Income Tax (Regulations, Assessment and Payment) in Ethiopia

How is income tax assessed in Ethiopia? Who is obliged to pay income tax in Ethiopia? What is the tax year in Ethiopia? What are categories of tax payers in Ethiopia? This article attempts to answer these and other questions in relation to Income Tax Regulations, Assessment and Payment in Ethiopia.

  1. Income Tax Proclamation No. 286/2002 or 286/1994 EC  and its amendment Income Tax (Amendment) Proclamation No. 608/2008 or 608/2001 EC 

Highlights of the Income Tax Proclamation, Regulation

The highlights of the Income Tax proclamation and regulation are listed below; however, it’s advisable that a reader gets the documents for a comprehensive understanding of the existing proclamations and regulations.

Scope of Application of the Income Tax proclamation

1) The Proclamation shall apply to residents of Ethiopia with respect to their worldwide income.

2) The Proclamation shall apply to non-residents of Ethiopia with respect to their Ethiopian source income.

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Obligation to pay Income Tax

Every person having income as defined in the proclamation shall pay income tax in accordance with this Proclamation

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Residence

  1. An individual shall be resident in Ethiopia, if he:An individual, who stays in Ethiopia for more than 183 days in a period of twelve (12) calendar months, either continuously or intermittently, shall be resident for the entire tax period.
    • has a domicile within Ethiopia;
    • has an habitual abode in Ethiopia; and/ or
    • is a citizen of Ethiopia and a consular, diplomatic or similar official of Ethiopia posted abroad
  2. A body shall be resident in Ethiopia, if it:“Resident person” includes a permanent establishment of a non-resident person in Ethiopia.
    • has its principal office in Ethiopia;
    • has its place of effective management in Ethiopia; and/or
    • is registered in the trade register of the Ministry of Trade and Industry or Trade bureaux of the Regional Governments as appropriate

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Sources of Income

Income taxable under this proclamation shall include, but not limited to:

  1. income from employment;
  2. income from business activities;
  3. income derived by an entertainer, musician, or sports person from his personal activities;
  4. income from entrepreneurial activities carried on by a non-resident through a permanent establishment in Ethiopia;
  5. income from movable property attributable to a permanent establishment in Ethiopia;
  6. income from immovable property and appurtenances thereto, income from livestock and inventory in agriculture and forestry, and income from usufruct and other rights deriving from immovable property is uch property is situated in Ethiopia;
  7. income from the alienation of property referred to in(e);
  8. dividends distributed by a resident company;
  9. profit shares paid by a resident registered partnership;
  10. interest paid by the national, a regional or local Government or a resident of Ethiopia, or paid by a non-resident through a permanent establishment that he maintains in Ethiopia;
  11. license fees (including lease payments, and royalties paid by a resident or paid by a non resident through a permanent establishment that he maintains in Ethiopia.

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Foreign Tax Credit

  1. If during the tax period a resident derives foreign source income, the Income Tax payable by that resident in respect of that income shall be reduced by the amount of foreign tax payable on such income. The amount of foreign tax payable shall be substantiated by appropriate evidence such as a tax assessment, a withholding certificate or any other similar document accepted by the Tax Authority.
  2. However, the reduction of the Income Tax provided by Sub-Article (1) shall not exceed the tax payable in Ethiopia that would otherwise be payable on the foreign source income.
  3. In the case of a taxpayer subject to Income Tax on Schedule C income, any reduction of tax prescribed by Sub-article (1) shall be limited to the tax that would otherwise be payable in Ethiopia computed as if Article 28 (loss carry forward) of this Proclamation applied separately to each foreign country in respect of profit and losses derived from sources therein.
  4. The reduction of tax prescribed by this Article shall be calculated separately in respect of each foreign country from which income or profit is derived.

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Schedules of Income

This Proclamation provides for the taxation of income in accordance with four schedules, as follows:

  1. Schedule ‘A’, income from employment;
  2. Schedule ‘B’, income from rental of buildings;
  3. Schedule ‘C’, income from business as defined in Article 2(6), but not including activities covered by the Rural Land Use Fee and Agricultural Activities Income Tax Proclamations issued by regional states;
  4. Schedule ‘D’. other income including income from:
    • royalties;
    • income paid for services rendered outside of Ethiopia;
    • income from games of chance;
    • dividends;
    • income from casual rental of property;
    • interest income;
    • specified non-business capital gains.

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Foreign Exchange Transactions

All net gains and losses arising from any transactions in foreign exchanges shall be brought to account for tax purposes as additions to taxable income or deductible losses in the year in which they are realized.

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Categories of Taxpayers

Category “A”, category “B” and category “C” taxpayers are classified as follows:

1. Category “A” which shall include the following persons and bodies:

  • Any company incorporated under the laws of Ethiopia or in a foreign country, for example Private Limited Companies Share Companies and;
  • Any other business having an annual turnover of Birr 500,000 (Five hundred thousand Birr) or more;

2. Category “B”, unless already classified in category “A”, any business having an annual turnover of over birr 100,000 (One hundred thousand Birr);

3. Category “c”, unless already classified in Categories “A” and “B”, whose annual turnover is estimated by the Tax Authority as being up to Birr 100,000 (One hundred thousand Birr)

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Maintenance of Accounts

Category “A” and “B” taxpayers shall maintain the following records and accounts:

  1. Category “A” taxpayers shall at the end of the (tax) year submit to the Tax Authority a balance sheet and profit and loss statement and the detail of the following:Category “B” taxpayers shall at the end of the year submit to the Tax Authority profit and loss statement.
    • Gross profit and the manner in which it is computed;
    • General and administrative expense
    • Depreciation; and
    • Provisions and reserves,
  2. All entries in the records and account referred to in sub-Article 1 and 2 hereof shall be supported by appropriate vouchers.

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Vouchers (i.e, Invoices, Receipts)

  1. Taxpayers who have the obligation to maintain books of account shall have to register with the Tax Authority the type and quantity of vouchers they use before having such vouchers printed.
  2. Any printing press before printing vouchers of taxpayers shall ensure that the type and quantity of such vouchers is registered with the Tax Authority.

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Tax Year

  1. Unless otherwise provided, the period for tax assessment (“tax year”) shall be the fiscal year, that is, the one-year period from 1st Hamle to 30th Sene.
  2. The tax year of a person is:
    • in the case of an individual or an association of individuals, the fiscal year;
    • in the case of a body, the accounting year of the bod

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Declaration of Income

  1. Category “C” taxpayer shall within the period prescribed under Article 68(2) of the Proclamation declare to the Tax Authority:The Tax Authority may, on the basis of declaration submitted by category “A”, “B” and “C” tax-payers, and on the basis of other information and surrounding circumstances, determine whether the taxpayer shall continue in the same category or his category be changed for the following tax year.
    • His annual turnover;
    • The amount derived from a source other than his regular operations;
    • The type of business carried on is changed;
  2. If a non resident person operates his business activity through an agent or agents the non-resident person and the agent or agents shall be jointly responsible for submitting the declaration of income and payment of the tax thereon.

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Time of Declaration of Income and Payment of Taxes

  1. Category A taxpayers within 4 months from the end of the taxpayer’s tax year
    • For example (as is the case usually), if a taxpayer follows the fiscal year, the one-year period from 1st of Hamle to 30th of Sene (8th of July to 7th of July), the income has to be declared and paid till 30th of Tikimit (that is 9th of November and 10th of November during a Leap year according to the Ethiopian calendar)
  2. Category B taxpayers within 2 months from the taxpayers tax yearCategory C taxpayers shall pay the tax determined in accordance with standard assessment on the 8th of July (1st of Hamle) to the 6th of August (30th of Hamle) every year
    • For example (as is the case usually), if a taxpayer follows the fiscal year, the one-year period from 1st of Hamle to 30th of Sene (8th of July to 7th of July), the income has to be declared and paid till 5th of Pagume (or 6th of Pagume during a Leap year according to the Ethiopian calendar (that is 10th of September or 11th of September during a Leap year according to the Ethiopian calendar)

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What is included in the amendment

  • Includes additional 3 sub-articles to article (2) defining ‘electronic filing and payment system’, ‘sales register machine’ and ‘supplier’
  • 3 new sub-articles to article (91): Penalties for failure to meet requirements of the use of sales Register Machines, Penalties for failure to observe supplier’s obligations and Penalties for failure to observe sales Register Machine Service center’s obligations
  • 3 new sub-articles to article (97): Violations of the requirements of the use of Sales Register Machines, offenses by Suppliers and offenses by Sales Register Machine Service Centers and their Personnel and more replacements of words and phrases.
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