22 July 2017

Ethiopia: Developmental Assumptions of the Presumptive Tax Directive

Photo: Addis Standard
Businesses in Kolfe, Axena Tera here in the capital Addis Abeba spent July 20 by shutting their doors in protest.

Information obtained from the Ethiopian Revenues & Customs Authority (ERCA) indicates that the Authority carried out a new reassessment of the income of 148,514 businesses that are under category "c", on the basis of the estimated revenue of the daily sales of goods and services. There was tremendous uproar after notices were issued on the results of the estimates and taxes imposed thereon.

In a bid to soothe the uproar, the officials of the Authority tried to explain how the assessment was carried out and attempted to justify the probity of the process while not denying some irregularities.

Time and again, the Authority emphasized that the new reassessment of taxes payable by category "c" businesses was delayed by 6 years, that they are still paying on the basis of outdated assessments made in 2011 when it should have been conducted every 3 years, and that the economy of the country has grown with no proportional adjustment over taxes payable by this category of taxpayers.

ERCA also complained that certain businesses did not cooperate with assessors deployed during the course of the assessment for the daily revenue estimate to enable them to reach appropriate estimates - that merchandises were removed and hidden from shopping shelves, that inaccurate and inappropriate information was provided and so on. After the reassessment of the estimate and the amount of tax payable was issued, in response to the complaint presented by a considerable number of the taxpayers, Netsanet Abera, head of the Authority Tax Program Development Support Works division, went to the extent of warning complainants against lodging "group petitions".

The types of complaints among members of the business community are too numerous and overwhelming, hard to believe and, as a result, require sober attention, close examination and appropriate remedial action by all concerned. There are always elements of arbitrariness on taxes assessed by estimation. While all citizens of a nation getting income must fairly contribute to the state coffer by way of tax on the basis of his or her earning capacity, the Tax Authority would have to be able to obtain proper information upon which it can assess and determine, reasonably and fairly, the amount of tax payable by each income earner.

Getting accurate information from businesses that are not required or under legal obligation to maintain acceptable books of account, and whose books of account are rejected for one reason or another by ERCA, is, however, a big challenge that would force it to resort to collection of tax by estimation.

Countries implementing presumptive taxation have adopted various mechanisms to acquire income information of a taxpayer that is close to fairness and ameliorates the degree of arbitrariness that might arise from the assessment and collection of tax by estimation according to their particular circumstances. Ethiopia has adopted a few of these rudimentary techniques.

On my part, I have found that the recent action of ERCA to reassess the daily sales and income of category "c" taxpayers in Addis Ababa City Administration, and the unfolding complaints that have flared up, require close attention and examination.

Last year, a new Income Tax Proclamation was adopted that has increased, among other things, the minimum threshold of taxable business income from 1,800 to 7,200 Br, in line with the "level of economic development achieved so far." In March 2017, ERCA issued Average Daily Revenue Estimate Information Collection Implementation Directive no. 123/2009 for Addis Ababa City Administration category "c" taxpayers that may have been replicated by other regional states too.

It is recalled that during the tenure of Mayor Kuma Demekssa, the Addis Ababa Revenue Office arguably came under ERCA, and tax revenues assessed and collected by and within the competence of the City Administration became ERCA's responsibility. Accordingly, the City Administration has ceased and foregone its most important tax assessment and collection related activities that other regional states jealously safeguard and exercise.

It is against this backdrop that ERCA came to assume such a directive when it was supposed to be issued by the City Administration.

The adoption of the directive emphasises the need for an adjustment of the revenue framework for imposing tax payment. Although boosting government tax revenue collected from and obtained among category "c" taxpayers is not specifically stated, legal and contractual frameworks regulating the daily activities of ERCA employees requires working hard to increase tax revenue.

After the unprecedented salary increment made to employees of ERCA in 2009, it is recalled that employees were required to sign a "Result Focused Work Performance Agreement" to exert the effort to maximise planned revenue collection targets adopted by the Authority that was far beyond officially set planned collection targets of the government.

I recall having commented on the agreement signed by the employees of ERCA in one of my articles in Fortune under the title, "Blurred Line of Dangerous Commitment and Rosy Promise of the Taxman."

A provision of the agreement commented on provided that "if a shortfall is registered from the planned target (of revenue collection), the manager/director/team leader ... of the branch office shall receive oral and then written warning. Where performance cannot be improved the manager/director/team leader/etc. ... shall be removed from his post."

While results of the new controversial reassessment might be argued to be related to such a type of agreement and, plausibly, with the recent salary increment made to the employees, some provisions of the recently adopted Implementation Directive have also incorporated additional ideas to buttress this assumption.

The Directive which has 39 articles divided into six parts provides the modality for the collection of information on the average daily revenue estimate. The enforcement of the directive is also purported to be carried out by a plethora of committees, organised starting from the top echelon of the City Administration down to Wereda Administration level involving, on average, ten city government officials of sector offices.

In addition to the three territorially organised committees, there are 5 additional functional committees that are described as Average Daily Revenue Estimate Information Collection, Inspection, Sensitization, Complaint Hearing and Information Screening and Follow-Up Committees.

Paradoxically, the so-called "Traders Forum," a de facto association favourably patronized by the incumbent regime for supposedly representing the "taxpaying businesses" that seemed to have supplanted the official or de jure association of the business community - the Chamber of Commerce, is unequivocally mentioned in the directive by name, among the list of institutions and officials at each level.

On the contrary, some regional states, for example, the Amhara Regional State, disclosed that the business community was represented by the respective Chamber of Commerce at all levels of the committees in this year's reassessment of the average daily revenue information collection.

Previously, the Chamber of Commerce had been represented at all levels of committees including in the average daily revenue estimate information collection and other committees. Judging from the Implementation Directive issued by ERCA, at least in Addis Abeba, the Chamber of Commerce is not recognised as a legitimate body worth collaborating with to represent the business community in the activities of all committee works at the level.

This directive further provides the membership criteria for all functional committees that appear to be inspired and motivated by the ideological underpinnings of the ruling party that overshadow their independence, neutrality, fairness and judgement.

All members of the "Average Daily Revenue Estimate Information Collection", that have been actually involved in conducting and fulfilling the assignments by gathering the information for daily revenue estimates, as well as the Inspection and Complaint Hearing Committees, are required, under the directive, to possess among others, "better understanding of the objective of tax and its assessment", "better developmental attitude" and so on.

While most selection criteria for members of these functional committees lack objectivity and concreteness, the criteria that require committee members to fulfil "better developmental attitude" begs party related issues.

How a person's "developmental attitude" or even "better developmental attitude" can be recognized and determined is hard to know unless a person belongs or affiliates himself to and has some orientations, framework or mechanisms drawn from the Ethiopian People's Revolutionary Democratic Front (EPRDF) party platform or related ideological literatures that clarify the distinction between "developmental" or, its opposite, "anti-developmental" and "developmental attitude" from "rent seeking attitude."

The criteria "better developmental attitude" also raises another concern as to the exact meaning the phrase implies in respect to the expected or required behaviour and action that a member selected to conduct daily revenue estimates of sales and services under such criteria would have to honour and comply with. Does it carry a message that a member must come up with a higher revenue estimate enough to contribute to the developmental effort of the government?

Does it imply conceding to the idea that Ethiopia's development requires a sustained tax base and a much higher revenue estimate of tax than a given business man is currently paying? Or does it imply any other developmental idea of similar nature?

However dubious the ideological vocabulary of "better developmental attitude", it should be noted that it is not a latent instrument but rather a potent and lethal weapon to neutralise even members of the committee. A case in point was featured on a live FM 97.1 Radio programme, last Sunday evening, where one lady who claimed to have worked as a member of the Average Daily Revenue Estimate Information Collection complained that she was allegedly dismissed from her assignment for "obstructing development" on account of her sympathetic position to the resolution of grievances of the business community.

Although presumptive taxation is practised in both developed and developing countries, the techniques of obtaining information from the taxpayer and the method of issuing revenue estimates to issue tax assessment on the taxpayer varies from country to country. Certain common principles stand out conspicuously.

These principles include discharging the responsibility with "honesty" and making an assessment to "the best of the assessor's judgement" that will assist him to arrive at "a fair and proper estimate." The assessor must at all times "avoid acting dishonestly or vindictively or capriciously" in carrying out his duty.

These principles are not clear and evident in the ERCA directive as much as other irrelevant non-legal matters that could potentially and unduly influence the judgement of each assessor to make appropriate decisions.

The ideological element on the criteria of the functional committees is a preemptive action in line with the stereotype reflected on the business community, particularly the service sector, that has been grossly demonized and ridiculed by EPRDF bigwigs, and the rank and file alike for adding no value and being breeding grounds to "rent seeking" attitudes. Ironically, this sector remained a significant contributor and generator of public revenue.

Basically, tax laws should not be made to serve as ideological instruments since their application and enforcement should be uniform, fair and equitable upon all taxpaying citizens of a given category of taxpayers irrespective of their ideological orientations and alignments.

The other pitfalls of the directive is the retroactive application of the new average daily revenue estimate upon which assessments were made for tax payments on category "c" business earnings of the last Ethiopian fiscal year. Businesses that have received notice of the new average daily revenue estimate, for their sales of goods and services, are expected to pay profit tax on the basis of what has been newly reassessed results made last June rather than what they might have predicted to pay according to previously made assessment.

Interestingly, on the other hand, the directive makes clear that indirect taxes payable with the annual profit tax - value added, turnover and excise taxes, shall be paid according to the previous assessment but only for the last fiscal year.

Since the directive does not explain why these twin and contradictory ways of tax assessment and payments were adopted, asked why a different approach was chosen for indirect tax, ERCA disclosed that this could impose a heavy burden on the taxpayer. Thereby indirectly admitting the unfairness and unwarranted burden resulting from the retroactive application of the reassessment on the earnings obtained by businesses of category "c" for the last fiscal year.

By calculating the amount of indirect tax that should have been collected according to the new reassessment of the average daily revenue estimate, from each category "c" taxpayers, ERCA tried to convince revenues foregone but "the losses" it claimed are just accepted by the government. Business earnings were also justified by the fact that unless the Authority resorts to such action, it is claimed that it will collect no revenue from this category of taxpayers since the new income tax proclamation has raised the minimum threshold of taxable income.

The justification for the retroactive application of the new and highly controversial reassessment average daily revenue estimate, on the income earned for the last fiscal year, even if the ERCA might cite a provision of the income tax regulations, the effective date is legally questionable. The principal aim of preventing retroactive application of laws is to avoid unfairness and arbitrariness.

While the very technique of obtaining the information of the average daily revenue estimate on the basis of sales of goods and services for the purpose of presumptive taxation involves a considerable amount of arbitrariness, these problems are compounded with the application of such estimates to last year's business earnings.

Finally, having been flooded and faced with a large number of complaints, by taxpayers aggrieved by the new reassessment of average daily revenue estimate, ERCA is even prompted to announce that it will never entertain "group petitions" and tried to isolate and confront individual aggrieved businesses by introducing segmentation of petitioners.

Segmentation of petitioners is perhaps designed to contain and diffuse mass complaints against ERCA that have apparently become hard to address quickly. The announcement on the prohibition of group complaints was even disseminated in public media.

Citizens' right to access and seek justice is recognised under article 37 of the current Constitution of Ethiopia. Under this provision "any group or person who is a member of, or represents a group with similar interests" has the right "to bring a justiciable matter to, and to obtain a decision or judgment by, a court of law or any other competent body with judicial power."

While ERCA is bound to address the growing complaints cautiously and timely, it cannot impose measures that can compromise the constitutional and legal rights of citizens to lodge their complaints depending on their preference whether individually or as a group.

Changes introduced to the tax legislation and results of new assessments made on taxpayers under presumptive taxation method are often bound to create havoc among taxpayers.

Addressing complaints arising from the reassessment procedure requires sober, fair and knowledgeable review and investigation of the pitfalls made during the course of the reassessment to prevent and avoid further chaos since tax complaints, and the injustices arising from it, have throughout history been the source of social upheavals and revolutions.

Yohannes Woldegebriel (Johnwaa@hotmail.com) Is a Lawyer Who Has Served As a Public Prosecutor in Four Different Institutions


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