26 February 2012

Ethiopia: Tax Authority Shortlists Six Firms for Revenues Study

Effort to pinpoint Ethiopia's tax potential follows first attempt, cancelled due to cost

Officials at the Ethiopia Revenues & Customs Authority (ERCA) have submitted the names of six companies, of which two have local offices, to the World Bank after short listing them in a bid to conduct a national revenues potential study.

The World Bank has given the Authority a grant of 11 million Br, through its Public Sector Capacity Building Programme (PSCPP). It is a programme launched in 2004, designed to support ongoing capacity building and institutional reform efforts in the country, including helping the federal government increase its capability of mobilising domestic revenues.

Following a public invitation for expressions of interest, 16 international and local companies responded. Only six made the cut: a US office of McKinzy & Co, Inc (founded in Chicago), an Indian branch of Deloitte Touche Tohmatsu Ltd (US), a UK office of Adam Smith International Ltd (UK), a Kenyan office of KPMG (the Netherlands), the local office of Ernst & Young (UK), and DFC & VNG Partners. These companies were selected after scoring above 70pc in evaluations of their technical proposals, which considered the track record and capacity of each in terms of professional staff to conduct the study.

Ernst & Young already studied the revenues potential for Addis Abeba last year. But, the final study remains unendorsed by the Authority, thus far.

"We did not reach an agreement on some technical aspects of the study," an official at the ERCA told Fortune.

Deloitte, one of the big four international consulting firms along with Ernst & Young and KPMG, was the largest consulting firm set up shop in Ethiopia, after Ernst & Young. It signed a joint venture agreement with HST Consulting Plc, a local firm, to give management consultancy and tax advisory services to clients in Ethiopia, three weeks ago.

This is not the first time that the Authority invited companies to assess the nation's revenues potentials, which remains the lowest in African at 13pc of GDP. Two years ago, it had issued a similar invitation, which was cancelled after the financial offers of bidding firms that passed technical evaluation were opened. The financial offers, all above 15 million Br, were deemed very expensive.

The Authority is now determined to pursue the project, according to its senior officials.

"It is considered as one of the major projects of the government," a senior official who requested anonymity said. "The study will be done at any cost."

The firm to be selected for the job will be required to measure the revenue productivity of each tax and identify gaps between the actual collection and potential revenue.

"The study will show which part we are doing good in and the part we are not," another official at the Authority told Fortune.

The Authority has been performing to its target levels of mobilising domestic revenues. For instance, it collected 35.1 billion Br in the past two quarters, with value-added tax (VAT) contributing 37pc. It also collected 7.5 billion Br from income tax and 1.3 billion Br from corporate tax during the same period.

However, the gap that tax officials claim to exist is in the capital city. Of the 3.2 billion Br collected from taxpayers in Addis Abeba, 804.5 million Br was from VAT, while corporate tax contributed 756.5 million Br, and income tax generated 786.5 million Br. This performance triggered the Authority to open two branch offices in the Merkato business district, where a study by the IMF discovered a tax compliance rate of only 25pc.

The federal government envisaged mobilising 145 billion Br from domestic sources at the end of its five-year growth plan, up from the 63.3 billion Br targeted for the current fiscal year.

"It would be difficult to set a target without knowing the taxable income that the economy has," a tax expert told Fortune.

"There could be tension in the economy if tax is collected beyond the domestic capacity or under collected," senior officials at the Authority conceded.

"Though we do not know what the exact gap is, we are well aware that the Authority is collecting as much as there is to collect," an official told Fortune. "But, there are transactions in millions without paying tax."

Indeed, revenue collected from businesses in the capital was around 500 million Br last year, while employees under government and private companies contributed 1.7 billion Br, indicating that there is a high noncompliance rate.

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