BAHIRDAR UNIVERSITY

SCHOOL OF LAW

LL.M PROGRAM IN BUSINESS AND CORPORATE LAW

LAW OF BUSINESS TAXATION

Journal Article Review

Prepared By: Mengistu Mulate ------ID No. BDU 1108223

Submitted to Misganaw G. Beza (Asst. Prof. of Laws)

Submission Date: 30 of January, 2019

 Introduction

The subject of this piece of writing is reviewing a journal article. The article has been published on Bahir
Dar University Journal of Law. The full bibliographic reference is Ataklti Weldeabzgi Tsegay, ‘Tax
Exemption through Letters: Issues of Legality and Equality’, Bahir Dar University Journal of Law,
2014, Vol. 5. No. 1, PP. 127-169. The main purpose of the article was to assess whether payments other
than periodic salary of an employee (house and transportation allowance) are taxable or not. The author
concludes by drawing inferences from the laws and principles with the practice of tax exemption through
letters. The review of this article has two parts. In the first part, I will try my best to summarize the main
theme of the article in my own words as much as possible. Then I will forward my reflection on the
article I will summarize.

Summary of the Journal Article

Among other sources of tax, employment income is one source of income tax in Ethiopia. In employment
relationship, tripartite parties are involved: employer, employee and tax authority and the system of
effecting payment of tax is PAYE which is regarded as a cornerstone of an effective income tax system.
At the time of employment relationship of employee with employer, the former entitled to payments other
than periodic salary like transportation and house allowance, bonuses, sick pay, expenses on uniform,
conveyance, and other benefits. It is suffice that the source of payment is employment relationship, no
matter how the type of payment is.

The levying and exemption of tax by law maker or delegated authority should adhere to the basic
principles of taxation inter alia, legality, equality, equity, and others. This concurred with the adage of
“no taxation without law”. Albeit the FDRE constitution does not incorporate this principle explicitly, it
can be inferred from the provisions of the constitution that grants power to the parliament to impose tax.
Every person has an obligation to pay tax whenever s/he generates an income from any activity which
regarded as taxable income under tax law unless it has been exempted. The other principle that must be
observed by legislature/delegated authority in levying and exemption of tax is principle of equality
properly called equity. This principle has a constitutional basis in Ethiopia. It has two aspects: horizontal
and vertical equity. While the former deals about payment of equal tax by tax payers who generates equal/
similar amount of income, the latter is about treating those who earns different income differently based
on their ability to pay. The failure to comply with equity aspects of taxation would render to tax injustice,
lose of trust in the tax adjudication and increase non-compliance by tax payers.

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Allowances (such as house and transportation) which are payable to the employee are taxable in the form
of taxable wages unless exempted explicitly by law and employers have an obligation to withhold and pay
withhold tax to the tax authority. Under the federal income tax proclamation, regulation and directives,
house and transportation allowances are not exempted from payment of tax. Even the law says as
provided above, practically ministry of justice, Federal Ethics and Anti-corruption commission and
ERCA (the current ministry of revenue) requests the office of Prime Minister for exemption of their
prosecutors‟ from payment of tax on house and transportation allowances. By accepting the request of the
above federal government institutions, the office of prime minister exempted their prosecutors from
payment of tax on allowances. However, this act is absolutely violates principle of legality in taxation. In
addition to the above federal government, exemption of tax through letter also practiced in ANRS. The
supreme court of the region requests the regional administration head office by the writing a letter for
exemption of house and transportation allowance for judges who has appointed and serves in the region.
In fact the directive enacted by BoFED contradicts with the regulation enacted by the regional council.
That is why the ANRS supreme court take such measure and hence, illegal and improper means to redress
the right violated and tantamount with abuse of power.

In addition to violation of principle of legality, the act of the above federal government institutions and
ANRS Supreme Court act violates the principle of equity in payment of tax. Principle of equity in
taxation requires that equal income earners should be treated alike and has to pay equal tax. But
practically this is not the case. The above federal government and ANRS supreme court employees are
entitled to preferential treatment by exemption from payment of tax on allowances (house and
transportation). But, employees of other governmental institutions who are entitled to allowances are not
given similar treatment i.e. exemption from payment of tax on allowance. Hence, the practice of the
above mentioned federal institution including office of the prime minister (grants exemption through
letter) against the fundamental principles of legality and equality.

Withholding agents have an obligation to withhold tax from the payment they made to their employee
unless exempted by law and pay it to the tax authority. However, the above discussed withholding agents
failed to comply with provisions of income tax laws and do not withhold tax from house and
transportation allowance they paid to their employees. More surprisingly, ERCA the principal organ
entrusted with tax administration and monitoring compliance, has failed to implement its legal duty
enshrined under the income tax proclamation. Though the law provides that such failure would result in
civil and criminal sanction, it could not implemented and cannot deter these governmental institutions
from their illegal activities.

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In nutshell, as a conclusion, exemption of tax via letters (illegal means of tax exemption and made by an
unauthorized organ) is amounts to violation of the basic principles of legality and equity in payment tax
on allowances and hence, utter transgression of the income tax proclamation.

Reflection

The article written by the author is well-articulated and supported by deep analysis of the practice with
the principles and legal provisions. The principle of legality and equality has paramount importance in
levying of tax by the law maker. Similarly, exemption of any income of employee from payment of tax
requires predetermined legal rules which are enacted by the competent authority to do so. Hence,
imposition of tax and its exemption requires a legal basis. However, in practice what is inconsistent with
the law says, exemption of payment of tax via writing a letter (by the legally unauthorized body) that
examined by the author has violated important principles of legality and equality in payment of tax.
Exemption from payment of tax on house and transportation allowance should be supported by legal
ground enshrined under tax legislations. I have concurred with the stance of the writer of this article in
that tax could be exempted only by the competent and legally authorized body to exempt income of the
employees‟ from payment of tax. In Ethiopia, it‟s only the House of people Representatives, Council of
Ministers and Ministry of Finance and Economic Development (though not internationally accepted body
to exempt tax) have a power to exempt any income of tax payers that obtained from the payment by
employer based on certain justifiable grounds. However, exemption of tax through letters violates the
fundamental principles of legality and equality. Additionally, it has a great impact on the national
economy because revenues collected by taxation are used to build infrastructure in the country. Imagine
how other institutions follow the footsteps of the above governmental institutions for the purpose of
exempting their employees‟ from payment of tax on allowances (on house and transportation) by writing
a piece of paper? Such exemption of taxation has an impact on the fiscal policy. The act of exemption of
payment of tax through letters has a double standard impacts. For one thing, the office of prime minister
is not a legally authorized body of the government to exempt tax payers‟ allowance from payment of tax
and its ultra-virus act i.e. abuse of power. For the other thing, making legislations ineffective by writing a
piece of letter shows how the executive takes primacy over matters reserved to other organs of
government and raises the question of legality. It also creates suspension on the public generally and on
the taxpayers particularly. Additionally, ERCA (the current Ministry of Revenue) has conferred an
authority to tax administration, monitoring compliance and implementation of income tax law under
income tax proclamation failed to do so and put the fate of tax laws in danger because it has an obligation
to implement the income tax proclamation but violates it.

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However, the following points are worth mentioning in relation to the article at hand.

1. Under key terms the author tried to provide words that enables the reader to grasp the theme of
the article. And „tax exemption‟ is one key words among others and critical because its title of the
article. However, the writer has failed to define the term “tax exemption” in the body of the paper
in nowhere.
2. Since the journal is peer-reviewed and follows a scientific investigation of facts based on
available data to draw a certain conclusion, it has been better to adopt methodological approach.
The author heavily relied on review of literatures, laws, principles and deep scrutiny of
documented data like letters (around twelve in numbers) written by the federal and one regional
government institutions makes the article fit with qualitative investigation. However, the author
does not say anything about the methodology he would apply to reach in the finding of his
writing. So, the methodology used by the author to reach at his final conclusion of the paper is
qualitative though the article is mute on the issue.
3. When writing his article, the author used income tax proclamation no. 286/2002, regulation no.
78/2002 and other laws. But currently this proclamation has repealed by the newly enacted
proclamation no. 979/2016 and the former proclamation has only a gap filling role in case of
need. So, the article at hand has to read in light with such amendments of the income tax
proclamation, regulation and directives (if) enacted.