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CHAPTER FOUR

ETHIOPIAN TAX SYSTEM

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Structure of Ethiopian Tax System and

Administration
• The 1995 Constitution of the Federal Democratic
Republic of Ethiopia (FDRE) classifies taxation
power into three:
Federal government revenues include:
Income tax on employees of the federal
government and international organizations.
Income, profit, sales and excise taxes on
enterprises owned by the federal government.
Tax on income of air, rail and sea transport
services.
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Regional states revenues include:

Income tax on employees of the state and of
private enterprises.
Taxes on the income of private farmers and
farmers incorporated in cooperative associations;
Profit and sales taxes on individual traders
carrying out a business within their territory;
Profit, sales, excise and personal income taxes on
income of enterprises owned by the states.
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Joint federal and regional states revenues:

Profit, sales, excise and personal income taxes on
enterprises they jointly establish.
Taxes on the profits of companies and on dividends
due to shareholders.
Taxes on incomes derived from large scale mining
and all petroleum and gas operations and royalties
on such operations.
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Assignment of revenues and tax administration

organs are:
Ethiopia revenue and custom authority (ERCA)
 Regional revenue authorities.
ERCA is responsible for administration of
revenues that belong exclusively to the federal
government and those concurrently owned by both.
Regional revenue authorities are entrusted with the
responsibility of administering taxes assigned to
them.
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Cont......

The principal taxes in Ethiopia are

Income taxes
Type of tax governments impose on income
businesses and individuals within their jurisdiction.
Value added tax (VAT)
 Consumption tax that is collected by VAT-registered traders on
their supplies of goods and services.
 VAT is charged at the point of sale.
Turnover tax (TOT)
 A turnover tax is a tax applied to a product at a specific stage
of production.
Excise taxes
 Excise taxes are taxes levied on specific goods or services
like fuel, tobacco and alcohol.
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INCOME TAX IN ETHIOPIA

Is a tax levied upon the incomes of an

individual.
According to the Income Tax Proclamation
Number 979/2016, income is defined as
“Every sort of economic benefit including non-
recurring gains in cash or in kind, from whatever
source derived and in whatever form paid
credited or received”.
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Sources

Employment
Business activity
Entertainment
Music and personal activities of a sports person
Entrepreneurial activities
Movable property attributable to a permanent
establishment in Ethiopia;
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Cont....

Immovable property and apparatuses thereof

Livestock and inventory in agriculture and
forestry
Alienation of property (transfer of property from
owner to some body either owner alive or dead).
Dividends of a resident company;
Profit shares paid by a resident registered
partnership
Interest
License fees.
 Income Tax Jurisdiction 10

There are three income tax jurisdictions in which

governments of a given country uses.
1. Territorial(source-based) jurisdictional rules.
This focuses on the source of the income.
Countries that adopt this approach only tax
income sourced within their geographic borders,
irrespective of where the taxpayer resides.
2)Worldwide(residence-based) jurisdictional rules.
This focuses on the taxpayer’s country of
residence.
Countries that adopt this broader approach tax
their residents on both their domestic and
foreign source income but only tax foreign
residents on their locally sourced income.
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Cont....
2) Residency principle
Principle according to which the resident of the country
subject to tax on their world wide income and non-residents
are subject to only domestic-income source.
3. Citizenship principle
Based on nationality of a person on a given country.
A person subject to tax on the income of the country they
are citizen of, weather or not they reside in the country and
weather or not the income they generate is sourced in that
country.
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For the purpose of income taxation, residents are defined as

including:
(i)One who has permanent residence address in Ethiopia.
(ii) If the person has a place in Ethiopia that he frequently
resides in
(iii)If the person is an Ethiopian citizen but lives abroad for
the purpose of councilor office, diplomatic or for any
official duty.
iv. An individual, who stays in Ethiopia for more than 183
days either continuously or intermittently shall be resident.
As far as bodies are concerned, they will be considered as
residents
(i) A resident body is body that is incorporated or formed in
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Income taxation system

There are two important systems of income taxation
1. The global system of income taxation
Under the global system of taxation, an individual has
to declare his/her aggregate income for the purpose of
taxation.
2. The scheduler system of income taxation
Is the system adopted in Ethiopia takes the different
sources of income of an individual into consideration for
the purpose of taxation.
• Each source of income is considered to have its own
identifying unique features for the purposes of taxation.
• Sources of income have to be properly identified
according to the correct schedule set by the system.
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Major Schedules of the Income Tax

The Income Tax Proclamation No. 286/2002 has

classified sources of income into four schedules.
Schedule 'A' Income from employment;
Schedule 'B' Income from rental buildings;
Schedule 'C' Income from business;
Schedule 'D' Income from other sources.
Schedule E: exempt income.
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Schedule “A” Income (Employment Income Tax)

• Employment income tax (EIT) is levied each calendar
month on the employment income that tax-resident
employees receive during that month.
• It refers to a tax levied and charged by a government
on the amount of taxable income of taxable person.
• It is a tax on earnings or income from employment of
an individual.
• An employment income tax is the tax that an
employee/worker pays on a monthly basis from the
payment that he receives from his employment.
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What is the scope of employment income tax?

An Ethiopian income tax system is based on the principle of
residence.
Any resident individual who is employed and who generates
income from employment shall pay employment income tax
on his worldwide employment income.
However, Non-resident individual who is employed and
who generates employment income in Ethiopia shall pay
employment income tax on his Ethiopian employment
income source only.
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What is Employment Income?

• It refers to any payment received or receivable by an
employee from his employer(s) by virtue of rendering
services to the employer(s) and not by virtue of personal
considerations.
• It may even comprehend non-monetary benefits and
perquisites (personal advantages).
• In our country’s context, article 12(1) of Income Tax
Proclamation No. 979/2016 defines employment income,
also called personal Income or schedule ‘A’ income as:
“Employment income shall include any payments or
gains (benefits) in cash or in kind received from
employment by an individual.”
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Ingredients of Employment Income

a. Basic Salary (Wage)

• Means the regular payment to which a worker is entitled in
return for performance of the work that he performs under a
contract of employment.
b. Overtime Pay (Overtime Earning)
 The amount payable to an employee for overtime work
performed by the employee during a specific payroll period
say a month.
• It is a payment to an employee for the work done by the
employee in addition to his regular/normal working hours.
• It is the work done in excess of the regular working hours.
 • In Ethiopia, in this respect, article 68 of labour
proclamation No. 377/2003 discussed the
following points about how overtime work should
be paid.
1. A worker shall be entitled to be paid at a rate of
one and one-quarter (1 ¼) times the ordinary
hourly rate for overtime work performed before
10:00 P.M in the evening western time.
2. A worker shall be paid one and one half (1 ½)
times his ordinary hourly rate for overtime work
performed between 10:00 P.M and 6:00 A.M in
the morning.
3) A worker shall be paid two (2) times the ordinary hourly
rate for overtime work performed on weekly rest days.
4) A worker shall be entitled to be paid at a rate of (2 ½)
times the ordinary hourly rate for overtime work
performed on a public holiday.
Bonus
It is payments made for
• Outstanding performance of employees.
• Achieving results better than usual.
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Schedule “A” income

Taxable employment Tax rate (%) Deduction
income (Birr)

Over To Birr
Birr
0 600 The first 600 Tax No tax
exempted
601 1,650 The next 1,050 10 60
1,651 3,200 The next 1,550 15 142.5
3, 201 5, 250 The next 2,050 20 302.5
5, 251 7, 800 The next 2,550 25 565
7, 801 10, 900 The next 3,100 30 955
Over 10, 900 Over 10,900 35 1, 500
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Exemption from Employment income

• Income tax proclamation no 979/2016 the following
categories of income shall be exempt from payment of
tax.
An amount paid by an employment to cover the actual
cost of medical treatment of an employee.
An allowance in lie instead of means of transportation
granted under a contract of employment.
A hardship allowance.
Transportation allowance up to 25% of basic salary but
not exceeding Br 2,200.
Amounts paid to recover traveling expenses incurred on
duty by employees.
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Allowances for employees engaged in public service in

foreign country.
Contribution by an employer to pension, or other
retirement fund for the benefit of an employee provided
the monthly total of contributions does not exceed 15% of
the monthly employment income of the employee.
A scholarship or financial support for attendance at an
educational institution.
Salaries paid to domestic servants (the employment of
hired workers by private household for the performance
of tasks such as house cleaning, cooking, childcare and
gardening).
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Schedule “B” Income-Tax on Income from Rental of

Buildings
This is the tax imposed on the income from rental of
buildings.
Rental income tax is levied on an annual basis.
If the taxpayer leased furnished quarters, the amounts
received attributable to the lease of furniture and
equipment would be included in the income and taxed.
The tax payable on rented houses would be charged at the
following rates:
▫ On income of bodies/corporation 30% of taxable
income.
▫ On income of persons according to the schedule on the
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Schedule B income
Income from Rental of Buildings Tax rate (%) Deduction
(Birr)
Over Birr To Birr

0 7,200 0

7,201 19,800 10 720

19,801 38,400 15 1,710

38,401 63,000 20 3,630

63,001 93,600 25 6,780

93,601 130,800 30 11,460

Over 130,800 35 18,000

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Conditions of payment:

The owner of a building who allows a lessee to sub-lease is

liable for the payment of the tax for which the sub-lessor is
liable, in the event the sub-lessor fails to pay.
When the construction of a rental building is completed or
when the building is rented, the owner and the builder are
required to notify the administration of the Kebele in which
the building is situated about such completion and the
name, address, and tax identification number of the person
or persons subject to tax on income from rental of building;
The Kebele administration has the obligation to
communicate the information obtained to the appropriate
tax authority.
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Deductions
(i) Taxes paid with respect to the land and buildings being leased;
except income taxes.
(ii) 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.
(iii) For taxpayers maintaining books of account, the expenses
incurred in earning, securing, and maintaining rental income, to
the extent that the expenses can be proven by the taxpayer and
subject to the limitations specified by this Proclamation,
deductible expenses include (but are not limited to) the cost of
lease (rent) of land ,repairs , maintenance, and depreciation of
buildings, furniture and equipment in accordance with Article 23
of this Proclamation as well as interest on bank loans, insurance
premiums.
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Schedule C Income- Business Income/ Profit Tax

This is the tax imposed on the taxable business income /
net profit realized from entrepreneurial activity.
Taxable business income would be determined per tax
period on the basis of the profit and loss account or
income statement, which shall be drawn in compliance
with the international accepted accounting standards
Corporate businesses are required to pay 30% flat rate of
business income tax.
For unincorporated or individual businesses the business
income tax ranges from 10% - 35%.
Unincorporated or individual businesses are taxed in
accordance with the “Schedule C’’ on the following
slide:
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The following expenses shall be deductible from gross

income in calculating taxable income:
The direct cost of producing the income, such as the
direct cost of manufacturing, purchasing, importation,
selling and such other similar costs.
General and administrative expenses connected with
the business activity.
Premiums payable on insurance directly connected
with the business activity.
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Expenses incurred in connection with the promotion of the

business inside and outside the country
Commissions paid for services rendered to the business
The following categories of income would be exempted from
payment of business income tax:
Awards for adopted or suggested innovations and cost saving
measures.
Public awards for outstanding performance.
Income specifically exempted from income tax by the law in
force in Ethiopia, by international treaty or by an agreement
made.
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Business income tax classifications

The Ethiopian tax system classifies businesses into three
categories – A, B and C according to whether the business
is incorporated or not and the size of the business as
measured by its turnover.
Incorporated taxpayers (corporations) are classified as
Category A and face the same tax rate (30%) and
administrative requirements regardless of their size.
For unincorporated taxpayers, these categories determine
the information that firms are required to submit when
reporting to the revenue authority, and whether the firm
must use a cash or an accruals basis for accounting.
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Categories of firms Thresholds

Category “A” Over ETB 1 million

This threshold applies to
unincorporated businesses or individual
businesses.
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Reporting requirement
Businesses are required to submit a financial statement and a
profit and loss statement showing their gross profit and the
manner in which it is computed, general and administrative
expenses, depreciation and provisions and reserves.
 Uses accrual basis of accounting.
Businesses liable for rental income tax are required to keep
records of rental income received, fees and charges paid to a
state or city administration in relation to the rented building
and expenditure incurred by the taxpayer in relation to the
rented building and keep a register of rental buildings showing
the acquisition date, the cost of acquisition any cost of
improvement in relation to the building and the current net
book value of the building.
 NBV=Acquisition cost of fixed asset-Accumulated
depreciation
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Category “B”
 Threshold =ETB 500,000 to ETB 1 million
Reporting requirements
Businesses are required to submit a profit and loss
statement that summarizes the revenues and expenses of the
business over the reporting period but no balance sheet
(financial statement) information is required.
They can keep simplified books of accounts using cash
basis accounting and must file their returns within two
months of the end of the financial year reflecting the
simplified requirements.
 Similar to Category A taxpayers, if these businesses are
liable for rental income tax, they are expected to keep
records in relation to the rented building.
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Category “C”
Threshold=Below ETB 500,000
Reporting requirement
Businesses are not required to keep books of accounts, as
firms pay their taxes based on an assessment made by the
Minister of revenue.
 However they can pay according to the information from
their own books of accounts if the Minister of revenue finds
that acceptable and grants them a permission to do so.
Category “C” taxpayers must pay their tax liability within
one month of the end of the financial year.
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SCHEDULE ‘D’ INCOME: OTHER INCOMES

• 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.
Incomes chargeable under this Schedule of income:
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1. Tax on Income from Royalties (Article- 54):

‘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.
Royalties income shall be liable to tax at a flat rate of 5% on gross
amount.
The withholding agent who effects payment shall withhold the
foregoing tax and account to the Tax Authority.
2. Income from Games of Chance (Article- 57):
Every person deriving income from winning of games of chance
(e.g., lotteries, tombola and other similar activities) shall be subject
to tax at the rate of 15% on gross amount, except for winning of
less than 1000 Birr.
The payer shall withhold or collect the tax and account to the Tax
Authority.
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3. Dividends (Article- 55):

Every person deriving income from dividends from a
share company or withdrawals of profits from a private
limited company shall be subject to tax at the rate of 10%
on gross amount.
The withholding agent shall withhold or collect the tax
and account to the Tax Authority
4. Income From Causal Rental of Property (Article-
58):
Including any land, building or moveable asset not related
to a business activity.
This type of income is subject to tax at a flat rate of 15%
of the annual gross income.
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5. Interest Income on Deposit (Article- 56):

Every person deriving income from interest on saving deposits
shall pay tax at the rate of 5% of the gross amount of interest.
In any other case 10% of the gross amount of interest.
6. Gain on Transfer of Certain Investment Property (Art- 59):
This is the tax payable on gains obtained from the transfer (sale
or gift) of building held for business, factory, office and shares of
companies.
Such income is taxable at the following rates:
Building held for business, factory and office at the rate of 15%.
Shares of companies at the rate of 30%.
Gains obtained from the transfer of building held for residence
shall be exempted from tax provided that such building is fully
used for dwelling for two years prior to the date of transfer.
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Cont...

Undistributed profit
 10% on the gross amount of undistributed profit.
Gains on disposal of investment asset
15% for disposal of an immovable asset 30% for disposal
of a share or a bond.
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Cont....

Schedule “E” ( Exempted income)

These include:
Any amount paid by an employer to cover the actual cost of
medical treatment of an employee.
Hardship allowances given to employees.
An allowance for transport costs granted under a contract
of employment.
Travel expenses and a per diem payment to cover
accommodation and food for employees travelling as part of
their work.
The cost of travel from and to an employee’s normal place
of residence if that differs from the place of employment,
both at the start and end of the term of employment.
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Consumption Taxes
• Value-Added Tax
• VAT is consumption tax charged on the value added to
goods & service.
• VAT is ultimately borne by the consumers.
• It is added on charged value (incremental value or newly
created value of goods and service.
• According to VAT proclamations No: 285/2002 and VAT
regulation No: 79/2002
• VAT is payable on taxable supplies made in Ethiopia by
taxable person or taxable activities.
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VAT registration in Ethiopia

Mandatory/obligatory registration
• If annual turnover or taxable transactions exceeds or likely
to exceed Br500,000.
Voluntary registration
• Even annual turnover doest exceeds Br 500,000 a person
can apply to be registered for VAT if the person supplies
more than 75% of supplies and goods for taxable person.
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Cont...

• Turnover taxes replaced sale tax.

• Rate of turnover taxes
• The Turnover Tax shall be:
• 2% on Goods sold locally
• For services rendered locally:
2% on contractor, grain mills, tractors and combine-
harvesters.
10% on others.
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Cont...

Obligation to Collect and Transfer the Turnover Tax

A person who sells goods and services has the obligation to
collect the Turnover Tax from the buyer and transfer it to
the Tax Authority.
 Hence, the seller is principally accountable for the
payment of the tax.
Excise tax
 Is tax charged on goods manufactured domestically by a
licensed manufacturer.
Stamp duties
A stamp duty is a tax that governments place on documents
that are required to legally record certain types of
transactions such as real estate, patents or copyrights.
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Cont...

Custom duties
The rate of customs duty ranges from 0% to 35% with an
average.
Ethiopia has reduced customs duties on a wide range of
imports, including the removal of tariffs on agricultural
equipment but duties still remain high on certain items, such
as vehicles.
Sur-Taxes
 A surtax is an additional tax imposed by a government on
taxpayers that is in addition to another tax.
 Surtax is charged when the government wants to raise
funds to cover a specific program, such as a health or
military initiative.
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