SCHEDULE ‘C’ –
INCOME FROM BUSINESS
1
Business Income Tax shall be imposed
for each tax year at the rate or rates
specified in Art. 19 (979/2016) on a
person conducting business that has
taxable income for the year.
Business Income Tax Rates
1. The rate of business income tax
2. The rates of Business income tax applicable to an individual are:
Business Income in Birr (per Tax rate Shortcut
Year) deduction
0 - 7,200 0% 0
7,201-19,800 10% 720
19,801-38400 15% 1710
38401-63000 20% 3630
63001-93600 25% 6780
93,601-130800 30% 11460
Over 130,000 35% 18000
Taxable Income
3
1. The taxable income of a taxpayer for a tax
year shall be the total business income of the
taxpayer for the year reduced by the total
deductions allowed to the taxpayer for the
year.
2. The taxable income of a taxpayer for a tax
year shall be determined in accordance with
the profit and loss, or income statement, of the
taxpayer for the year prepared in accordance
with the financial reporting standards.
Example
4
Assume a taxable business income is Br
70,500. Determine the tax liability if the
company is
a. a corporate firm (share company or
PLC)
b. unincorporated firm (sole proprietorship
or partnership business)
Business Income
5
Business income of a taxpayer for a tax year shall include
the following:
a) the gross amounts derived by the taxpayer during the year from
the conduct of a business, including the gross proceeds from the
disposal of trading stock and the gross fees for the provision of
services (other than employment income);
b) the gross amounts derived by the taxpayer during the year from
the investment of the capital of a business, including dividends,
interest, and royalties;
c) a gain on disposal of a business asset (other than trading stock)
made by the taxpayer during the tax year;
d) any other amount included in business income of the taxpayer
for the tax year under this Proclamation.
Cont....
6
Business income shall not include an
amount that is exempt income.
The gain on disposal of the asset included
in business income is the amount (if any)
by which the cost of the asset exceeds the
net book value of the asset at the time of
disposal; and any gain above cost is
taxable under Article 59.
Deductible Expenditures
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a) any expenditure to the extent necessarily
incurred by the taxpayer during the year in
deriving, securing, and maintaining
amounts included in business income;
b) the cost of trading stock disposed of by
the taxpayer during the year as determined
in accordance with the financial reporting
standards;
Cont’d…..
c) the total amount by which the depreciable
assets and business intangibles of the
taxpayer have declined in value during the year
from use in deriving business income as
determined under Article 25 of the Proclamation;
d) a loss on disposal of a business asset (other
than trading stock) disposed of by the taxpayer
during the year;
e) any other amount allowed as a deduction
to the taxpayer under the Proclamation for
the year.
Interest Expenditure
9
1) Subject to this Article and Article 46 of the
Proclamation, in determining the taxable
income of a taxpayer for a tax year,
“the taxpayer shall be allowed a deduction for
any interest incurred by the taxpayer in a tax
year if the taxpayer has used the proceeds or
benefit of the debt or other instrument or
agreement that gives rise to the interest to
derive business income.”
Cont’d…..
10
No deduction shall be allowed for the following:
a) interest paid or payable by a taxpayer in excess of the
rate used between the National Bank of Ethiopia and
commercial banks increased by 2 percentage points
unless the interest is paid to:
A financial institution recognised by the National Bank of
Ethiopia; or
A foreign bank permitted to lend to persons in Ethiopia;
b) interest paid or payable by a taxpayer to a related
person who is a resident of Ethiopia except when the
interest is included in the business income of the
related person.
Charitable Donations:
11
The taxpayer shall be allowed a deduction for the
amount of a donation when the donation is made:
a) to a non-profit organisation (Defn. Proc. 621/2009); or
b) in response to an emergency call issued by the
Government to defend the sovereignty and integrity of
the country, to prevent or provide relief in relation to
man-made or natural disasters or an epidemic, or for
any other similar cause;
The total deduction allowed to a taxpayer under sub-article
(1) of this Article for a tax year shall not exceed 10% of
the taxable income of the taxpayer for the year.
Depreciation of Depreciable Assets
and Business Intangibles
12
The taxpayer shall be allowed a deduction for
the amount of the depreciable assets and
business intangibles of the taxpayer declined in
value during the year through use in deriving
business income.
Buildings:
On a straight line basis,
Depreciated annually at 5%,
Economic life of 20 years
Post-acquisition capital costs depreciated over
the next twenty years.
Cont’d…..
13
Intangible assets:
On straight line basis
Depreciated annually at 10%,
Economic life of 10 years,
Post-acquisition capital costs depreciated over the next ten
years.
Two pools of assets:
computers, information systems, software products and
data storage equipment 25%;
Decliningbalance method
Depreciated annually at 25%,
Economic life of 4 years
Cont’d…..
14
All other business assets (Motor,
Machineries…):
Decliningbalance method
Depreciated annually at 20%,
Economic life of 5 years
Cont...
15
The depreciation of a depreciable asset or
business intangible shall commence when
the asset or intangible is ready and
available for use in deriving business
income, but, in the case of a building
constructed by a taxpayer, not before the
regulatory authority has issued the
taxpayer with a certificate of completion
for the building.
Bad Debt
16
In the determination of taxable business
income, a deduction is allowed for a bad
debt if the following conditions are met:
an amount corresponding to this debt was
previously included in the income;
the debt is written off in the books of the
taxpayer; and
any legal action to collect the debt has been
taken but the debt is not recoverable.
Non-deductible Expenditures and
Losses
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a) an expenditure of a capital nature except to the
extent provided for under Article 22(1)(c) of the
Proclamation;
b) an increase in the share capital of a company or
the basic capital of a registered partnership;
c) voluntary pension or provident fund contributions
in respect of an employee in excess of 15% of the
monthly employment income of the employee;
d) dividends and paid-out profit shares;
Cont’d…..
18
e) an expenditure or loss to the extent recovered or
recoverable under a policy of insurance, or a contract of
indemnity, guarantee, or surety;
f) a fine or penalty imposed, or punitive damages
awarded, for violation of any law, regulation, or contract;
g) an amount that a person has transferred, in its financial
accounts, to a reserve or provision for expenditures or
losses not yet incurred but expected to be incurred in a
future tax year;
h)income tax paid under this Proclamation or under a
foreign tax law, or recoverable value added tax;
Cont’d…..
19
i) representation expenditures of an employee in
excess of 10% of the employment income of the
employee;
j) expenditure incurred in the provision of
entertainment, except:
(1) when the person’s business involves the provision
of entertainment; or
(2) to the extent that the expenditure is allowed as a
deduction under a Directive issued by the Minister
relating food provided to for free to employees by
an employer conducting a mining, manufacturing,
or agricultural business;
Cont’d…..
20
k) A donation or gift except as provided for in Article
24 of the Proclamation;
l) Personal consumption expenditure;
m) A loss on the disposal of a business asset by a
taxpayer to a related person;
“entertainment” means the provision to any
person of food, beverages, tobacco,
accommodation, amusement, recreation, or
hospitality of any kind.
Some of the exemptions are:
*an amount paid by an employer to cover the
actual cost of medical treatment of an employee;
*travelling expenses paid to an employee recruited
from place other than the place of employment on
joining or completion of employment, including, in
the case of a foreign employee, travel expenses
from and to their country of origin, but only if the
travel expenses have been paid pursuant to
specific provisions of the employee’s contract of
employment;
*food and beverages provided for free to an
employee by an employer conducting a mining,
manufacturing, or agricultural business;
*contributions
21
by an employer to a pension,
provident, or other retirement fund for the benefit
Loss carry forward
22
If the total amount of deductions allowed to a
taxpayer for a tax year (other than a deduction
allowed under this Article) exceeds the total
business income of the taxpayer for the year,
the amount of the excess shall be the
taxpayer’s loss for the year.
Subject to sub-article (4) of this Article, if a
taxpayer has a loss for a tax year, the taxpayer
shall carry the amount of the loss forward to the
next following tax year and the loss shall be
allowed as a deduction in computing the
taxpayer’s taxable income for that following year.
Loss carry forward
23
If a taxpayer is not able to wholly deduct a loss under
sub article (2) of this Article, the taxpayer shall carry the
amount not deducted forward to the next following
tax year and apply the amount as specified in sub-
article (2) of this Article in that year, and so on until
the loss is fully deducted, but a taxpayer shall not carry
a loss forward for more than 5 tax years after the end
of year in which the loss was incurred.
If there has been two tax years in which a
taxpayer has incurred a loss under sub-article (1) of this
Article and each of those losses has been carried
forward under sub-article (2) of this Article, the taxpayer
shall not be permitted to carry forward any further
losses under sub-article (2) of this Article.
