Kara Sears
Ethiopia has two types of tax: direct and indirect. The Ethiopian tax system is conditioned by the nature of its federal structure, with powers to levy and collect taxes split between the states and the federal government. The federal government collects the greater part of taxes, and the tax year for individuals runs from 8 July to 7 July. In 2016, the Federal Tax Administration Proclamation was issued, introducing new tax reforms. Ethiopia has also concluded Double Taxation Agreements with several countries.
| Characteristics | Values |
|---|---|
| Federal structure | Powers to levy and collect taxes are split between states and the federal government |
| Tax types | Direct and indirect |
| Direct tax | Any resident earning income in Ethiopia or abroad must pay tax on that income |
| Direct tax exemptions | Gifts or inheritances are exempt from tax |
| Indirect tax | VAT, GST, sales tax |
| Tax schedules | A (employment), B (rent), C (business income), D (other direct taxes), E (exempt) |
| Tax year | July 8 to July 7 |
| Tax brackets | 0-35% for employment income tax |
| Tax exemptions | Customs duty exemptions for international trade |
| Tax penalties | Administrative (sale/seizure of property) and criminal (imprisonment/fine) |
| Tax reforms | Reassignment of Ethiopian Revenues and Customs Authority to the Ministry of Revenues; establishment of Tax Appeal Commission; increase in tax brackets |
Explore related products
What You'll Learn
Ethiopia's federal structure determines tax law
Ethiopia's federal structure determines its tax laws, with powers to levy and collect taxes split between the states and the federal government. The federal government and regional states have distinct responsibilities, but the majority of taxes are collected by the federal government. For instance, in 2018/19, the federal government collected approximately 72% of total tax revenue.
The federal government has exclusive jurisdiction over import and export taxes and tariffs, income taxes for civil servants, taxes on publicly-owned companies, lottery winnings, transportation services (excluding regional transport), properties owned by the federal government, and monopolies.
On the other hand, the regional states have exclusive authority over taxes on farmers' income, transportation income within their respective regions, mining services' income, sales and income taxes for traders operating in regional territories, property rent taxes, taxes on companies owned by regional states, and various royalties and fees for terrain, water, and forest usage.
Ethiopia categorises income into five schedules: A, B, C, D, and E, each with its own taxation implications. Schedule A, for example, covers taxation from employment, while Schedule B covers taxation from rent. Unlike many other countries, Ethiopia taxes employment income on a monthly basis, resulting in varying tax amounts based on employees' monthly earnings. This means that self-employed workers often pay a disproportionately higher amount of tax compared to those receiving a monthly salary.
In addition to these federal and regional divisions of tax collection, Ethiopia has implemented tax reforms in recent years. In 2016, the Federal Tax Administration Proclamation was issued, introducing new tax reforms to modernise the system and enhance the government's leverage over resources. Ethiopia has also concluded Double Taxation Agreements (DTAs) with several countries, providing relief from double taxation for expatriates.
Justice and Law: Two Sides of the Same Coin?
You may want to see also
Explore related products
Tax collection duties of federal government and regional states
Ethiopia's federal structure determines its tax system, with powers to levy and collect taxes shared between the federal government and regional states. The federal government collects the majority of tax revenue (around 72% in 2018/19). This is due, in part, to the types of taxes it is responsible for, which include import and export taxes and tariffs, income taxes on civil servants, taxes on publicly-owned companies, lottery winnings, transportation services (excluding regional transport), properties owned by the federal government, and monopolies.
The federal government also collects taxes from employment, which is based on monthly earnings, with a tax rate ranging from 0% to 35% depending on the employee's income level. This includes salary, allowances, and benefits in kind. Self-employed workers often pay disproportionately higher taxes than those who receive a monthly salary. Employers are required to withhold payroll tax from salaries and remit it to the tax authorities, meaning employees do not need to file tax returns themselves.
The regional states, meanwhile, collect taxes on the income of farmers, transportation within their respective regions, mining services, sales and income taxes of traders conducting business in the region, rent, companies owned by the regional states, and various royalties and fees for terrain, water, and forest usage.
Ethiopia categorises its types of income into five schedules: A, B, C, D, and E, which denote the aforementioned tax categories. Schedules D and E refer to other direct taxes and exempt incomes, respectively. Direct taxes include taxes on dividends, lotteries, undistributed profit, income of non-resident entertainers, repatriated profit, royalties, interest income, rural land use fees, and urban land leases. Certain income sources are excluded, such as travel expenses, medical treatment covered by the employer, and hardship allowances.
In addition, Ethiopia has implemented tax reforms in recent years, including changes to trade and domestic tax laws, and exemptions on customs duty to facilitate international trade. The country has also introduced tax relief measures in response to the economic impact of the COVID-19 pandemic.
Trump's Tax Law: Impact on Homeowners
You may want to see also
Explore related products
Tax law reforms
Ethiopia has a long history of levying taxes against its population. In 1976, after the fall of the Emperor and the rise of the Derg government, agricultural and rural land taxes were replaced by a land-use fee and a new agriculture tax. The country underwent major tax reform in the 1990s, overhauling the tax system and much of the public finance system. These reforms were considered some of the most successful on the African continent.
However, Ethiopian law did not allow subnational governments to set their own tax rates, leading to an unwieldy tax system that required all decisions to be made at the federal level. To address this challenge, additional reforms were passed in 2002 as Ethiopia transitioned to a market system. These reforms included changes to outdated and ineffective trade and domestic tax laws. The value-added tax (VAT), which had been abolished in 2002, was reintroduced in 2003 at a rate of 15% on every transaction at each stage of manufacturing. Certain exemptions and zero rates were also applied to specific goods and services, such as humanitarian aid, religious and cultural services, and exports.
In 2016, Ethiopia introduced further tax reforms through the Federal Tax Administration Proclamation. The most notable reforms included the reassignment of the Ethiopian Revenues and Customs Authority, which became the Ministry of Revenues, and the establishment of the Tax Appeal Commission to evaluate appeals. The tax brackets were also increased, and reforms were implemented to address issues related to inflation and economic changes. Exemptions were introduced on customs duties to facilitate international trade, and tax relief measures were implemented in response to the economic impact of the COVID-19 pandemic.
Ethiopia's tax system is shaped by its federal structure, with taxing powers shared between the states and the federal government. The federal government exclusively conducts import and export taxes, income taxes on civil servants, taxes on publicly-owned companies, lottery winnings, transportation services (excluding regional transport), properties owned by the federal government, and monopolies. Meanwhile, the regional states are responsible for taxes on farmers' income, transportation income within their regions, mining services income, sales and income taxes of traders in regional territories, rent taxes on properties, and companies owned by the regional states.
Understanding REG: Tax Law Acronyms Explained
You may want to see also
Explore related products
$32.45
Direct and indirect tax
Ethiopia collects both direct and indirect taxes. Direct taxes are paid directly to the government by individuals or companies, and indirect taxes are collected by the taxpayer from customers and not from their own income.
Direct Tax
According to Proclamation No. 286/94, residents of Ethiopia must pay tax on income earned within Ethiopia or abroad. If a person is not a resident of Ethiopia but earns income sourced in Ethiopia, they are also subject to direct tax. Direct taxes include employment tax, which is levied and collected per the proclamations issued by the government. This is based on monthly earnings for employees, meaning that the tax varies according to changes in monthly income. Self-employed workers typically pay disproportionately higher taxes compared to those who receive monthly salaries. Other direct taxes include taxes on dividends, lotteries, undistributed profits, income of non-resident entertainers, repatriated profits, royalties, interest income, and rural land use.
Indirect Tax
The main type of indirect tax in Ethiopia is Value-Added Tax (VAT), which is applied during the production and distribution process to most goods and services, including imports. While the consumer ultimately bears the cost of VAT, businesses are responsible for charging, collecting, and paying it to the tax authority. There are two rates of VAT applied to goods and services in Ethiopia: the standard rate of 15% and a zero rate. Some goods and services are exempt from VAT. Businesses supplying VAT-able goods and services can claim credit for VAT paid on purchases (input tax), including VAT paid on imported goods. Other types of indirect taxes include customs duty, excise tax, and turnover tax (TOT).
Paralegals: Contract Law's Unsung Heroes
You may want to see also
Explore related products
Tax penalties
Ethiopia has been working towards modernizing its taxation system to enhance its leverage over resources. The country's tax system is conditioned by its federal structure, with powers to levy and collect taxes shared between the states and the federal government. The federal government collects a greater portion of the total tax revenue.
In Ethiopia, taxes are divided into five schedules: A, B, C, D, and E. Schedule A, concerning employment taxation, is based on monthly earnings, resulting in varying tax amounts for employees with fluctuating monthly incomes. Self-employed workers often pay disproportionately higher taxes compared to those receiving monthly salaries. Schedule B covers taxation from the rent of land and buildings, while Schedule C addresses taxation on income from businesses, professions, and vocational occupations, as well as lumbering and interest. Schedule D includes other direct taxes, and Schedule E pertains to exempt incomes.
Regarding tax penalties, the Ethiopian government has been actively enforcing customs and immigration violations, emphasizing the importance of individuals and organizations meticulously adhering to tax procedures. American citizens and entities have been particularly advised to ensure compliance with the country's tax requirements.
While the U.S. Embassy in Ethiopia cannot provide legal advice, it has highlighted the potential consequences of certain actions. For instance, entering or exiting the country illegally, residing in the country illegally, or assisting someone else in doing so can result in a maximum prison sentence of three years and fines of up to 10,000 Ethiopian Birr (ETB). Legally residing foreigners found guilty of aiding others in illegal residence may face penalties four times higher.
Additionally, organizations that fail to comply with the rules of the Ministry of Labor and Social Affairs (MOLSA) or the Charities and Societies Agency (CSA) risk facing repercussions. These consequences can include the removal of employees or the seizure or freezing of funds and property.
Understanding Permanent Resident Status: Lawful Admission Requirements
You may want to see also
Frequently asked questions
There are two types of tax in Ethiopia: direct and indirect tax. Direct tax is based on income, and is paid by any resident of Ethiopia on their income within Ethiopia or abroad. Indirect tax is levied on rent, dividends, lotteries, undistributed profit, income of non-resident entertainers, repatriated profit, royalties, interest income, rural land use, urban land leases, etc.
The tax rate on employment income ranges from 0% to 35% depending on the taxable income level of the employee. The capital gains tax rate is 30% on the transfer of shares and bonds and 15% on the transfer of buildings.
The Ethiopian tax year runs from July 8th to July 7th for individuals.
There are two types of penalties for non-compliance: administrative and criminal. Administrative penalties include the sale or seizure of the taxpayer's property, while criminal penalties can result in imprisonment and fines.
![Federal Income Taxation [Connected eBook] (Aspen Casebook)](https://m.media-amazon.com/images/I/61dCYeLQMxL._AC_UL320_.jpg)
