The Ethiopian tax law provides for the direct and indirect taxes. The direct taxes are divided into five categories: personal income tax, rental tax, withholding tax, corporation tax and so on. The main types of indirect taxes applicable are VAT, customs duty, excise and turnover taxes.
Direct Taxes
Incomes taxable under Income Tax Proclamation No. 286/2002 (Article 6) include incomes form employment, business activities, personal activities, entrepreneurial activities by non-residents, movable property, immovable property, alienation property, dividends distributed by resident company, profit shares paid by registered partnerships, interest paid by the national, regional or local governments and license fees. The highest rate for employment income is presently 35% which is also the same for taxable business income.
Capital gains tax under the Proclamation is payable on gains obtained from the transfer of buildings used for business, factory or office purposes at 15% and shares of companies at 30%.
An individual foreigner, who lives in Ethiopia for more than 183 days in a period of 12 calendar months, whether continuously or intermittently, is regarded as being resident for the entire tax period and is taxed in accordance with the provisions of the Proclamation.
However the following are excluded from the computation of taxable income in accordance with Article 13 of the Proclamation and Article 14 of the Regulations No. 78/2002:
- medical treatment
- transportation allowance
- hardship allowance
- reimbursement of travelling expenses incurred on duty
- per diem and travelling expenses on joining and completion of employment, provided that such payments are made pursuant to specific provisions of the contract
- board members and board secretaries allowances; the income of persons employed for domestic duties
- the contribution of the employer and employee to the retirement or provident fund and all forms of benefits contributed by employees that do not exceed 15% of monthly salary and
- payments made to a person as compensation in relation to inures suffered by that person or the death of another person
Other direct taxes applicable are royalties (5%) , income paid for services rendered outside of Ethiopia (10%), income from games of chance(15%), dividends (15%) and interest income (5%) and are payable at flat rates in accordance with Article 31-36 of the Income Tax Proclamation.
Indirect Taxes
The value added tax (VAT) system, which came into effect on July 4, 2002, largely replaced the old business tax system of commodity and service taxes including the sales tax and the withholding tax.
The VAT rate is 15% of the value of every taxable transaction by a registered person and all imports of goods and services other than those exempted. Taxable transactions which shall be charged with zero percent are export of goods or services to the extent provided in the regulations. The rendering of transportation or other services directly connected with international transport of goods or passengers as well as the supply of lubricants and other consumable technical supplies taken on board for consumption during international flights.
Excise tax is payable on a range of consumer goods, whether locally produced or imported, for example, alcohol, tobacco, salt, fuel, television sets, cars, carpets and toys. Its rates vary from 10% on receivers, garments and textiles of any type and fabrics to 100% on perfumes, vehicles above 1800cc and alcoholic drinks. It is payable in addition to VAT.
Turnover tax, under the total value of 500,000 Birr, is applicable to pay 2 percent or 10% from annual taxable transactions on goods sold or service rendered locally.
All income from domestic or foreign sources is taxed whether it is obtained as remuneration, profit or gains, from employment, business activities or any activity which brings income to the beneficiary.
For depreciation allowance, assets are categorized into different classes. The categories and rates of depreciation are:
- buildings and structures (5%)
- intangible assets (10%)
- computers, information systems, software products and data storage equipment (25%)
- all other business assets, including automobiles, buses and minibuses (20%) Every investor has a tax obligation and is required to obtain a tax payer identification number (TIN) from the Federal Customs and Revenue Authority.
An investor who has plans to be involved in taxable activity also has an obligation to register for VAT.
Further information can be easily obtained from the FCRA or the Ethiopian Investment Commission.
[Busiweek]
[Image Source: www.llminfo.com]