MINISTRY OF REVENUES A BRIEF NOTE OF ETHIOPIAN

MINISTRY OF REVENUES A BRIEF NOTE OF ETHIOPIAN DOMESTIC TAXATION (Discussion Note For Korean Business Community In Ethiopia ) COMPILED BY: NEBIYOU SAMUEL Tax Advisor to the Minister October 2019 ADDIS ABABA 1

1. q INTRODUCTION The purpose of this presentation is to give an overview of Ethiopian domestic taxation provision. q q • • We hope this shall enable the business community to get awareness on what Ethiopian taxation structure, tax rate, tax base look like, time of return filing and payment of tax due under either self-assessed by tax payer or/and assessment by tax office. Legislations used: Income Tax Proclamation/ITP 979/2016 Income tax Regulation /ITR/ 410/2017 Tax Administration Proclamation/TAP/ 983/2016 Tax Administration Regulation/TAR/ 410/2017 2

• • • Vat Added Tax Proclamation /VAT/ 285/2002 VAT R 79/2002 Excise Tax Proclamation /ETP/ 307/2002 -amendment 76/2003 // 610/2008 Turnover Tax Proclamation/TOTP 308/2002 -amendment Stamp Duty Proclamation/SDP/ 110 /1998 -amendment /SDP/ 612/2008 q It worth's noting that this briefing note, under no circumstances, considered a substitute to the proclamation it refers to. 3

DISCUSSION POINTS 1. INTRODUCTION 2. ETHIOPIAN DOMESTIC TAXES 3. TAX REVENUE OWNERSHIP 4. TAX/CUSTOMS REFORM INITIATIVES 5. CONCLUSION 4

2. ETHOPIAN INLAND TAXES Taxation jurisdiction General: Taxation follows either of three jurisdictions: Territorial Income earned in a geographical territory of a country is subject to tax. Foreign Tax Credit Tax paid abroad is credited for an amount not more than the total tax payable (usually). An economy with transnational coverage 5

Nationality Income earned by nationals both from in and outside is subject to tax. Ethiopia has adapted a residential jurisdiction of taxation commencing 2003, replacing the previous territorial one. Any Ethiopian resident is subject to tax from in and out of Ethiopia nationals abroad are not subject to Ethiopian tax. 2. 1. SOURCES OF INCOME Income is defined to represent every sort of economic benefit from whatever source derived/paid, credited & received/. 6

Income taxable in Ethiopia includes mainly the following: Direct Tax § Employment § Rental of buildings § Business activities § Others including Dividends, Interest etc. . 7

2. 2 Scope of Application Residents of Ethiopia are subject to tax on their world wide/Global/ income, in which their foreign tax credit is granted. Tax shall be paid on the net undistributed profit, to the extent that it is not reinvested, of the body at the rate of 10 per cent Non-residents are subject to tax on their Ethiopian source income through technical fee. 8

Permanent Establishment/PE/ is a fixed place of business through which the business of a person is wholly or partly conducted. - A place of management , branch, office, factory, warehouse, or workshop, - A mining site, oil or gas well, quarry---- Taxable on Ethiopian sourced income. -Repatriated profit tax is payable @ 10 per cent 9

2. 3. SCHEDULES OF INCOME TAXES ¨ Domestic taxes are categorized in to schedules. ¨ Five schedules/A, B, C, D & E/ are legislated. ¨ Schedule is exempt income. ¨ Any income falls in either of the schedules. ¨ schedules are not subject to aggregation/Consolidation/ ¨ Income from different sources within the same schedule shall be aggregated. Schedule –A-Income from Employment Salary, wages, an allowance, bonus, commission, other remuneration, fringe benefits, termination pay. ¨ Payable monthly 10

Ø 35% is applied on a monthly taxable income in excess of birr 10900 monthly /130800 annually/ ØCollected by withholding i. e. deducted by employer except employees of diplomatic organizations who themselves declare and pay. ØAn employee working for more than one employer is also responsible to declare and pay by own self, the tax difference due to aggregation. 11

Schedule –B- Income from Rental of Buildings Individuals Individual leasers are taxed at a rate of 10%-35% is applied on a taxable income of greater than birr 130, 800. First birr 7200 is non-taxable for individuals. Body Corporate Subject to 30% flat tax rate. General Ø Payable annually maintain books of accounts. Relevant business expenses are deductible. Accounts are subject to audit of tax office on risk basis. 12

Schedule -C –Income from Business Individual Taxable at a rate of 35% is applied on a taxable income of greater than birr 130, 800 First birr 7200 taxable income is non-taxable. Ø Accounts Maintenance- IFRS compliant -subject to legal alteration- An annual income of >birr 1, 000/category ‘A’; Category ‘B’ simplified tax system/cash basis/ Body Corporate Tax rate: 30% Maintain accounts irrespective of level of annual income. IFRS compliant-subject to legal alteration. General 13 Tax base: business income of a person. Payable annually

Individuals with less than 500, 000 birr annual income are subject to standard presumptive taxation scheme. Business expenses are deductible from income in as long as justifiable. Loss incurred by tax payer is carried forward for not more than 5 year/proc. 979/2016 art. 26/ Tax holy-day allowed by investment law is entertained for specified period. Withholding taxation Scheme on account of schedule "c" tax is employed. All withholding taxes are final taxes (Schedule “D" taxes) except casual rent of property/15%/ 14 and non-business capital gains.

International Tax Schedule ‘c’ Foreign Tax credit foreign business income is allowed to off-set against tax payable by resident tax payer in Ethiopia/Art 45/. Foreign business lose is off-set against only foreign business income taxable under schedule ‘c’/Art 46/ Thin capitalization rule Interest expense charged by a foreign controlled resident co. and PE in excess of average debt ratio of 2: 1 /debt to equity/ is not deductible/Art. 47/ 15

Schedule "D" –Other Income For residents & Non-residents/Art. 51/ • Insurance premium and Royalty at 5% § § § § Dividend & interest at 10% Management or technical fee 15% Games of Chances at 15%. Casual rental of property at 15% Undistributed nor underinvested profit is taxable @ a rate of 10% A repatriated profit by PE is subject to tax @ a rate of 10% Specified non-business capital gains. Building held for business, Factory, Office at 15% ¨ Shares & bonds of companies at 30% ¨ These taxes are collected by withholding scheme, . 16

INDIRECT TAXES Unlike the business income tax these taxes are payable on consumption and production /Expenditure, documents and are not scheduled. Separate legislations are in place to enforce each tax. Common provisions catering for all taxes are in single legislation: Federal income tax administration proclamation 17

2. 2. 1. VALUE- ADDED-TAX / VAT/ Launched on January 1, 2003. Collected at all stages in the production and distribution in Ethiopia. Taxable at standard 15% and zero rate. Some goods & services are exempted. Businesses with an annual turnover of more than 1, 000 birr are taxable. Allows for a deduction (credit) of a tax paid on the preceding transaction/input/. Export sales are not subject to VAT /Zero rated/. 18

2. 2. 2. TURNOVER TAX Turnover tax/Equalization/ of 2% and 10% is payable on supplies made by those below the registration threshold. Works contract and grinding mills, tractors and combine harvesters are taxed at 2% /exception/. Monthly, quarterly and annually payable. Recently lifted from some agricultural products. 19

2. 2. 3. Excise Tax Charged on similar goods imported or locally produced. Charged as a % age (advalorem) of cost/value/ of products. Tax rate is 10% to 100% with 19 products involved. Textile and textile products, Television broadcast receiver at 10%. Alcoholic drink (other than beer & stout, wine and whisky) and perfumes and toilet waters at 100%. 20

2. 2. 4. STAMP DUTY Payable on certain contractual documents. Charged at a specific or advalorem rate. About 13 documents are included in the system. 21

2. 3. TAX LIABILITY DETERMINATION Initially a tax liability is assessed by the taxpayers themselves (self- assessment, declaration). A final tax payable is adjusted for any discrepancy (official assessment). APPEAL PROCESS Taxpayer has the right to appeal against the assessment (liability), To the internal review at tax office within 21 days, If still not satisfied appeals to Tax Tribunals (Tax Appeal Commission)which might be concluded at the level of panel of juries. Failure to pay the tax due entails various sanctions and ultimately sales of property to settle the liability. 22

3. Reform and modernization program 3. 1. Necessity Existing tax administration is not effective. Does not collect appropriate tax from the economy. 23

3. 2 Reform Generations First Reform Legislation & policy reform Taxpayer Identification Numbering System (TIN) Value-Added- Tax (VAT) introduction Systems, procedures and manuals. Presumptive Taxation Scheme. Center and Regional Cooperation. Customs modernization Tax Office Organization. Taxpayers registration and recruitment. IT Infrastructure Development 24

Second Reform n Business Process Reengineering n Necessity and Commencement n Understanding current situation/AS-IS/ n Designing new processes n Implementation strategies n Implementation phase n Formation of Ethiopian Revenues and Customs Authority/ERCA/ 25

Third Reform: Re-organization of work procedure Development. Tax transformation program § Implemented at Mo. R, Customs Commission and Ministry of Finance following a detailed diagnostics conducted on Ethiopia’s tax system in 2016. 26

§ The main objective of the reform is to bring forth tax transformation that enable to meet ambitious national tax revenue targets reflected in GTP II. § Six priority areas identified: § Large Taxpayers Office, § Organizational Health, § Business Process Transformation (BPT) § Data/ IT system, § Customs Administration, and § Tax Policy Each initiative under the priority is led by initiative owner 27

4. CONCLUSION TAXATION is "for man from man by man “! The responsibility for taxation goes beyond the reach of the tax administration organ. Every one has a responsibility to contribute to the national development efforts. Therefore we all have to collectively thrive to facilitate any means for having a modern tax administration that can appropriately tax from the growing economic performance of our country. Thank you! Q&A 28