The Ethiopian Revenues & Costumes Authority (ERCA) ordered all the private banks and the Commercial Bank of Ethiopia (CBE) to collect and pay taxes from the fringe benefits they have been providing their employees since July 2016.
ERCA's move bases the regulation that was drafted by the Ministry of Finance & Economic Cooperation (MoFEC) in pursuant to the Income Tax Proclamation. The regulation stated that the fringe benefits - housing, telephone and electricity bills and vehicle allowances - are subjected to no more than 10pc of the beneficiaries gross salary.
The tax on the banks is levied on the benefits they provide to their employees such as advance loans for housing and vehicle purchases. The financial institutions provide loans to their employees with a deposit interest rate instead of a lending interest rate, which is twice higher than the deposit rate. The banks offer this benefit in a bid to incentify and retain their staffs, and it was not subjected to any tax previously.
Until it was recently increased to seven percent by the regulatory bank, the National Bank of Ethiopia (NBE), the minimum and maximum deposit interest rates were five percent and 5.75pc, respectively in 2016/17 according to a data from the NBE. The banks' charge an average of a 12.75pc lending interest rate.
The 17 commercial banks hire 78,466 employees in their 4,257 branches across the country as of June 30, 2017. These banks last year have advanced a total of 50.5 billion Br in loans.
"We dispatched a letter to all of the banks referring to the regulation and the proclamation of income tax," said Teressa Ensesu, deputy director for domestic taxes affairs at Large Taxpayers Office of the Authority.
ERCA is under pressure of collecting 230 billion Br for the current fiscal year which is 69pc of the total budget of the country. Until the third quarter of the current fiscal year, ERCA has collected 133.5 billion Br in revenue a shortfall of the targeted 162 billion Br.
The Authority also claimed close to 0.8 billion Br from insurance companies for the settlement of outstanding customs guarantee bond they had provided to clients. Law enforcement experts of the Authority have started confiscating vehicles and seizing bank accounts of the companies which did not settle the due amount.
During the past nine months of the current fiscal year, the ERCA managed to collect 7.7 billion Br from income tax and fringe benefit, collectively. This was 121pc of the target set by the Authority for the reported time. The amount was also 40pc higher from that was collected during the same period last year.
In return, the banks had lodged a letter to the MoFEC seeking for clarification of how the taxes would be calculated and deducted. Their letter, which was sent through the Ethiopian Bankers Association (EBA) and coppied the customs authority, is still pending at the MoFEC.
"We did not respond to their requests as it will be addressed by a directive, which we are currently drafting," said Bochu Sentayehu, director of legal services at MoFEC.
A group of experts divided into two subgroups from ERCA and MoFEC are in Bishoftu town for over a month's time to draft 20 directives which are based on the Income Tax Proclamation. Most of the directives are finalised or halfway done, except for the fringe benefit.
"As the issue is new and needs further research, we are taking time on it," Bochu told Fortune.