How is income tax assessed in Ethiopia? Who is obliged to pay income tax in Ethiopia? What is the tax year in Ethiopia? What are categories of tax payers in Ethiopia? This article attempts to answer these and other questions in relation to Income Tax Regulations, Assessment and Payment in Ethiopia.
- Federal Income Tax Proclamation No. 979/2016 (hereinafter the Proclamation) (DOWNLOAD)
- Council of Ministers Regulation No. 410/2017 on The Federal Income Tax (DOWNLOAD)
- Federal Tax Administration Proclamation 983/2016 (DOWNLOAD) and Council of Ministers Regulation No.407/2017 on Federal Tax Administration (DOWNLOAD)
The highlights of the Income Tax proclamation and regulation are listed below; however, it is advisable that the reader get the documents for a comprehensive understanding of the existing proclamations and regulations.
Definition (Article 2(14) of the Proclamation)
According to the proclamation income tax is a tax imposed on every form of economic benefit, including non-recurring gains, in cash or kind from whatever source derived and in whatever form paid, credited, or received.
Scope of Application (Article 7 of the Proclamation)
The Proclamation applies to residents of Ethiopia with respect to their worldwide income and non-residents with respect to their Ethiopian source income.
Obligation to Pay Income Tax (Article 9 of the Proclamation)
Every person deriving income shall pay income tax in accordance with the Proclamation and the Tax Administration Proclamation.
Tax Year (Article 2(21) of the Proclamation)
The tax year for an individual is, the one-year period from 1st Hamle to 30th Sene, unless the Authority has granted permission, by notice in writing and subject to such conditions as may be specified by the Authority in the notice, for the individual to use its accounting year as the individual’s tax year; for a body, the accounting year of the body; or a transitional accounting year as determined under Article 28 of the Proclamation.
Categories of Taxpayer (Article 3 of the Proclamation)
For the purposes of the Proclamation there are the following categories of business taxpayers.
- Category “A” taxpayer being a company or any other person having an annual gross income of Birr 1,000,000 or more;
- Category “B” taxpayer being a person, other than a Company, having an annual gross income of Birr 500,000 or more but less than 1,000,000 and;
- Category “C” taxpayer being a person other than a Company, having an annual gross income of less than Birr 500,000.
Source of Income (Article 6 of the Proclamation)
- Employment income derived by an employee shall be Ethiopian source income to the extent that it is derived in respect of employment exercised in Ethiopia, wherever paid; or if it is paid to the employee by, or on behalf of, the Government of Ethiopia, wherever the employment is exercised.
- Business income derived by a resident of Ethiopia shall be Ethiopian source income except to the extent that it is attributable to a business conducted by the resident through a permanent establishment outside Ethiopia.
- Business income derived by a non-resident shall be Ethiopian source income to the extent that it is attributable to: a business conducted by the non-resident through a permanent establishment in Ethiopia; sales in Ethiopia by the non-resident of goods or merchandise of the same or similar kind as those sold by the non-resident through a permanent establishment in Ethiopia; or any other business activity conducted by the non-resident in Ethiopia of the same or similar kind as that conducted by the non-resident through a permanent establishment in Ethiopia.
- Other incomes deemed as an Ethiopian source income include; (a) a dividend paid to the person by a resident body; (b) rental income from the lease of immovable property located in Ethiopia or, movable property located in Ethiopia; (c) a gain arising from the disposal of an immovable property located in Ethiopia; (d) an insurance premium relating to the insurance of a risk in Ethiopia; (e) income from a performance or sporting event taking place in Ethiopia; (f) winnings from a game of chance held in Ethiopia; and (g) interest, a royalty, management fee, technical fee, or other income subject to tax under the Proclamation.
Schedules of Income (Article 8 of the Proclamation)
The Proclamation provides for the taxation of income in accordance with the following schedules:
- Schedule ‘A’, income from employment (Article 10-12 of the Proclamation);
- Schedule ‘B’, income from rental of buildings (Article 13-17 of the Proclamation);
- Schedule ‘C’, income from business (Article 18-27 of the Proclamation);
- Schedule ‘D’, other income (Article 51-58 of the Proclamation);
- Schedule ‘E’, exempt income (Article 65 of the Proclamation).
Foreign Tax Credit (Article 45 of the Proclamation)
If a resident taxpayer has foreign income taxable under schedule “C” in respect of which the resident has paid foreign income tax, the tax payer is allowed a tax credit of an amount equal to the lesser of the foreign income tax paid or the business income tax payable under Schedule “C” in respect of the foreign income. The business income tax is commuted by applying the average rate of business income tax applicable to the resident taxpayer for the year against the net foreign income of the resident for the year.
A foreign tax credit is allowed only if; the resident tax payer has paid the foreign income tax within two years after the end of the tax year in which the foreign income was derived by the taxpayer or within such further time as the Authority allows; and the resident taxpayer has a receipt for the tax from the foreign tax authority.
In computing the business income tax payable by a resident taxpayer for a tax year, the taxpayer shall apply the foreign tax credit before applying for any other tax credits of the tax payer for the tax year.
Record-Keeping (Article 82 of the Proclamation)
Category “A” taxpayers liable for business income tax are required to keep books of account prepared in accordance with the financial accounting reporting standards and, in particular shall keep the following:
- A record of the business assets and liabilities of the tax payer
- A record of all daily income and expenditures related to the taxpayer’s business.
- A record of all purchases and sales of trading stock, and services provided and received
- A record of trading stock, on the hand at the end of the taxpayer’s tax year including the type, quantity, and cost of stock, and method of valuation used.
- Any other document relevant for determining the tax liability of the taxpayer.
Category “B” tax payers liable for business income tax shall keep the following records;
- A record of daily income and expenditure
- A record of all purchases and sales of trading stock
- A salary and wages register
- Any other document relevant in determining the tax liability of the taxpayer.
Further, Category “A” or “B” taxpayer liable for tax under Schedule B of this proclamation shall keep the following:
- A record of rental income received
- A record of fees and charges paid to a state or city administration in relation to the building.
- A record of any expenditures incurred in relation to the building
- A register of rental buildings showing the acquisition date, cost of acquisition, any costs of improvements in relation to the building, and the current net book value of the building
- A record of any sub-lease arrangements in respect of the building.
On the contrary Category “C” payers may keep a gross income and are only required to keep records as specified in the regulation.
Tax Declarations and Payments (Article 83 and 84 of the Proclamation)
- An employee is not required to file a tax declaration unless he has more than one employer or has self-withholding obligation. An employee with more than one employer is required to file for declaration within 30 days from the end of every three month. Such employees must pay the due taxes every 3 month.
- A Category “A” or “B” taxpayer should file a tax declaration within 4 months or 2 months from the end of the tax year, respectively. For a Category “A” taxpayer the declaration shall include taxpayer’s profit and loss statement and balance sheet for the year. On the contrary a Category B tax payer should only attach the taxpayer’s profit and loss statement for the year. Category A or Category B tax payers should pay the due tax when the period of tax declaration for the year is due.
- A Category “C” tax payer is required to file for a tax declaration and subsequently pay the due tax from 7th day of July to 6th day of August each fiscal year.
- A tax payer 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 2 months after the date of the transaction. The payment of the tax should also be effected when such period is due.
- In a different manner importers under Schedule “C” are required to make an advance payment of business income tax equal to 3% of the CIF value of the goods. The payment should be effected before the imported goods are released from customs control. This payment is credited against the taxpayer’s business income tax liability for the year. Additionally, a tax payer falling under Schedule “C” is allowed to pay tax on installment. (See article 86 of the Proclamation.)