In this Article, we look at the Ethiopian tax system, Types of Taxes in Ethiopia applicable to everyone. Tax is a compulsory payment made by an individual or a corporate establishment (legal entity) to the government. This payment is usually a small percentage of a total earning, made to assist the government in offsetting its expenditure or raise capital in order to carry out an agreed upon national project. In many countries, the refusal to pay, as well as tax evasion and resistance is a serious offense punishable by a huge fine, or jail time.
In economic terms, tax is is a means of wealth transfer from households, and businesses to the commonwealth or government. Tax can be a good thing if the money is judiciously utilized such that capital projects and infrastructural development take place. Tax can be a bad thing if it is too high, and does not go towards the common good through infrastructure projects, through corruption, or a visionless government.
The amount of money (percentage) imposed on people or corporate bodies as income tax varies from country to country, and this is determined by a number of factors including earning potential, culture, religion and so on. Many Muslim countries do not pay income tax at all.
Types Of Taxes In Ethiopia
Now, what are the tax rates, and on what kinds of income should a person pay tax? That information is clearly and neatly provided below. For easy understanding, Ethiopian tax must be broken down into 2 major parts:
- Direct Tax, and
- Indirect Tax.
Direct Taxes are broken down further into Five parts:
- 1. Personal Income Tax
Income from employment is taxable from (5%-35%) That means that one does not receive his salary in full, but forfeits withing 5 to 35 percent of his paycheck to the government.
- 2. Rental Tax
If a person owns a piece of land, or a building, or a residence, or a business premises which he rents out to another, he forfeits withing 10 percent to 35 percent of his earnings from rent to the Ethiopian government.
- 3. Withholding Tax
Withholding tax is that which is deducted at source such that one does not need to make payments to the government at a later time. Such taxes include dividend payments (10%) Income from investments such as life insurance and annuities (10%) and income from chance winnings and games or lotteries (15%).
- 4. Business Profit Tax
Income from business profit is the tax eligible for payment from Businesses, that exist in Ethiopia. That means that when a business makes a profit, it does not keep all of it. If the business is Incorporated in Ethiopia it pays 30% of its profits, and if the business is not incorporated it pays between 10% to 35%. (the business is treated as an individual and the owner is not taxed again, separately.) If a business earns a profit of 1,800 Ethiopian Birr to 60,000 Ethiopian Birr it pays 10 percent of its earnings as tax, but if the business earns more than 60,000 Ethiopian Birr it pays 35%.
- 5. Other Taxes
This category includes Income from royalties. This means that if a person writes a book, produces a song, or does a film, and this intellectual property goes on sale in Ethiopia the owner of the said intellectual property pays 5% of the income gained through the proceeds of his work to the Ethiopian government.
Casual rental of property attracts 15% of income. This category includes movable assets, vehicles, trucks, cooling vans, and so on.
Transfer of Property: Sale or Gift. If a person acquires a new commercial building such as a factory or an office he pays 15% of its value, while if a person receives shares in a company he pays 30% of its value to the government.
If a person inherits a building or land, he is not required to make any payments.
The Ethiopian government makes exceptions to people whose personal or economic circumstances put them at a disadvantage. According to Article 13 of the Income Tax Proclamation, such circumstances include the following.
- 1. Medical treatment: Those who suffer from recurring illnesses and therefore may not be able to work as much as they otherwise would, or who spend a lot of money treating medical illnesses or conditions are given special consideration during tax.
- 2. Transportation allowances. Those who have to travel long distances to and from their places of employment are given special consideration during tax.
- 3. Hardship allowances. Those who may be infirm or injured are given special consideration in tax issues. They may even receive payments from the government.
- 4. Secretaries allowances. This is an extra allowance paid to those who are employed as domestic workers. Their employers are compensated for this.
- 5. Employer and the employee retirement savings fund. Employers are encouraged to set up a savings fund for their employees so as to help them have a source of income after retirement. The Ethiopian government makes special consideration for this scheme as far as savings do not exceed 15 % of employees monthly salary.
- 6. Compensation in relation to injuries suffered by an employee, or a personal businessman, or a close relative of either of the afore-mentioned.
Indirect Taxes are those which are not paid directly by individuals to the Ethiopian government, but which are deducted through third parties, during other financial and commercial transactions. Examples are given below.
- 1. Value Added Tax (VAT): This is 15% of the value of every taxable transaction by a registered person, and all imports of goods bought, and services rendered, except VAT exempted items in Ethiopia examples of which include medical supplies, food items, educational supplies, and such essential commodities.
Some products are taxable but are charged at zero percent. These are export of goods or services, the rendering of services directly related to international transportation of goods or persons, and also the supply of lubricants as well as consumable products that make air travel complete.
- 2. Customs Duty: This is basically the levy imposed on businesses whose operations involve exporting Ethiopian products. Most of the Ethiopian Exports are raw or processed leather, wet-blue cowhide, sheepskins, and goat skins. They attract a fee of 150%.
- 3. Excise Duty: Excise duty is an additional tax, after VAT imposed on goods that are considered luxuries. Goods that fall into this category include alcohol, tobacco, television sets, cars, carpets, toys, and perfumes. Such taxes vary from 10% to 100%.
- 4. Turn over Taxes: This is an additional tax to business tax. It appears that the purpose is to bridge the disparity between the rich and poor. Domestic business transactions under 500,000 Ethiopian Birr are required to pay about 2% of their earnings while others may pay about 10%.
Who Are Applicable To Pay Tax In Ethiopia
The Types of Taxes in Ethiopia makes interesting reading for those who may be thinking of emigrating to Ethiopia, for work, or to start a business. Bear in mind that income tax is applicable to anyone who owns landed property, has an apartment rented out, has a business, or works in Ethiopia, regardless of what his country of origin is. According to Ethiopian Law, if a person lives in Ethiopia for 183 days out of a calendar year of 365 days, he is eligible to pay tax. Income Tax Proclamation in Article 5.2 states:
- The one who has a permanent residence in Ethiopia.
- One who has a place in Ethiopia that he frequently resides in.
- One who is an Ethiopian citizen but who lives abroad for the purpose of working in a Councillors office, or a diplomatic mission.
- One who is resident in Ethiopia for 183 days within a 12 months period is obligated to pay tax to the Ethiopian government.
Under Ethiopian law, all taxes are subject to appeal. That means that if a person believes that he has been taxed unfairly he may call or write the tax office in order to seek redress.
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