Income Tax in Ethiopia

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.

Business Income Tax Rates:

1.      The rate of business income tax applicable to a body is 30%.

2.      The rates of business income tax applicable to an individual are:

Taxable Income (per year) Birr	Business Income Tax Rate
0 - 7,000	0%
7,001-19,300	10%
19,301-37,750	15%
37,751-62,350	20%
62,351-93,100	25%
93,101-130,000	30%
Over 130,000	35%

Taxable Income:

1.      The taxable income of a taxpayer for a tax year shall be the total business income of the taxpayer for the year reduced by the total deductions allowed to the taxpayer for the year.

2.      The taxable income of a taxpayer for a tax year shall be determined in accordance with the profit and loss, or income statement, of the taxpayer for the year prepared in accordance with the financial reporting standards, subject to any modifications made in this Proclamation, regulations made by the Council of Ministers, and directives issued by the Minister.

 Business Income:

1.      Subject to this Proclamation, the business income of a taxpayer for a tax year shall include the following:

a)     the gross amounts derived by the taxpayer during the year from the conduct of a business, including the gross proceeds from the disposal of trading stock and the gross fees for the provision of services (other than employment income);

b)    the gross amounts derived by the taxpayer during the year from the investment of the capital of a business, including dividends, interest, and royalties;

c)     a gain on disposal of a business asset (other than trading stock) made by the taxpayer during the tax year;

d)  any other amount included in business income of the taxpayer for the tax year under this Proclamation.

2.      Business income shall not include an amount that is exempt income.

3.    Subject to sub-article (4) of this Article, the gain on disposal of a business asset included in business income under sub-article (1)(c) of this Article is the amount by which the consideration for the disposal of the asset exceeds the net book value of the asset at the time of disposal.

4.      If a business asset is a taxable asset under Article 58 of this Proclamation:

a) the gain on disposal of the asset included in business income under sub-article (1)(c) of this Article is the amount (if any) by which the cost of the asset exceeds the net book value of the asset at the time of disposal; and

b) any gain above cost is taxable under Article 58.

Deductible Expenditures

1.      Subject to this Proclamation, in determining the taxable income of a taxpayer for a tax year, the deductions allowed to a taxpayer shall include the following:

a)     any expenditure to the extent necessarily incurred by the taxpayer during the year in deriving, securing, and maintaining amounts included in business income;

b)      the cost of trading stock disposed of by the taxpayer during the year as determined in accordance with the financial reporting standards;

c)     the total amount by which the depreciable assets and business intangibles of the taxpayer have declined in value during the year from use in deriving business income as determined under Article 25 of this Proclamation;

d)     a loss on disposal of a business asset (other than trading stock) disposed of by the taxpayer during the year;

e)     any other amount allowed as a deduction to the taxpayer under this Proclamation for the year.

2.      Article 58 of this Proclamation and not sub-article (1)(d) of this Article shall apply to a loss on disposal of a taxable asset except when the taxable asset is a depreciable asset.

3.    For the purposes of sub-article (1)(d) of this Article, a loss on disposal of a business asset is the amount by which the net book value of the asset at the time of disposal exceeds the consideration for the disposal.

Non-deductible Expenditures and Losses:

1.  Except as provided for in this Proclamation, no deduction is allowed for the following:

a) an expenditure of a capital nature except to the extent provided for under Article 22(1)(c) of this Proclamation;

b) an increase in the share capital of a company or the basic capital of a registered partnership;

c) voluntary pension or provident fund contributions in respect of an employee in excess of 15% of the monthly employment income of the employee;

d) dividends and paid-out profit shares;

e) an expenditure or loss to the extent recovered or recoverable under a policy of insurance, or a contract of indemnity, guarantee, or surety;

f) a fine or penalty imposed, or punitive damages awarded, for violation of any law, regulation, or contract;

g) an amount that a person has transferred, in its financial accounts, to a reserve or provision for expenditures or losses not yet incurred but expected to be incurred in a future tax year;

h) income tax paid under this Proclamation or under a foreign tax law, or recoverable value added tax;

i) representation expenditures of an employee in excess of 10% of the employment income of the employee;

j) expenditure incurred in the provision of entertainment, except:

(1) when the person’s business involves the provision of entertainment; or

(2) to the extent that the expenditure is allowed as a deduction under a Directive issued by the Minister relating food provided to for free to employees by an employer conducting a mining, manufacturing, or agricultural business;

k) a donation or gift except as provided for in Article 24 of this Proclamation;

l) personal consumption expenditure;

m) a loss on the disposal of a business asset by a taxpayer to a related person;

n) expenditure to the extent disallowed under regulations to be issued by the Council of Ministers.

2.  If a withholding agent is allowed a deduction for a payment from which the agent is required to withhold tax under Part Ten of this Proclamation, the agent shall not be allowed to claim the deduction until the withholding tax has been paid unless to the Authority.

3.  In this Article, “entertainment” means the provision to any person of food, beverages, tobacco, accommodation, amusement, recreation, or hospitality of any kind.

Loss carry forward:

1.      If the total amount of deductions allowed to a taxpayer for a tax year (other than a deduction allowed under this Article) exceeds the total business income of the taxpayer for the year, the amount of the excess shall be the taxpayer’s loss for the year.

2.      Subject to sub-article (4) of this Article, if a taxpayer has a loss for a tax year, the taxpayer shall carry the amount of the loss forward to the next following tax year and the loss shall be allowed as a deduction in computing the taxpayer’s taxable income for that following year.

3.      If a taxpayer is not able to wholly deduct a loss under sub-article (2) of this Article, the taxpayer shall carry the amount not deducted forward to the next following tax year and apply the amount as specified in sub-article (2) of this Article in that year, and so on until the loss is fully deducted, but a taxpayer shall not carry a loss forward for more than 5 tax years after the end of year in which the loss was incurred.

4.    If there has been two tax years in which a taxpayer has incurred a loss under sub-article (1) of this Article and each of those losses has been carried forward under sub-article (2) of this Article, the taxpayer shall not be permitted to carry forward any further losses under sub-article (2) of this Article.

5.      A taxpayer shall carry forward a loss under sub-articles (2) and (3) of this Article in accordance with the Regulations.

Tax Administration:

Tax Declarations:

1.    An employee whose income for a tax year consists exclusively of employment income shall not be required to file a tax declaration unless the employee has more than one employer for a calendar month.

2.    If an employee has more than one employer for a calendar month, the employee shall file a tax declaration for the month within 30 days after the end of the month.

3.      For an employee who is not required to file a tax declaration, the withholding tax certificate provided by the employer to the employee under Article 94 of this Proclamation for a month shall be treated for the purposes of this Proclamation and the Tax Administration Proclamation as an assessment of the amount of tax payable by the employee for the month being that amount as set out on the statement.

4.      A Category ‘A’ or Category ‘B’ taxpayer shall file a tax declaration for a tax year within:

a)     for Category A taxpayers, 4 months from the end of the tax year; or

b)     for Category ‘B’ taxpayers, 2 months from the end of the tax year.

5.      A tax declaration filed under sub-article (4) of this Article for a tax year shall be accompanied by:

a)     for a Category ‘A’ taxpayer, the taxpayer’s profit and loss statement and balance sheet for the year; or

b)     for a Category ‘B’ taxpayer, the taxpayer’s profit and loss statement for the year.

6.      A Category ‘C’ taxpayer shall file a tax declaration within the period specified in Article 82(4) of this Proclamation.

7.      A taxpayer who has Schedule ‘D’ income for a tax year that is not discharged by the withholding of tax from the income shall file a tax declaration within two months after the date of the transaction giving rise to the income.

Payment of Tax:

1.      The employment income tax payable by an employee for a calendar month shall be due on the date that the taxpayer’s tax declaration for the month is due.

2.      The tax payable for a tax year by a Category ‘A’ or Category ‘B’ taxpayer shall be due on the date that the taxpayer’s tax declaration for the year is due.

3.      The tax payable by a taxpayer to whom Article 81(7) applies in respect of a transaction shall be due on the date that the tax declaration in relation to the transaction is due.

4.      A Category ‘C’ taxpayer shall pay tax on the 7th day of July to the 6th day of August each fiscal year in accordance with the standard assessment applicable to the taxpayer.

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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.