27 May 2017

Ethiopia: Govt Officials Subject to Taxation for Allowances

Photo: Ministry of Foreign Affairs of Ethiopia
The new Ethiopian cabinet takes the oath of office (file photo).

Benefits including housing, telephone and electricity bills and vehicle allowances, are all subjected to tax

Government officials are going to be subjected to a tax of no more than 10pc of their gross salary for the fringe benefits - housing, telephone and electricity bills and vehicle allowances - they are getting.

This is according to the new regulation drafted by the Ministry of Finance & Economic Cooperation (MoFEC) in pursuant of the Income Tax Proclamation that was approved last year.

"This was amended following the various claims from the public who argue that these officials are highly favoured, and creates unfair treatment with the civil servants," said Wasihun Abate, legal service director at MoFEC.

Because of this and other claims concerning the previous income tax proclamation, which was in effect for 15 years, the Ministry drafted two new regulations, which focus on three main areas including; revenue from businesses, taxes on earnings from rents and taxes on fringe benefits.

"The issuance of the regulation delays mainly because the tax system of the country has many stakeholders," said Haji Ibsa, public relations and information director at the Ministry.

It was last year the income tax proclamation was revised just before the parliament recess in June 2016. The amendment was done following the research that was conducted by an Australian consultant that was hired by the World Bank. The experts did the study for a year and suggested significant reforms on the proclamation.

Six months ago, the experts also conducted a study of the regulation and handed over the research to the Ministry, according to Wassihun.

"Since we received the research, we have been drafting the regulations with the stakeholders," Wassihun told Fortune.

In revising the bill, the Ministry considers comments from the general public, regarding promotion fee, depreciation value and fringe benefits, according to officials from the Ministry.

According to the new regulation, flower farms and companies that own animals such as dairy companies will get diminishing value. The new law added an arrangement of loss transfer for the next year. Also, it added 16 new business categories in the grouping, which were not on the list previously. It also assessed and revised the profitability rates of businesses.

One of the categories of business that was added to this is legal services. The Ethiopian Revenues & Customs Authority (ERCA) has been using an indicator-based approach tax system for this business. They pay taxes with fixed rates, but now their incomes are estimated and pay taxes depending on their profitability rate which is 25pc.

The new tax law also amends the three grouping of taxpayers. It pushes the category C taxpayers to a maximum annual gross income of 500,000 Br from 100,000 Br. Businesses with an annual gross income of one million Birr or more lie under category A. Companies having an annual gross income of 500,000 Br or more but less than one million Birr lie in the taxpayers' category of B.

"The category revision came as the purchasing power of Birr has declined and because of major changes in the economy," said Wassihun.

Some ten years ago the national budget was 140 billion Br, but it has reached 274 billion Br during the current fiscal year. Up until last year, the tax ratio to GDP of the country was at 13.5pc, which is below the sub-Saharan average, 18pc.

The new system also amends the tax rate of business vehicles with less than five seats. The owners of these vehicles had been paying 120 Br in annual tax over the past 12 years. But, according to the new amendment, they are expected to pay 1,171 Br every year.

At the same time, hotels and restaurants that serve meals to their workers will not be taxed anymore for the food they serve to their employees. And daily labourers that are hired for less than 30 days are not subjected to income tax, according to the new regulation.

The two draft regulations are now up for public discussion to get feedback from the community before it sends them to the Council of Ministers for approval.

"The regulations will be approved in the coming weeks," said Haji.

All income which is earned starting from July 2016 will be taxed by the new proclamation and regulations, according to Haji.

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