1. Income Tax Proclamation No. 979/2016 (DOWNLOAD) (hereinafter the Proclamation)
2. Council of Ministers Regulation No. 410/2017 (DOWNLOAD)
As per the Proclamation, a withholding tax is a tax on an income which is required to be withheld by the withholding agent. Withholding Agent means a person liable to withhold tax from a payment made to a person and includes a person required to self-withhold tax.
1. Types of Withholding Tax under the Proclamation
Under the Income Tax proclamation there are five circumstances where tax may be withheld.
Withholding of Tax from Employment (Article 88 of the Proclamation)
An employer paying employment income to an employee who is subject to employment income tax under the Proclamation must withhold tax from the gross amount of each payment of employment income made to the employee at the tax rate or rates applicable to the employee. In cases where the employee has more than one employer, the employer who is aware of such tax is required to withhold the income tax provided that the other employers didn’t withhold tax based on the aggregated employment income.
An obligation of an employer to withhold tax from a payment of employment income to an employee has priority over any obligations of the employer to withhold any other amount from a payment of employment income to an employee.
Withholding of Tax from Payments to Non-residents (Article 89 of the Proclamation)
A resident of Ethiopia or a permanent establishment in Ethiopia of a non-resident making a payment of a dividend, interest, royalty, management fee, technical fee, or insurance premium that is subject to non-resident tax shall withhold tax from the gross amount paid at the non-resident tax rate applicable to the income (as specified in Article 37(4), 51(2), 54, 55, 56, 62 and 63 of the Proclamation).
A resident of Ethiopia or a permanent establishment in Ethiopia of a non-resident making a payment to a non-resident entertainer subject to tax shall withhold tax (10%) from the gross amount paid for the non-resident.
Withholding of Tax from Dividends, Interest, and Royalties (Article 90 of the Proclamation)
Royalty: A resident of Ethiopia or a permanent establishment in Ethiopia of a non-resident paying a royalty that is subject to tax shall withhold the royalty tax (5%) from the gross amount of the royalty.
Dividend: A resident body paying a dividend that is subject to tax shall withhold tax (10%) from the gross amount of the Dividend.
Interest: A resident of Ethiopia or a permanent establishment in Ethiopia of a Non-resident paying interest that is subject to tax shall withhold tax (5% or 10% as the stipulated under article 56) from the gross amount of the interest.
Withholding of Tax from Income from Games of Chance (Article 91 of the Proclamation)
A person paying winnings from a game of chance subject to tax shall withhold tax (15%) from the gross amount of the winnings.
Withholding of Tax from Domestic Payments (Article 92 of the Proclamation)
A registered person for VAT authorized by the Authority, body having legal personality, government agency, non-profit organization, or nongovernmental organization shall withhold tax at the rate of 2% of the gross amount of a payment made for the following:
- the supply of goods in Ethiopia involving more than 10,000 Birr in one transaction or supply contract;
- the supply of services involving more than 5,000 Birr in one transaction or supply contract
This also applies to separate supplies of goods or services for an amount that is less than the amount specified above, when it would reasonably be expected that the goods or services would ordinarily be supplied in a single supply for an amount exceeding the amount specified.
Here, it is important to note that the 2% tax rate is increased to 30%, where the supplier in a transaction has failed to provide their TIN to the withholding agent. This 30% withholding tax is a final tax on the income derived by the supplier from the supply; and may not be waivered by either a Directive or administrative decision.
2. Self-withholding (Article 93 of the Proclamation)
Under the Proclamation, the following circumstances would entail a self-withholding obligation (i.e. the employee will become the withholding agent):
- An employee employed by an international organization or working in an embassy, diplomatic mission, or other consular establishment in Ethiopia of a foreign government shall withhold tax from the employment income paid by the international organization or foreign government. However, this is not applicable if the organization has withheld the tax.
- If an income of royalty, interest or game of chance is generated from a non-resident without permanent establishment in Ethiopia, the resident of Ethiopia gaining the income must withhold the due taxes.
- If a resident of Ethiopia derives a dividend from a non-resident body, the resident of Ethiopia deriving the income shall withhold tax from the income.
3. No Withholding from Exempt Income (Article 94 of the Proclamation)
A withholding agent is not required to withhold taxes from an amount that is exempt income of the recipient.
4. Time of Payment of Withholding Income (Article 95 of the Proclamation)
For the purposes of the part of the proclamation dealing with withholding tax, withholding income shall be treated as having been paid by a withholding agent to a person if any of the following applies:
- the withholding income is actually paid to the person;
- the withholding income is applied on behalf of the person either at the instruction of the person or under any law;
- the withholding income is reinvested, accumulated, or capitalized for the benefit of the person;
- the withholding income is credited to an account for the benefit of the person.
5. Withholding Tax Receipt (Article 96 of the Proclamation)
At the time of withholding tax from withholding income, a withholding agent shall provide the recipient of the withholding income with a withholding tax certificate in the approved form.
6. Payment of Withholding Tax (Article 97 of the Proclamation)
A withholding agent required to pay withholding tax must file a withholding tax declaration in the approved form with the payment. The withholding agent is required to pay the withhold tax to the Ministry of Revenue within 30 days after the end of the month in which the withholding income was paid.
Failure of the withholding agent to pay the withhold amount has serious repercussions. If a withholding agent either fails to withhold tax as required or having withheld tax fails to pay the tax to the Ministry as required, the withholding agent will be personally liable to pay the amount of tax to the Ministry. However, such withholding agent can recover the withhold tax paid from the recipient of the payment