Tax Laws in Ethiopia
By Fikadu Asfaw and Associates Law Office, Ethiopia
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Brief note on the various tax laws of Ethiopia. In Ethiopia there are two types of tax. These are direct and indirect tax.
I. Direct Tax
According to proclamation No 286/94 any person whose permanent residence is in Ethiopian, has to pay tax from the income that he gets within Ethiopia or abroad. If the person is not resident of Ethiopia gets his income which has its source in Ethiopia also should pay tax. This is direct tax, which a person pays from any income he gets. Article five of the proclamation, defines resident as follows:
A. The one who has permanent residence address in Ethiopia; or
B. If the person has a place in Ethiopia that he frequently resides in; or
C. If the person is an Ethiopian citizen but lives abroad for the purpose of councilor office, diplomatic or for any other similar purposes; and
D. If the person was present for 183 days in Ethiopia within 12 months permanently or other way, the law regards him as an Ethiopian resident and imposes him an obligation of paying tax from any income he gets.
According to Art 8 of Proclamation No 286/94, there are certain types of income which are treated under direct tax. These are:
A. Income from Employment
B. Income from rent of house
C. Income from business( trade) activities
D. And others
Under other we can find many sources of income such as:
Income From Rent of Patent and Copyright
Income From Winning Lottery
Income From Share in Company Etc
So, any employed person should pay tax from his salary according to table A of the proclamation. Employers should deduct the appropriate tax from the salary of their employees and should submit to the tax authority.
In the same way an income from rent of house is treated under direct tax. If the income is from legal persons, the owner should pay 30% of the income if it is from an individual, it should be paid according to table B of the proclamation No 286/94.
Income tax shall impose on taxable business income realized from entrepreneurial activity.
Taxable business income of bodies is taxable at the rate of 30%. If the tax is from an individual it will be taxed according to table c of proclamation. 286/02 Accordingly:
1. An income from royalties or an income which come from rent of copyright shall be liable to tax at a flat rate of five percent.
2. Income from hindering of technical services will be taxed at a flat rate of ten percent.
3. Income from games of chance (e.g. Lottery) shall be subjected to tax at the rate of 15% except from winning less than 100 birr.
4. Any person who derives an income from dividends from a share company shall be subject to tax at the rate of 10%.
5. Income from Rental of property (any land, building or movable asset) not related to a business activity shall be taxed on the annual gross income at the rate of 15%.
6. Every person deriving income from interest on deposits shall pay tax at the rate of 5%.
These are some of sources of income that should be treated under direct tax. The implementation of the tax proclamation and shall be the duty of the tax authority.
II. Indirect Tax
Indirect tax is a kind of tax which the tax payer collects it from the customers indirectly and not from his own income. This means, the tax money comes from the customers. The tax payer adds selling price on the service or product he renders so that the customers may pay the tax indirectly. There are three types of indirect tax:
Value Added Tax (VAT)
Turnover Tax; and
According to Proclamation No 285/94 the following persons are bound to pay VAT are the registered payers or the one who should be registered for VAT:
Registered, according to Art 17, means one who voluntarily registered for VAT;
The one who should be registered is a person who carries on taxable activity and is not registered, if the person:- at the end of any period of 12 calendar months made during that period, taxable transaction to the total value of which exceeded 500,000 birr; or
At the beginning of any period of 12 calendar months there are reasonable grounds to expect that the total value of taxable transactions to be made by the person during that period will exceed 500,000 birr. The ministry of finance and Economic Development may be directive increase or decrease the threshold. The rate of VAT is always 15% of the income.
When we come to turn over tax the following persons are liable for payment of TOT according to Art 3 of proclamation. No 308/95 for goods and services they sell in Ethiopia for value added tax shall pay turn over tax unless exempted under Article 7. The exemptions are as follows.
The sale or transfer of duelers used for a minimum of two years, or the lease of a dueling;
The rendering of financial service;
The supply of national or foreign currency and of security;
The rendering by religious organizations of religious or other related services;
The rendering by religious organizations of religious or at her related series;
The supply of prescription drugs specified in directives issued by the relevant government agency and the renderings of medical services;
The rendering of educational services provided by educational institutions, as well as child care services for children at pre-school institution;
The supply of goods and rendering of services in the form of humanitarian aid
The supply of electricity, kerosene and water;
The provision of transport;
Permits and license fees- the supply of books; and
The supply of goods or services by a worker shop employing disabled individuals if more than 60% of the employees are disabled. the minister of finance and economic development may, by directive, exempt other goods and services so an income from every goods treated under turn over tax, if they are sold within Ethiopia, shall be taxed by 2% and services rendered in Ethiopian such as construction, miles and tracker services shall be taxed 2% for any other services the tax will be 10%.
III. Obligations of Tax Payers
Any tax payer should pay his tax on time. This includes:
If he is obligated by law to have registered account he should do the same and
He should notify his income timely.
If the tax payer is an employer he should withhold the appropriate amount tax from the employees and pay to the tax authority.
Every tax payers, when asked by the tax authority, has an obligation:- to give information.
To submit records and documents.
If necessary to show the stock record for the authority when asked.
There are two forms of penalties that entail if the person does not comply with his obligation of tax payment:
(1) Administrative penalty; and
(2) Criminal penalties.
The administrative penalty includes the sell or seizure of tax payers property and pays the tax. The criminal penalty includes Imprisonment and fine.
ABOUT THE AUTHOR: Fikadu Asfaw Law Office
Fikadu Law Office is an Ethiopia law office providing advisory and litigation services to corporate and private clients in Ethiopia and throughout the world. The Law Office is licensed to practice throughout Ethiopia at all level of courts including Federal First Instance Court, Federal High Court, Federal Supreme Court, Cassation Court and any other similar legal tribunals.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.