain the following information:
(a) The name, addresses, and TIN of each taxpayer;
(b) The amount of payments subject to tax under Schedule D;
(c) The amount of the tax withheld from the payments.
o At the time of making a payment to a taxpayer, the payer shall furnish each taxpayer a tax
withholding certificate (in the form prescribed by the Tax Authority) showing the date of
the payment and stating the information ; the taxpayer’s right to contest the amount of tax
withheld; and the manner of doing so.
o The tax-withholding certificate is proof of the amount of tax withheld on payments subject
to tax under Schedule D.