15 July 2012

Ethiopia: Taxman Accuses Lifan of 78 Million Br in Arrears

The Ethiopian Revenues & Customs Authority (ERCA) and Lifan Motors, the Chinese vehicle assembler, are in a dispute over 78 million Br in alleged tax arrears.

The Authority served a tax notice three weeks ago to the company, claiming the arrears were discovered during a comprehensive audit. Out of the total amount claimed, 70.4 million Br is in excise tax and around 6.6 million Br in other types of taxes, according to sources.

The comprehensive audit was conducted three years after the company became operational.

The dispute is revolving mainly around the excise tax, while the two sides are said to be negotiating on how to settle the claim of the 6.6 million Br in other taxes, according to an official at the ERCA.

Lifan has lodged a complaint with the Tax Review Committee, which is accountable to the Authority, claiming that it should not be liable to pay excise tax, which, it says, is applicable to those who are producers.

The tax experts at the ERCA, however, argue otherwise.

"It is not the issue of being a producer or not at all," a legal expert at the ERCA told Fortune. "A vehicle is a good that is liable to excise tax, whether it is produced or imported."

Excise tax is levied on luxurious goods, such as television sets, perfumes, and cars; inelastic goods, such as salt; and goods that are hazardous to health, such as alcohol and tobacco products, according to the Excise Tax Proclamation of 2002. The list includes 18 categories.

The excise tax on vehicles is levied based of their chassis capacity. Those up to 1,300kg are charged 30pc and those up to 1,800kg 60pc. For those that exceed that, the rate goes up to 100pc.

In the case of imported goods, as in the case of Lifan, according to the ERCA, the excise tax should be paid when the goods are cleared at the ERCA. In case of local production, the tax should be paid within 30 days from the date of production.

The company, which has its assembly plant on 8,464sqm of land in Akaki Kality District benefits from a flat rate of five per cent duty when the parts to be assembled are imported; the normal rate is 35pc. However, it has not paid excise tax, according to the ERCA.

The cost of production, for locally produced goods and the cost of freight and insurance for imported goods are considered for imports.

"The company is not paying the excise at the gate of the customs area because the value of the goods is not known, yet, as it is to add value to it," the expert argued. "It is not because the company is exempted from excise tax."

A tax expert that Fortune talked with agreed with the ERCA's expert. He also argued that Lifan, can be considered a producer.

"It is an internationally accepted definition that the term producer is a broader one that also includes assemblers," he said. "The Basic World Tax Code defines products as manufactured and assembled, while the producer is defined as a manufacturer or assembler."

The Chinese privately owned enterprise, Lifan Group, which was founded in 1992, used to supply engines, motors, and spare parts for the locally assembled Holland Car, which produced Abay and Awash automobiles for the local market and export.

Because of a dispute that it had with Holland Car, the Chinese company ended its relationship with Holland Car in June 2004 and set up its own plant in Ethiopia with an initial investment of around 10 million Br.

Along with Lifan and Holland Car, there are a total of five car assemblers operating in the country, including BH Trading & Manufacturing and Belayab Enterprise.

Lifan's managers refused to comment on the issue.

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