Chapter- Four

Ethiopian Tax System

Main types of taxes in Ethiopia
 Tax structure of Ethiopia divides tax in the country as
direct and indirect.
 This classification is purely based on tax shifting of tax.
 Direct taxes are those obligations of payment that cannot
be shifted to a third party.
 Indirect taxes are those obligation in which the burden
of payment is shifted to third parties.
• Direct taxes, in Ethiopia, include
employment income tax, business income
tax; rental income tax, capital gains tax,
agricultural income tax and rural land use
fee, mining income tax, taxes on lottery and
other chance winning, tax on royalty, interest,
dividend, and casual rental of property.
• Import and export duty(custom duty), value
added tax and excise tax are the indirect
taxes collected by the country.
INCOME TAX
Taxable income (under direct taxes) is
categorized into four schedules A, B, C and
D. Employment income is categorized as
Schedule “A” income, rental income as
Schedule “B” income, Business income as
Schedule “C” income, and all other direct
taxes together as Schedule “D” income
 A. Employment Income Tax
 Employment Income Tax is a direct tax levied on
income from employment.
 Employment income shall include any payments or
gains in cash or in kind received from employment
by an individual.
 Employers have an obligation to withhold the tax
from each payment to an employee, and pay the Tax
Authority the amount withheld during each
calendar month.
 As amended in income tax proclamation No 979/2016,
every person deriving income from employment is liable to
pay tax on that income at the rate specified in Schedule “A”
as follows:
 Employment business Tax rate Deduction
NO income (%) In Birr
(per month birr)
01 0 600 Non- None
taxable
02 601 1650 10 60
03 1651 3200 15 142.5
04 3201 5250 20 302.5
05 5251 7800 25 565
06 7801 10900 30 955
07 Over 10900 35 1500
 The total tax payable on
employment income can be
determined using a simplest
method.
Tax Liability = (Taxable Income X Tax Rate for the Bracket) – Deduction.
Illustration
• Ato Yimer is an employee of Abay Bank and his
monthly basic salary is Br 4,700. In addition he is
getting Br 100 monthly taxable house allowance.
• Required: Determine his taxable income and
income tax liability.
Solution:
Taxable income = Br 4,700 + Br 100 = Br 4,800
Tax liability = (Taxable income X Tax rate for the
Bracket) – Deduction
= (4,800 X 20%) – 302.5= Br 657.5
The following categories of income shall be exempt
from payment of Employment income tax:
– Income from employment received by casual employees
who are not regularly employed provided that they do not
work for more than one month for the same employer in
any twelve months.
– Pension contribution, provident fund and all forms of
retirement benefits contributed by employers in an
amount that does not exceed 15% of the monthly salary of
the employee.
– Subject to reciprocity, income from employment, received
for services rendered in the exercise of their duties by
diplomatic and consular representatives, and other
persons employed in any Embassy and who are national of
that state and bearers of diplomatic passports.
 Cont’d…….
– Payments made to a person as compensation or
gratitude in relation to personal injuries suffered
by that person or death of another person.
– Amounts paid by employers to cover the actual
cost of medical treatment of employees.
– Allowances in lieu of means of transportation
granted to employees under contract of
employment.
– Hardship allowance.
– Amounts paid to employees in reimbursement of
traveling expenses incurred on duty.
 B. Rental Income Tax
 This is the tax imposed on the income from rental
of buildings engaged in leasing of the building.
 Income includes rent of building and rent of
furniture and equipment if the building is fully
furnished.
• The tax collected on annual basis and the tax
period is the Ethiopian fiscal year.
• The tax payable on rented houses would be
charged at the following rates:
• On income of bodies, 30% of taxable income.
• On income of persons according to the following
schedule:
Taxable Income from Rental Income Tax Deduction(i
of Buildings (per year) Payable (in %) n Birr)

over Birr to Birr

0 7,200 Exempted
7201 19, 800 10% 720.00
19, 801 38, 400 15% 1710.00
38,401 63,000 20% 3630.00
63,001 93, 600 25% 6780.00
93, 601 130, 800 30% 11,460.00
over 130, 800 35% 18,000.00
 Taxable income from Schedule “B” income is determined by
subtracting the allowable deductions from gross income.
 Allowable deductions include the following:
A) Those who do not maintain books and records:
• taxes paid with respect to the land and buildings being leased; except income
taxes; and
• for taxpayers not maintaining books of account, one fifth (1/5) of the gross
income received as rent for buildings furniture and equipment as an allowance
for repairs, maintenance and depreciation of such buildings, furniture and
equipment
B) Those who maintain books and records:
 Tax on land and building
 Cost of lease of land
 Repairs and maintenance expenses actually incurred.
 Depreciation on building (and furniture and equipment if fully
furnished)per income tax proclamation.
 Interest on loan if any.
 Insurance premium paid on insurance of building.
 C. Business Income Tax-Schedule ‘’C’’
 Any person or body which is designated as a
business.
 Tax base- Income reported in accordance with IFRS
Adjusted for provision of tax proclamation and
regulation/ directives
 Corporate businesses(share company and PLC) are
required to pay 30% flat rate of business income
tax.
 For unincorporated or individual businesses, the
business income tax ranges from 0% - 35%.
 Unincorporated or individual businesses are taxed in
accordance with the following schedule below as
amended in income tax proclamation No. 979/2008.
N Taxable business income Tax rate (%) Deduction
O profit (per year) In Birr
01 0 7200 Non-taxable None

02 7201 19,800 10 720

03 19,801 38,400 15 1710

04 38,401 63,000 20 3630

05 63,001 93,600 25 6780

06 93,601 130,800 30 11,460

07 Over 130,800 35 18,000

Determination of Taxable Income

Net income as per the requirement of IFRS-----------------------------------------XXX

Plus(Minus) Adjustments-----------------------------------------------------------------(xx)
Taxable income--------------------------------------------------------------------------------xxx

Deductible expense in business income tax

 In the determination of business income subject to tax, deductions
would be allowed for expenses incurred for the purpose of earning,
securing, and maintaining that business income to the extent that the
expenses can be proven by the taxpayer.
 Expense Which are allowed for deduction
 Direct cost of production or sales
 CGS—for merchandising firm(using weighted average method) and
manufacturing firm.
 Construction cost---For construction company
 General and administrative expenses( by applying immediate
recognition).
 Insurance Payment related to the business.
 Expense incurred for the promotion of business---Maximum limit by directive.
 Commission paid for services rendered, provided that the amount shall not
exceed the normal rates provided by other similar businesses or persons.

 Salaries and wages or other benefit paid to the children of proprietors or

member of partnership. Subjected to the following two conditions;
 such employees shall have the required qualification.
 the salary payable for such employs shall be equivalent for the post.
 Pension expense: If it is less than 15% of basic salary of employee.
 Interest expense, if the lending institution is recognized by NBE and should not
exceed the rate between Commercial banks and NBE by more than 2%.
 Bad debt—If any proved Uncollectible and if the related income /revenue is
reported for uncollectible receivable.
 Donation/ support to others.
 Humanitarian aid( For NGOs)
 Emergency call by the government
 Non-commercial education and health service
Depreciation expense: Fixed percentage
method(straight line method) and by categorizing plant
asset
– Building: 5% of the original cost.
– Intangible Assets: 10% of the original cost. (straight-
line basis).
– Computers, information systems, software products
and data storage equipment: 25% of book value(on a
pooling system).
– All other business assets: 20% (on a pooling system)
N.B: Expenditure for acquisition if it is less than or equal
to 1000 birr can be deducted.
Expenditure for maintenance it is less than or equal to
20% of related asset deductible as expense.
 Non-allowable Deductions
• All those expenses, which are not wholly or exclusively
incurred for the business activity, shall not be allowed as
deductions per the provisions of law. Such expenses include:
– Additional investment: an increase in the share capital of a
company or the original capital of a registered partnership
– Pension or provident fund contribution in excess of 15% of the
monthly salary of employees
– Business profit tax and input value added tax ;- but they can be
recovered through collection on sales.
– Fines or penalty paid under violation of law
– Losses that are not connected with the business activity
– Losses recoverable by insurance
– Entertainment expenses
– Personal consumption expenses
– Salary, wages, and other personal benefit paid to the partner, or
proprietor of an enterprise
Example:
ABC metal work enterprise
Income statement
For the year ended sene 30,2011
Sales----------------------------------------------------1,157,898
Less: CGS…………………........................................(1064,218)
Other direct cost of production………………………..(27,753)
Gross profit……………………………………………………..65,923
Operating expense…………………………………………(27002)
Profit before tax……………………………….……………38,921 birr
 The following information is obtained after assessment
1) Deprciation expense overstated by 230 birr
2) Capital expenditure wrongly deducted by 8580 birr and related deprciation is715
birr not deducted in income statement.
3) Miscellaneous expense with no source document is 768 birr
4) Donation not allowed to be deducted= 200 birr
5) Penality =80 birr and Un-allowable salary for propriter= 580 birr were deducted
6) 25% telephone expense of 552 is for personal purpose.
Required:prepare income statement for tax purpose,compute taxable incomne as per
the income tax regulation and determine tax liability.
 Withholding income taxes or profit taxes
 Technically refers to advance payment of profit tax by a
business. Business pay some portion of profit tax liability
in advance of declaration and payment.

 Who withhold? Delegated withholding agent by tax

authority: Bodies having legal personality, government
agencies, non-profit organizations, or non-governmental
organizations and other tax payers required to withhold
tax for the supply of goods in Ethiopia involving more than
10,000 Birr in one transaction and supply of services
involving more than 3,000 Birr in one transaction at the
rate of 2% of the gross amount of a payment made.
 The withhold amount would be accounted during the
period and it would be deducted from business profit tax.
 Withholding tax on imported item
• A current payment of income tax shall be collected on
Schedule C income at the time of import of goods for
commercial use, and the collected amount treated as tax
withheld that is creditable against the taxpayer's income
tax liability for the year.
• The amount collected on import of goods shall be three
percent (3%) of the sum of cost, insurance, and freight ("CIF
value").
• If the amount of income tax collected on the import of
goods results in underpayment of business income tax due
for the year, as determined at the time of declaration of
income tax, the taxpayer is required to pay the difference
with the declaration. If the amount represents an
overpayment of income tax due for the year, the Tax
Authority shall after ensuring the accuracy of the books and
records refund the taxpayer the amount overpaid within 3
months period.
• Example: ABC enterprise(PLC) has sold
supplies of birr 500,000 to Hawssa university
On Jan 15,2015. it also imported goods of
200,000 birr during 2015. at the end of 2015,if
reported taxable income of 900,000birr
• Required Determine tax withhold by HU and
record the tax for ABC enterprise. Determine
the tax payment at the end of 2015.
 Administration, Assessment and payment of business
income tax

Categories of Business income Taxpayer

For administration of tax, business income tax payers are
categorized into:
1.Category “A” taxpayer being a body or any other person
having an annual gross income of Birr 1,000,000 or more.

2. Category “B” taxpayer being a person, other than a body,

having an annual gross income of Birr 500,000 or more but less
than 1,000,000.

3. Category “C” taxpayer being a person other than a body,

having an annual gross income of less than Birr 500,000.
 Tax assessment
 Assessment by book/self assessment for category ‘’A’’ and
Category ‘’B” tax payers since They maintain books of accounts.
 Assessment by estimation For category ‘’C’’ tax payers since they
do not maintain books of accounts. And based on given schedule
 Tax declaration and payment
 Tax accounting period is from Hamle 1 to sene 30, but it can be
differing from this based on agreement with tax authority.
 First organizations themselves declare the tax liability and related detail.
Then, the tax authority review the detail and notify final tax liability
after adjustment (if any)
 Taxpayers shall submit the tax declaration to the tax authority
at the time of submitting the balance sheet, and the profit and
loss account for that tax year within the time prescribed below:
– Category “A” taxpayers within four months from the end of the tax
year.
– Category “B” taxpayers within two months from the end of tax year.
– Category “A” taxpayers required to submit balance sheet, and the
profit and loss account.
– Category “B” taxpayers required to submit only the profit and loss
account.
 Declaration for category ‘’C’’ taxpayers every hamle 30 from
the end of fiscal year(June 30)
 D. Taxation of Other Income
• There are many types of income that need to be
taxed for equity, efficiency and revenue purposes.
• The income tax proclamation provides provisions to
catch those sources of income that do not fall
under the three schedules discussed earlier:
income from employment, income from rental of
building, and business income.
• The incomes that are not included in these three
schedules are many in type and nature and thus
taxed at different rates depending on their
characteristic.
• Income tax proclamation specifies these types of
income as Schedule “D” income and are discussed
as follows.
I) Royalty
 Royalty income 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.

 A resident of Ethiopia who derives a royalty shall be liable for

income tax at the rate of 5% on the gross amount of the royalty.

 Non-resident who derives an Ethiopian source royalty that is

attributable to a permanent establishment of the non-resident
in Ethiopia shall be liable for income tax at the rate of 5% on the
gross amount of the royalty.

 The payer should withhold and transfer to the tax office.

 If the payer resides abroad, the recipient is responsible to make
the payment.
II) Income from rendering of professional service.
 The term technical service means any kind of expert advice or
technological service rendered.
 Income from locally provided technical or professional service is taxed
at a flat rate of 5%.
 Whereas, income received from rendering service abroad is taxed at a
flat rate of 10%.
 The Tax shall be withheld and paid to the Tax Authority by the payer.
III) Tax on Income from Games of Chance:
 games of chance means a game whose outcome depends primarily on
chance rather than the skill of the participant, including a lottery, card
game, or tombola.

 Person who derives income from winning at games of chance held in

Ethiopia shall be liable for income tax at the rate of 15% on the gross
amount of the winnings except the winnings are less than 1000 Birr.

 In computing the gross amount of winnings, no deduction shall be

allowed for any loss incurred by the person from games of chance.
 The Tax shall be withheld and paid to the Tax Authority by the payer.
IV) Tax on Dividend Income
• A resident of Ethiopia who derives a dividend shall be liable for income
tax at the rate of 10% of the gross amount of the dividend.
• A non-resident who derives an Ethiopian source dividend that is
attributable to a permanent establishment of the non-resident in
Ethiopia shall be liable for income tax at the rate of 10% on the gross
amount of the dividend.
• The withholding agent shall withhold or collect the tax and account to
the Tax Authority
V) Income from casuals rent of property
A person who derives income from the casual rental of property in
Ethiopia (including any land, building, or movable property) shall be liable
for income tax on the annual gross rental income at the rate of 15% of the
gross amount of the rental income.

VI) Tax on Interest Income on Deposits

 A resident of Ethiopia who derives interest shall be liable for income tax
at the rate of 5% of the gross amount of the interest in the case a
savings deposit with a financial institution that is a resident of Ethiopia.
In any other case, 10% of the gross amount of the interest.
 A non-resident who derives Ethiopian source interest that is
attributable to a permanent establishment of the non-resident in
Ethiopia shall be liable for income tax at the rate of 5% of the gross
amount of the interest in the case a savings deposit with a financial
institution that is a resident of Ethiopia. In any other case, 10% of
the gross amount of the interest.
 The payers are required to withhold the tax and account to the Tax
Authority
VII) Tax on Gains of Transfer of Certain Investment Property
• A person who derives a gain on the disposal of immovable property,
a share, or bond (referred to as a taxable asset) shall be liable to pay
income tax at the rate of 15% for immovable property and 30% for
shares and bonds on the amount of the gain.
• The amount of a gain on disposal of a taxable asset by a person shall
be the amount by which the consideration for the disposal of the
asset exceeds the cost of the asset at the time of disposal.