|Investment Proclamation No. 769/2012||DOWNLOAD|
|Council of Ministers Regulations No. 270/2012||DOWNLOAD|
|Investment Incentives and Investment Areas Reserved for Domestic Investors and its amendment Regulation No. 312/2014||DOWNLOAD|
|Export trade Duty Incentive Schemes Proclamation No. 768/2012||DOWNLOAD|
According to these laws, there are three types of incentives under the Ethiopian Investment Incentive Scheme; Fiscal Incentives, Non-fiscal Incentives and Financial Incentives. The export incentives under the current investment incentives, with the above stated incentives, will be discussed below.
The reader is advised to consult the above stated laws to have a comprehensive understanding of Ethiopian investment incentives scheme.
1. Fiscal Incentives
Fiscal incentives are tax measures geared to encourage industrial development designed to assist manufacturing entrepreneurship. The fiscal incentives under the current legal system are incentives relating to customs duty, income tax duty, and export incentives.
Customs Duty Exemptions
Customs duty exemptions are applicable to both domestic and foreign investors engaged in eligible new enterprises, as stated under the Regulation, or expansion projects in manufacturing, agriculture, agro-industries, generation, transmission and supply of electrical energy, Information and Communication Technology Development (ICT), tourism, construction contracting, education and training, star designated hotel, specialized restaurant, architectural and engineering consultancy works, technical testing and analysis, capital goods leasing and importation of LPG and bitumen.
Customs duty exemptions include:
- 100% exemption from the payment of customs duties and other taxes levied on imports is granted to all capital goods, such as plant, machinery and equipment and construction materials. An investor granted with a customs duty exemption will be indefinitely allowed to import capital goods duty free, if his investment is in manufacturing and agriculture and if his investment is in other eligible areas for five years. Moreover, Investment capital goods imported without the payment of custom duties and other taxes levied on imports may be transferred to another investor enjoying similar privileges.
- Spare parts worth up to 15% of the total value of the imported investment capital goods, provided that the goods are also exempted from the payment of customs duties. There is even an automatic/zero rates on customs duty and other taxes (VAT, sur tax, withholding and excise tax) on imported spare parts by textile and apparel, and leather and leather products manufacturers. There is a publication by MoFEC which lists the spare parts (required by textile and apparel and leather industries) which are qualified for the automatic exceptions.
- An investor entitled to a duty-free privilege who buys capital goods or construction materials from local manufacturing industries is refunded the customs duty paid for raw materials or components used as inputs for the production of such goods.
- Exemption from customs duties and other taxes (VAT, Sur tax, Withholding and excise tax) on selected imported vehicles. (See article 14 of regulation no. 279/2012-as amended and Ethiopian Investment board directive on Duty-free Import of Motor Vehicles No. 4/2005 (E.C)).
- Investors who engage in export trade (producer exporters, indirect producer exporters, raw material suppliers, and/or, exporters) are exempted from customs duties and other taxes on all imported raw materials and accessories -including packaging materials- used for export processing.
Income Tax Exemptions
- Investors engaged in manufacturing (up to six years), agribusiness (up to ten years), generation, transmission and supply of electrical energy (up to five years), and ICT (up to five years) are entitled to income tax exemptions for a period ranging between 1 and 10 years, depending on the specific activity and the location of the investor.
- In addition, any investor who establishes a new enterprise in Gambella; Benshangul/ Gumuz; Afar (except in areas within 15 kilometers right and left of the Awash River); Somali; Guji and Borena Zones (in Oromia); or South Omo Zone, Segen (Derashe, Amaro, Konso and Burji) Area Peoples Zone, Bench-Maji Zone, Sheka Zone, Dawro Zone, Keffa Zone, Konta and Basketo Special Woredas (in Southern Nations, Nationalities and Peoples Region) is entitled to an income tax deduction of 30% for three consecutive years after the expiry of the income tax exemption period specified above.
- Hotel and tour service providers in non-traditional tourism destinations are accorded an income tax exemption up to five years. The list of non-traditional tourism destinations is defined through Investment Board Decision (on 7, January 2016) which includes: Bale and Simien Mountains; Ertale, Gerehalta mountains; rift valley lakes (Abaya, Shala, Chamo and Abiyata); and Wanchi mountain (lake and afro-alpine).
- Business Income Tax exemption in industrial parks incorporates an additional two-four years for industrial park enterprises with 100% export plan with an at least 80% achievement of the plan. Moreover, industrial park developers are granted an income tax exemption from 10 years up to 15 years. Ten years if the park is in Addis Ababa and Special Zone of Oromia Surrounding Addis Ababa and fifteen years for industrial parks in other areas.
- An investor who expands or upgrades his existing enterprise and increases at least by 50 percent its production or service capacity, or introduces a new production or service line at least by 100 percent of an existing enterprise is entitled to the income tax exemption period specified in the first bullet above.
- Investors who export at least 60% of their products or services, or supply these to an exporter, will be exempted from the payment of income tax for an additional 2 years.
- Business enterprises that suffer losses during the income tax exemption period can carry forward such losses, following the expiration of the income tax exemption period, for half of the tax exemption period. Any loss incurred during income tax exemption period is not allowed to carry forward for more than five income tax periods.
2. Non-Fiscal Incentives
Non- fiscal incentives are given to all investors who produce export products. Such investors will be allowed to import machinery and equipment necessary for their investment projects through suppliers’ credit.
A foreign investor has the also a right to make the following remittances out of Ethiopia in convertible foreign currency; profits and dividends; principals and interest payments on external loans; payments related to technology transfer agreements; proceeds from the sale or liquidation of an enterprise; compensation paid to an investor; and proceeds from the sale or transfer of shares or partial ownership of an enterprise to a domestic investor.
3. Financial Incentives
Financial incentives are grants that may be provided by the government to foster the success of firms in selected sectors. These grants may be provided by the government as investment grants or ―direct subsidies‖ which may cover the entire or substantial part of capital, production or marketing costs in relation to an investment project.
These are some of the financial incentives under the current scheme:
- Guarantee by Development Bank of Ethiopia (DBE) that covers 80% of loan and interest provided by commercial banks to exporters with bankable export project except for coffee export.
- DBE grants a soft loan for strategic investment projects, mainly by domestic investors, in priority sectors (agriculture, agro processing, manufacturing and extractive industries). Repayment term goes up to 20 years and interest rate ranges between 9-9.5percent depending on export capability. Also longer grace period (up to five years) is provided, and the project itself is taken as collateral.
- Domestic investors engaged in the manufacturing sector and undertaking their investment in industrial parks (with export orientation) can access 85% start-up loan from the DBE.
(See the 2017 Development Bank of Ethiopia Credit Policy, which is available here, for further information on the above three incentives)
- The DBE grants a Soft loan for capital goods/machinery purchase by SMEs (domestic businesses with paid up capital ranging between ETB 500,000 - ETB 7.5 million). DBE finances full cost of machinery including installation cost (ETB 1 million - 30 million) using the capital good/machinery as a collateral; interest rate of about 9%; repayment schedule goes up to five years with grace period of about six months after commissioning/commencement of production or service provision. However, the investor has to contribute at least 20% of the machinery value for running cost. Ownership is transferred up on full repayment.
4. Export Incentives
Fiscal incentives available to all exporters include:
- With the exception of a few products (e.g. semi-processed hides and skins-150%), no export tax is levied on Ethiopian export products
- Duty Drawback Scheme: this scheme offers investors an exemption from the payment of customs duties and other taxes levied on imported and locally purchased raw materials used in the production of export goods. Duties and other taxes paid are drawn back 100 percent at the time of the export of the finished goods. The beneficiaries of this scheme are producer exporters, indirect producers, raw material suppliers and exporters.
- Voucher Scheme: A voucher book means a document printed by the Ministry of Revenue, to be used for recording the balance of duty payable on raw materials imported or bought from bonded input supplies warehouse, for use in the production of goods for external market by persons availing themselves of the voucher scheme. In plain words, a voucher is a printed document having monetary value, which is used in lieu of duties and taxes payable on imported raw materials. Exporters cannot be the beneficiaries of the voucher scheme rather producer exporters, indirect producers and raw material suppliers.
- Bonded Factory and Manufacturing Warehouse Schemes: producers not eligible for voucher scheme but having licensed for bonded are entitled to operate such factory or warehouse in importing of raw materials duty free. Beneficiaries of this scheme are persons who are engaged in the production of export commodities. Additionally them must have a manufacturing plant which meets the national standards and obtain a certificate of eligibility.
Non-fiscal export incentives include:
- Exporters are allowed to retain and deposit in a bank account up to 20 percent of their foreign exchange earnings for future use in the operation of their enterprises and no export price control is imposed by the National Bank of Ethiopia
- Franco valuta import of raw materials is allowed for enterprises engaged in export processing. Franco-vaulta means using one’s own hard currency to import an item instead of applying for it and getting permission from the government.
- Exporters can benefit from the export credit guarantee scheme, which is presently in place in order to ensure an exporter receives payment for goods shipped overseas in the event the customer defaults, reducing the risk of exporters’ business and allowing it to keep its price competitive.