CHAPTER FOUR: ETHIOPIAN TAX SYSTEM

Both direct and indirect types of taxes exist in Ethiopia.

Direct Taxes:
- A direct tax is paid by a person on whom it is levied.
- In direct taxes, the impact and incidence fall on the same person.
- It is borne by the person on whom it is levied and cannot be passed on to others.
- In Ethiopia, Government levies the direct taxes such as income tax, tax on agricultural income,
professional tax, land revenues, taxes on stamps and registrations etc.
- From the above discussion, it can be understood that the direct taxes levied in Ethiopia take the form of
taxes on income and property.
Income tax is a very important direct tax. It is an important and most significant source of revenue of the
government. The government needs money to maintain law and order in the country; safeguard the security of
the country from foreign powers and promote the welfare of the people. It is the foremost duty of the
government to bring out welfare and development programs which will bridge the gap between the rich and the
poor. All this requires mobilization of fund from various sources. These sources may be direct or indirect.
Income tax being a direct tax is an important tool to achieve balanced socio economic growth by providing
concessions and incentives in income tax for various development purposes.

Income Tax Proclamation

Proclamation No. 286/2002 and Proclamation No.979/2016 (Amended income tax proclamation)

Income tax is a very important direct tax. It is an important and most significant source of revenue of the
government. The government needs money to maintain law and order in the country; safeguard the security of
the country from foreign powers and promote the welfare of the people. It is the foremost duty of the
government to bring out welfare and development programs which will bridge the gap between the rich and the
poor. All this requires mobilization of fund from various sources. These sources may be direct or indirect.

What is Income Tax?

“Income” means every sort of economic benefit including gains in cash or in kind, from whatever source
derived and in whatever form paid, credited or received.

“Taxable income” means the amount of income subject to tax after deduction of all expenses and other
deductible items allowed under this Proclamation 286/2002, Proclamation No.979/2016 and Regulations
78/2002 issued.

“Employee” means any individual, other than a contractor, engaged (whether on a permanent or temporary
basis) to perform services under the direction and control of the employer.
Sources of Income (Article-6):
Income taxable under this proclamation shall include, but not limited to:
a) Income from employment;
b) Income from business activities;
c) Income derived by an entertainer, musician, or sports person from his personal activities;
d) Income from entrepreneurial activities carried on by a non-resident through a permanent
establishment in Ethiopia;

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 e) 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
much property is situated in Ethiopia;
f) Dividends distributed by a resident company;
g) Profit shares paid by a resident registered partnership;
h) 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;
i ) 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.
 The above sources of income are grouped under the following four Schedules:

Schedules of Income (Article-8):

The proclamation provides for the taxation of income in accordance with four schedules.
Schedule 'A' Income from employment;
Schedule 'B' Income from rental buildings;
Schedule 'C' Income from business;
Schedule 'D' Income from other sources including:
 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.
 Every person having income as defined above shall pay income tax in accordance with this
Proclamation.

SCHEDULE 'A': EMPLOYMENT INCOME TAX

Determination of Employment Income (Schedule ‘A’)

Determination of Gross employment income: all type of income like Basic salary, allowance, overtime and
bonus
A. Taxable income
I. Every person deriving income from employment is liable to pay tax on that income at the rate
specified in Schedule “A”, shown bellow. The first Birr 600 (six hundred Birr) of employment
income is excluded from taxable income.
II. Employers have an obligation (Liability) to withhold the tax from each payment to an
employee, and to pay to the Tax Authority the amount withheld during each calendar month. In
applying preceding income attributable to the months of Nehassie and Pagumen shall be
aggregated and treated as the income of one month.
Every person deriving income for employment is liable to pay tax on that income at the rate specified in
schedule `A`, set out in Article 11. The first Birr 600 (six hundred Birr) of employment income is excluded
from taxable income. If the tax on income from employment, instead of being deducted from the salary on
wage of the employee, is paid by the employee in whole or in part, the amount so paid shall be added to the
taxable income and shall be considered as part there of

 According to Article 10 of income tax proclamation, the employers have an obligation to

withhold the tax from each payment to an employee and to pay to the tax authority the amount withheld

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 during each calendar month. In applying the procedure, income attributable to the months of Nehassie
and pagume shall be aggregated and treated as the income of one month.
B. Exemptions
The following categories of income shall be exempted from payment of income tax.
I. Income from casual employment
Income from employment received by casual employees who are not regularly employed provided that they do
not work for more than one month for the same employer in any twelve months period.
II. Contribution of retirement benefits by employers:
Pension contribution, provident fund and all forms of retirement benefits contributed by employers in an
amount that does not exceed 15% (fifteen percent) of the monthly salary of the employee.
III. Income from Diplomatic and consular representatives, and Other persons employed in any
Embassy, Legation, Consulate or Mission of a foreign state performing state affairs, which are national of that
state and bearers of diplomatic passports or who are in accordance with international usage or custom normally
and usually exempted from the payment of income tax..
IV. Payments as compensation
Payments made to a person as compensation or gratitude in relation to:
(i) Personal injuries suffered by that person;
(ii) The death of another person.
V. Allowable Deductions
The following payments, made to an employee by an employer, are allowed as deductions to determine taxable
income.
 Reimbursed medical expenses
 Transportation allowance (if provided in the contract)
 federal 25% of basic salary or not more than Br 800
 Addis Ababa 15% of basic salary or not more than Br 500
 Hardship Allowance
 Desert Allowance
 Reimbursed traveling expense (incurred on duty)
C. Tax Rate
Tax Rate
As amended in income tax proclamation No 979/2016, every person deriving income from employment is
liable to pay tax on that income at the rate specified in Schedule “A” as follows:
Schedule A
Employment Income (per month) Tax Rate (in %) Deduction (in Birr)

over Birr to Birr

0 600 Exempted
601 1650 10% 60. 00
1651 3200 15% 142. 50
3201 5250 20% 302.50
5251 7800 25% 565.00
7801 10900 30% 955.00
Over 10 ,900 35% 1500.00

Methods of employment income tax computations

There are two methods are used to compute employment income tax.
1. Progression method

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The amount of tax is calculated for each layer of tax bracket by multiplying the given rate under schedule A
For each additional income.

2. Deduction methods

Income Tax =Taxable Income x tax rate - Deduction

Deduction is computed by this formula

Deduction = upper taxable income pervious tax bracket tax rate of given bracket-cumulative threshold.
Exercise 1: The following data were taken from the records of Abraham Co. for July 2008 E.C. that pays
payroll to its employees according to Ethiopian payroll system.
Name Basic salary Allowance Overtime worked Duration of overtime work
Abel Tena Br.2,400 250 30hrs Up to 10:00pm
Sara Chala 3,200 500 20hrs 10:00pm-6:00am
Nega Girum 1,600 100 10hrs Weekends
18hrs Public holiday
Additional information:
1. All employees are expected to render services of 160hrs per month and all of them did except Sara
Chala who has served only 150hrs.
2. All employees are permanent employees except Abel Tena.
3. The allowance of Nega Girum is not taxable.
4. All employees promised to contribute 10% of their basic salary to the credit association of the company
Required:
 Determine the gross earnings, taxable income, total deductions and net pay of all employees.

SCHEDULE 'B': TAX ON INCOME FROM RENTAL OF BUILDINGS

Any income arising from rental of buildings is taxable under schedule ‘B’. Rental income includes all form of
income from rent of a building and rent of furniture and equipment if the building is fully furnished. Income
from the lease of business including goods, equipments and building which are part of the normal operation of a
business, (called business lease) are taxable under another schedule that is in schedule ‘C’
Gross rental income also includes any cost incurred by the lessee for improvement to the land or building all
payments made by the lessee on behalf of the lessor in accordance with the contract lease. In the lease contract
there are two parties involved in renting a building, the lessor and the lessee. The party who grants rent of the
building is the lessor. The one who leases the property for use is the lessee. In some occasions the lessor may
allow the lessee to sub lease the building for another party. In such circumstances the first lessee becomes the
sub-lessor and the third party who rents the building from the lessee is called sub-lessee. The sub lessor must
pay tax on the difference between income from the sub leasing and the rent paid to the lessor, provided that the
amount received by the sub lessor. The owner of the building who allows a lessee to sub- lease is liable for
payment of the tax for which the sub lessor is liable, in the event the sub-lessor fails to pay.

lessor lessee sub-lessee

Owner user third party/sub-lessee

Sub-lessor

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When a building is constructed for the purpose of giving on lease, the owner and contractor should inform the
Kebele Administration about its completion and the intention of giving it on lease. This is also applicable when
the building is rented before its completion. The Kebele Administration will pass the information to the tax
office for the administration of tax. It is also the responsibility of Kebele administration to gather any such
information and communicate to tax office in case where the parties fail to do so.

5.2.2 Taxable Income

i. Gross income includes all payments, either in cash or benefited in kind, received by the lessor for instance if
a computer trader rents a building for use and give computer to lessor, the market value of the computer shall
be used as gross rental income.
ii. All payments made by the lessee on the behalf of the lessor. For instance if the lessee pay brokerage fee on
behalf of the lessor, such payments are i.e ownership fee on behalf of the lessor , such payments are include in
the gross rental income.
iii. The value of any renovation or improvement to the land or the building is also part of taxable income under
this schedule if such cost is borne by the lessee in addition to rent payable.
A. Deduction
Taxable income from schedule B income is determined by subtracting the allowable deductions from the gross
income. Allowable deductions include the following:
A. For lessor that do not maintain books of accounts
 taxes paid with respect to the land and buildings being leased; except income taxes; and
 for taxpayers not maintaining books of account, one fifth (1/5) of the gross income received as rent for
buildings furniture and equipment as an allowance for repairs, maintenance and depreciation of such
buildings, furniture and equipment;
B. For lessor that maintain books of accounts
 For taxpayers maintaining books of account, the expenses incurred in earning, securing, and maintaining
rental income, to the extent that the expenses can be proven by the taxpayer and subject to the limitations
specified by this Proclamation, deductible expenses include (but are not limited to) the cost of lease (rent)
of land, repairs, maintenance, and depreciation of buildings, furniture and equipment in accordance with
Article 23 of this Proclamation as well as interest on bank loans, insurance premiums.
i.e. building 5%, computer and related asset 25%, furniture and equipment 20% and other asset 10% of
depreciation base.
Tax Rate
This is the tax imposed on the income from rental of buildings. The tax payable on rented houses would be
charged at the following rates:
 On income of bodies, 30% of taxable income.
 On income of persons according to the following schedule:
Taxable Income from Rental of Income Tax Payable Deduction(in Birr)
Buildings (per year) (in %)
over Birr to Birr
0 7,200 Exempted
7201 19, 800 10% 720.00
19, 801 38, 400 15% 1710.00
38,401 63,000 20% 3630.00
63,001 93, 600 25% 6780.00
93, 601 130, 800 30% 11,460.00
over 130, 800 35% 18,000.00

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  Computation of income tax on income from rental of building
In order to compute the taxable income from rental of building we use the following approach.

Sources (income) Amount in birr Amount in birr

Rental Income Received xxxxx

Add: Amount received on the
i) Lease of furniture xxx
ii) Lease of equipment xxxxx xxxxxx
Less: Deductions:
i) Taxes paid on land and buildings
Leased xxxx
ii) For those not maintain books of
Accounts
Allowance for repair, maintenance
and depreciation (1/5 of gross income) xxxx
(OR)
iii) For those maintain books of Accounts
 Expenses on
a) Cost of lease of land xxxx
b) Repairs xxxx
c) Maintenance xx
d) Depreciation of building, furniture and
Equipments xxx
e) Interest on bank loans xxx
f) Insurance premiums -- xxxxxx (xxxxxx)

Taxable Income from rental of Buildings xxxxxx

Exercise 2: Mr. X has a building that is available for rent in year 2008. The following are the details of the
property let out
 He has let out for twelve month
 Actual rent for a month is birr 30,000
 He paid 15% of the actual rent received as land taxes and 3% as other taxes
 He spent birr 10,000 for maintenance of the building
DEPRECIATION
SCHEDULE
ORGINAL
Type YEAR COST ADDITION TOTAL COST
building 2008 3,000,000.00 _ 3,000,000.00
Equipment 2008 150,000.00 _ 150,000.00
computer &
accessory 2008 100,000.00 60,000.00 160,000.00

Required: Compute the taxable income and tax liability

A. He does not maintain any books of accounts in this regard
B. Assumes that Mr. X has maintained books of accounts.
A. Solution :
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 Annual rental income (birr 30,000*12 months)---------------------------------------360,000
Less: allowable deductions
 Land tax (15% of 360,000)-------------54,000
 Other taxes (3%of 360,000)--------------10,800
 Maintenance (1/5 of 360,000)----------72,000 (136,800)
Taxable income……………………………………………… 223,200
 Then tax liability should be calculated as follows
>130,800 35% 18,000

= taxable income* tax rate- deduction

=birr223, 200*35%-18,000
=birr 60,120

B. Assumes that Mr. X has maintained books of accounts. Required: compute the taxable income and
tax liability
Solution:

Depreciation Schedule
1. For building 300,000*0.05=15,000
2. For Equipment 15,000*.20= 3,000
3. For computer 16,000*.25 = 4,000

Annual rental income (birr 30,000*12 months) ---------------------------------------360,000

Less: allowable deductions
 Land tax (15% of 360,000)----------54,000
 Other taxes (3%of 360,000)---------10,800
 Maintenance ---------------------------10,000
 Dep Expense Building----------------15,000
 Dep Expense Equpment-------------3,000
 Dep Expense computer---------------4,000-------------------------- (96,800)
Taxable income………………………………..………………263,200
 Then tax liability should be calculated as follows
>130,800 35% 18,000

= taxable income* tax rate- deduction

=birr263,200*35%- 18,000
=birr 74,120

SCHEDULE 'C': BUSINESS INCOME TAX

Business means manufacture or purchase and sale of a commodity with a view to make profit. It includes any
trade, commerce or manufacture or any other adventure or concern in the nature of entrepreneurial activity. It is
not necessary that there should be a series of transactions in a business and it should be carried on permanently.
Neither repetition nor continuity of similar transactions is necessary. Profit of an isolated transaction is also
taxable under this Schedule, provided that it is a venture in the nature of business or trade. In this connection, it
is important that the intention of purchase or manufacture should be sell at a profit.

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 Taxable Business Income
Taxable business income shall be determined per tax period on the basis of the profit and loss account or
income statement, which shall be drawn in compliance with the Generally Accepted Accounting Standards,
subject to the provisions of this Proclamation and the directives issued by the Tax Authority.
Business income tax or business profit tax is the tax imposed on taxable business income /profit realized from
entrepreneurial activities. it is charged on the profit of business enterprises on their activities arising each
accounting period or tax year.

Category of Taxpayers
For the purposes of payment of business tax, taxpayers are categorized into three namely: Category “A”,
Category “B”, and Category “C”.
Category “A” Taxpayer
Category “A” taxpayer includes;
a. Business that have separate legal personality (share company, PLC and public enterprise) regardless of
their annual sales revenue.
b. or any other person having an annual gross income of Birr 1,000,000 or more.
.
 Category “A” taxpayers shall submit the tax declaration to the tax authority within four months from the
end of the tax year.
 Tax assessment is a process of measuring, imposing tax liability and collecting tax from payers
 At the end of the year, category “A“ taxpayers are required to submit a balance sheet and a profit and
loss statement and the following details to the tax authority:
 Gross profit and the manner in which it is computed.
 General and administrative expense;
 Depreciation expense; and
 Provisions and reserves.

Category “B” Taxpayer

 Category “B” taxpayer being a person, other than a body, having an annual gross income of Birr
500,000 or more but less than 1,000,000.
 Category “B” shall submit the tax declaration to the tax authority within two months from the end of tax
year.
 At the end of the year, category “Taxpayers are required to submit only a profit and loss statement to the
tax authority.

Category “C” Taxpayer

Category “C” taxpayer being a person other than a body, having an annual gross income of less than Birr
500,000. Every businessman (except Category “C”) is required to preserve all books of accounts and other
records and documents for a period of not less than 5 years after the year of income to which such books and
documents relate.
To determine the income tax liability of such tax payer , standard assessment or presumptive method shall be
used . Assessment or presumptive tax is fixed amount of tax determined by estimation or best judgment.
However, if categories “C” tax payer maintain books of account, they shall pay taxes on the basis of their books
of account.
Moreover the tax payer who drives income from different source subjected to the same schedule shall be
assessed on the aggregate of such income. For example if the individual has barberry and castle shop, the
income of the two businesses are aggregated.
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 Tax payment Period
The fiscal year starts on Hamle 1 and ends on Sene 30. The body can change the accounting year only with the
permission of the tax authority. When the tax period of a body is changed (with the permission); the period
between the previous tax period and the new period will be treated as a “transitional period”.

Allowable Deductions

In the determination of business income subject to tax in Ethiopia, deductions shall be allowed for
expenses incurred for the purpose of earning, securing, and maintaining that business income to the extent
that the expenses can be proven by the taxpayer and subject to the limitations specified by this Proclamation. In
order to determine taxable income under Schedule “C” the following items of expenditures are allowable for
deduction.
1) Direct cost of producing the income such as the direct cost of manufacturing, purchasing, importation,
selling and such other similar costs.
2) General and administrative expenses incurred for earning, securing and maintaining the income. such
costs are salary of administrative personnel , utility cost, rental cost ,repair and maintenance and e.t.c.
3) Bad debt
4) Premium payable on insurance directly connected with the business activity ;- insurance premium
directly connected with business activities and against risk of damage or destruction of business premises.
5) Expense incurred for the promotion of business
6) Commission paid for services rendered, provided that the amount shall not exceed the normal rates
provided by other similar businesses or persons
7) Any payment made by a branch, subsidiary or associated company in
Subjected to the following two conditions;
a. The payment is made for the service actually received.
b. The service was necessary for the business and could not be performed by other person or by the
business itself at lower cost.
8) Salaries, wages or other benefit paid to the children of proprietors or member of partnership. Subjected to
the following two conditions;
a. such employees shall have the required qualification.
b. the salary payable for such employs shall be equivalent for the post.
9) Salaries and other personal benefit paid to manager or managers of a private limited company.
10) Interest expense, if the lending institution is recognized by NBE or a foreign bank permitted to lend to
enterprises in the country.
11) Depreciation expense

The following are the rates of depreciation permitted per the rule:
1) Building: 5% of the original cost. The cost includes the cost of acquisition, construction, improvement,
reconstruction and renewal.
2) Intangible Assets: 10% (straight-line basis).
3) Computers, information systems, software products and data storage equipment: 25% (on a pooling
system). Under pooling system the asset that has the same or similar character pooled together and are called
pooled asset. For example projector, LCD, scanner ,flash disk e.t.c.
4) All other business assets: 20% (on a pooling system)
All other depreciable business asset such as machineries, vehicles furniture is pooled together. For assets for
which the pooling method is used, the rate is applied to the depreciation base for the determination of
depreciation. Depreciation base is the book value of the asset on the opening day of the tax period, increased by
the cost of acquisition, creation, renewal, etc during the period and reduced by the sales price of the asset
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disposed during the period. Loss incurred during the period due to natural calamity and other involuntary
conversion will also be considered for the computation of depreciation base. Any compensation received for
these purposes will be deducted from the book value.

While determining the depreciation base, if it becomes negative, it will be added to the taxable income.
On the other hand, if the depreciation base is Br 1,000 or less in any tax period, the entire amount shall be
treated as depreciation for that period. Likewise, gain obtained as a result of revaluation of assets shall not be a
basis for determining depreciation base.

For each category of assets, the actual expense incurred for the maintenance and improvement is allowable
provided it does not exceed 20% of the depreciation base at the end of the year. If such an expense exceeds
20% of the depreciation base, the excess will be added to the depreciation base of the category.
According to the Regulation issued by the Council of Ministers, depreciation will be allowed as deduction
only if the tax payers keep satisfactory record and submit the same to the tax authority regarding the date and
cost of acquisition and a record of the total amount of depreciation deducted on the asset so far. However,
depreciation on assets such as fine art, antiques, jewelry, trading stock, etc (which are not subject to wear and
tear) are not allowed.
Financial institutions are permitted to deduct special reserves from taxable income in accordance with the
directives issued by NBE. However, the amount drawn from such reserves will be added to the taxable income
of such institutions.
Non-allowable Deductions
All those expenses, which are not wholly or exclusively incurred for the business activity, shall not be
allowed as deductions per the provisions of law. Such expenses include:
1) Additional investment: an increase in the share capital of a company or the original capital of a registered
partnership
2) Pension or provident fund contribution in excess of 15% of the monthly salary of employees
3) Business profit tax and input value added tax ;- but they can be recovered through collection on sales.
4) Fines or penalty paid under violation of law
5) Losses that are not connected with the business activity
6) Losses recoverable by insurance
7) Entertainment expenses
8) Personal consumption expenses
9) Salary, wages, and other personal benefit paid to the partner, or proprietor of an enterprise

Computing Business Income Tax

Using the income statement, taxable income may be determined as follows;
1. Take the net profit as shown in the income statement which is prepared in accordance with
Generally Accepted Accounting Principles (GAAP) or International Accounting Standards (IAS).
2. Add back any item deducted as expense, which is not allowed for tax purposes.
3. Deduct any item included in the income on which income tax has already been withheld by the
payer. Examples of such items are income received from royalties, income from games of chance,
dividends and interest received, etc. refer schedule ‘D” other income in the proclamation.
4. Multiply the figure so arrived (from step 1through step III) by the income tax rate. For bodies use
the progressive tax table for persons (other tax payers) to get the tax payable for the fiscal year.
5. Determination of Taxable Business Income
6. Allowable Deductions
7. Non-Allowable Expenses
8. Computing Taxable Income
9. Tax Rate
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 Declaration and Payment of Tax
The following is the procedures for the declaration of taxable income by taxpayers.
A) Taxpayers categorized as “A” are required to declare their taxable income within four months from the end
of the tax period
B) Those taxpayers who are categorized as “B” are required to declare their taxable income within two months
from the end of the tax period
C) Category “C” taxpayers shall declare taxable income within one month i.e. between July 07 and August each
year

Assessment of Tax
Assessment is a tax review by a tax official of the tax declaration and information provided by a taxpayer and a
verification of the arithmetical and financial accuracy of the declared tax liability. Pursuant to the proclamation,
each taxpayer is required to furnish the tax authority with all information required for the assessment of income
tax including information about his operations, and relationship with other bodies that may be necessary for the
declaration of income or for supporting the books of accounts.
The procedure for the assessment of business income tax takes two forms:
A) Assessment by books of accounts, and
B) Assessment by estimation.
Assessment by books will be done for those who maintain books of accounts (Category A and B). The revenue
authority makes assessment by estimation when the taxpayers do not maintain the books or when the submitted
books are not acceptable. This is also done if the taxpayer fails to declare his/her taxable income within the
time required. Tax, of those taxpayers who have different sources of income, will be assessed on the aggregate
of all income.
If the taxpayers keep no records, or if the income tax authority does not accept the submitted books, or if the
taxpayer fails to declare tax within the time specified, the income tax authority estimates tax by the use of
certain indicators. Category “C” should pay tax at fixed rate on the income estimated by the income tax
authority.
Tax assessors will be assigned by the tax office to estimate the daily sales of the taxpayers. The estimates will
be done using the best of their judgment and objectivity. The estimated daily sales will be converted to annual
income using the number of working days. Tax on annual sales is determined on the basis of presumptive value
assigned to each activity.

Tax Rate
This is the tax imposed on the taxable business income / net profit realized from entrepreneurial activity.
Taxable business income would be determined per tax period on the basis of the profit and loss account or
income statement, which shall be drawn in compliance with the Accounting standard adopted by the
company. Corporate businesses are required to pay 30% flat rate of business income tax. For
unincorporated or individual businesses, the business income tax ranges from 10% - 35%. Unincorporated or
individual businesses are taxed in accordance with the following schedule below as amended in income tax
proclamation No. 979/2008:

Schedule C
Taxable Business Income / Net Profit Tax Rate (in %) Deduction
per year (in Birr)
over Birr to Birr
0 7,200 Exempted
7201 19,800 10% 720.00
19,801 38,400 15% 1710.00
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 38, 401 63, 000 20% 3630.00
63, 001 93,600 25% 6780.00
93,601 130,800 30% 11,460.00
Over 130,800 35% 18,000.00

Provision for Loss Carry Forward

If a business incurs a loss in a year, that loss may be set off against taxable income in the next three years. If
there is operating loss for more than one period, earlier losses being set off before later losses. A net operating
loss may be carried forward and deducted only for two periods of three years. However, the loss cannot be
carried forward: If during a year, the direct or indirect ownership of the share capital or the voting rights of a
business changes more than twenty-five percent, by value or by number and if the business cannot provide a
books of account showing the loss, which are acceptable by the authority.
Penalties
The following penalties are provided in the proclamation regarding business income tax.
For Non-declaration
Taxpayers who do not declare tax income within the period specified in the regulation will be liable to pay Br
1,000 for the first 30 days of non-declaration. The penalty is Br 2,000 for the next 30 days of non-declaration.
Br 1,500 will be charged for each 30 days for failure to declare the taxable income thereafter.
For understatement of taxable income
Understatement of taxable income results in a penalty of 10% of the amount Understatement. If the
understatement is substantial, the penalty will be 30%.
For late payment
When a taxpayer fails to pay tax within the due date, he/she will be required to pay a penalty of 5% of the
amount unpaid. An additional 2% penalty on the amount unpaid is imposed on the first day of each month for
non-payment.
For failure to keep records
Failure to keep books of accounts, records and other documents by any taxpayer results in a penalty of 20% of
the tax assessed. If this failure continues for two consecutive years, the license of the taxpayer will be
suspended. One more year’s failure leads the tax authority to revoke the license of the taxpayer.
For failure to withhold
A withholding agent, who fails to withhold tax per the proclamation, will be personally liable to pay tax (which
has been withheld). In addition, this failure obliges the agent to pay Br 1,000 per case. The following
individuals are also liable in this regard:
1) The manager that has known of the failure
2) The chief accountant or a senior officer who was responsible for the supervision of the withholding
activities.
Recording Business Income Tax
Like any business transaction, profit tax payment must be properly accounted for. To record business profit
tax, Income Tax Expense will be debited and Income Tax payable will be credited (if the tax is not paid yet) or
cash will be credit (if recording is made at the time when the tax is paid).
Example 1: Melat enterprise, unincorporated business has reported earnings before tax of birr 80,000 at the tax
year ended Sene 30,2011.
Required:
A. Determine the amount of business income tax?
B. Record necessary journal entries?
Solution:

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7,200 - 19,800 10% 720
= 80,000* 10-720
= 8,000-720
= 7,280
To record recognition of income tax expense
Income tax expense ……………………7,280
Income tax payable ………………………. 7,280

To record payment of tax

Income tax payable…………….. 7,280
Cash …………………………………… 7,280
Example2: The following information is obtained from Densa private limited company.
 The book value of a pool of computer in the opening balance sheet of the tax period as of Hamle 1,
2006 was birr 150,000. During the year 2006:
 Densa bought data storage equipment for birr 75,000, software products for birr 50,000.
 The existing computer was upgraded and renewed for birr 12,000.
 Densa has also received birr 15,000 as compensation from Haron computer ,supplier ,since some
of storage equipments are not functioning.
 Densa also sold two old computers and received birr 8,500
Required:
1. Determine depreciation base of computer?
2. Determine depreciation expense of computer
3. Record necessary journal entries
Solution:
Beginning Book value……………………………………………….150, 000
Add: storage equipment …..75,000
Software product…… 50,000
Upgrading……………… 12,000 --------------- 137,000
Subtotal --------------------------------------------287,000
Less: Compensation………………..15,000
Cash proceed from selling…..8,500------------- 23,500
Depreciation base for tax ……………………………. 263,500
Depreciation expense = .25x 263,500 = 65,875

Journal entries: Depreciation expense ………………………..65,875

Accumulated Depreciation ………………………………….65, 875

SCHEDULE 'D': INCOME FROM OTHER SOURCES

1. Tax on Income from Royalties:
Royalty income means a payment of any kind received as a consideration for the use of, or the right to use, any
copyright of literary, artistic or scientific work including cinematography films, and films or tapes for radio or
television broadcasting. A resident of Ethiopia who derives a royalty shall be liable for income tax at the rate
of 5% on the gross amount of the royalty. Non-resident who derives an Ethiopian source royalty that is
attributable to a permanent establishment of the non-resident in Ethiopia shall be liable for income tax at the
rate of 5% on the gross amount of the royalty.

2. Income from rendering of professional service: The term technical service means any kind of expert
advice or technological service rendered. Income from locally provided technical or professional service is

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 taxed at a flat rate of 5%. Whereas, income received from rendering service abroad is taxed at a flat rate of
10%. The Tax shall be withheld and paid to the Tax Authority by the payer.
3. Tax on Income from Games of Chance: games of chance means a game whose outcome depends
primarily on chance rather than the skill of the participant, including a lottery, card game, or tombola.
Person who derives income from winning at games of chance held in Ethiopia shall be liable for income tax
at the rate of 15% on the gross amount of the winnings except the winnings are less than 1000 Birr. In
computing the gross amount of winnings, no deduction shall be allowed for any loss incurred by the person
from games of chance.
4. Tax on Dividend Income: A resident of Ethiopia who derives a dividend shall be liable for income tax at
the rate of 10% of the gross amount of the dividend. A non-resident who derives an Ethiopian source
dividend that is attributable to a permanent establishment of the non-resident in Ethiopia shall be liable for
income tax at the rate of 10% on the gross amount of the dividend. The withholding agent shall withhold or
collect the tax and account to the Tax Authority.
5. Income from casuals rent of property: A person who derives income from the casual rental of property in
Ethiopia (including any land, building, or movable property) shall be liable for income tax on the annual
gross rental income at the rate of 15% of the gross amount of the rental income.
6. Tax on Interest Income on Deposits: A resident of Ethiopia who derives interest shall be liable for income
tax at the rate of 5% of the gross amount of the interest in the case a savings deposit with a financial
institution that is a resident of Ethiopia. In any other case, 10% of the gross amount of the interest. A non-
resident who derives Ethiopian source interest that is attributable to a permanent establishment of the non-
resident in Ethiopia shall be liable for income tax at the rate of 5% of the gross amount of the interest in the
case a savings deposit with a financial institution that is a resident of Ethiopia. In any other case, 10% of the
gross amount of the interest. The payers are required to withhold the tax and account to the Tax Authority
7. Tax on Gains of Transfer of Certain Investment Property: A person who derives a gain on the disposal
of immovable property, a share, or bond (referred to as a taxable asset) shall be liable to pay income tax at
the rate of 15% for immovable property and 30% for shares and bonds on the amount of the gain. The
amount of a gain on disposal of a taxable asset by a person shall be the amount by which the consideration
for the disposal of the asset exceeds the cost of the asset at the time of disposal.
Note: immovable property shall not include a building held and wholly used as a private residence for 2 years
prior to the disposal of the property.

 Withholding of Tax from Domestic Payments

Bodies having legal personality, government agencies, non-profit organizations, or non-governmental

organizations and other tax payers required to withhold tax for the supply of goods in Ethiopia involving more
than 10,000 Birr in one transaction and supply of services involving more than 3,000 Birr in one transaction
at the rate of 2% of the gross amount of a payment made. At the time of withholding tax from withholding
income, a withholding agent shall provide the recipient of the withholding income with a withholding tax
receipt in the approved form in accordance with the directive of the authority.
 Withholding of tax from Imported goods
A current payment of income tax shall be collected on Schedule C income at the time of import of goods for
commercial use, and the collected amount treated as tax withheld that is creditable against the taxpayer's
income tax liability for the year. The amount collected on import of goods shall be three percent (3%) of the
sum of cost, insurance, and freight ("CIF value"). If the amount of income tax collected on the import of goods
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results in underpayment of business income tax due for the year, as determined at the time of declaration of
income tax, the taxpayer is required to pay the difference with the declaration. If the amount represents an
overpayment of income tax due for the year, the Tax Authority shall after ensuring the accuracy of the books
and records refund the taxpayer the amount overpaid within 3 months period.

INDIRECT TAXES:
 Value Added Tax.

 Turnover Tax.

 Excise Tax.

 Customs Duty.

 Stamp Duty.

Value Added Tax (VAT)

VAT is a tax on consumer expenditure. It is collected on business transactions and imports. A taxable person
can be an individual, firm, company, as long as such a person is required to be registered for VAT. Most
business transactions involve supplies of goods or services. VAT is payable if they are:
 Supplies made in Ethiopia.
 Made by a taxable person.
 Made in the course or furtherance of a business.
 Are not specifically exempted or zero-rated.
The Value Added Tax would be levied at the rate of 15% of the value of:
 Every taxable transaction by a registered person;
 Every import of goods, other than an exempt import; and
 Import of services.
The following types of supplies of goods (other than by way of export) or rendering of services, as well as the
following types of imports of goods are exempt from payment of VAT:

 Sale, transfer or the lease of a used dwelling;

 Rendering of financial services;
 Supply/import of national/foreign currency and of securities;
 Import of gold to be transferred to the National Bank;
 Rendering of religious organizations or church services;
 Import or supply of prescription drugs specified in directives issued by Minister of health,
rendering of medical services;
 Educational services provided by educational institutions, or child care services for children at
pre-school institutions;
 Supply of goods and rendering of services in the form of humanitarian aid, as well as import
of goods transferred to state agencies of Ethiopia and public organizations for the purpose of
rehabilitation after natural disasters, industrial accidents, and catastrophes;
 Supply of electricity, kerosene, and water;
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  Goods imported by the government, organizations, institutions or projects exempted
from duties and other import taxes to the extent provided by law or by agreement;
 Supplies by the post office authorized under the Ethiopian Postal Services Proclamation, other
than services rendered for a fee or commission;
 Provision of transport; Permits and license fees;
 Supply of goods or services by a workshop employing disabled individuals if more than 60
% of staff are disabled;
 Import or supply of books and other printed materials.

Turnover tax
The Turnover Tax would be payable on goods sold and services rendered by persons not registered for Value
Added Tax. The rate of Turnover Tax is:
 2% on goods sold locally;
 For services rendered locally: 2% on contractors, grain mills, tractors and combine-harvesters; 10% on
others.
The base of computation of the Turnover Tax is the gross receipts in respect of goods supplied or
services rendered. A person who sells goods and services has the obligation to collect the Turnover Tax from
the buyer and transfer it to the Tax Authority. Hence, the seller is principally accountable for the payment of
the tax. In accordance with the Turnover Tax Proclamation No. 308/2002, the following would be
exempted:
 Sale or transfer of dwelling used for a minimum of two years, or the lease of a dwelling.
 Rendering of financial services.
 Supply of national or foreign currency and of securities.
 Rendering by religious organizations of religious or other related services.
 Supply of prescription drugs specified in directives issued by the relevant government agency, and the
rendering of medical services.
 Rendering of educational services provided by educational institutions.
 Supply of goods and rendering of services in the form of humanitarian aid.
 Supply of electricity, kerosene and water.
 Provision of transport.
 Permits and license fees.
 Supply o f g o o d s or services by a workshop employing disabled individuals (if more than 60% of the
employees are disabled).
 Supply of books.

Excise Tax
It is believed that this tax should be imposed on luxury goods and basic goods, which are demand inelastic. It
is also believed that imposing the tax on goods that are hazardous to health and which are causes to social
problems will reduce the consumption thereof.

Rate of Excise tax:

The excise tax would be imposed on goods imported or either produced locally in accordance with the
schedule, given in Excise Tax Proclamation No. 1186/2012.

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 The base of computation of Excise Tax is the cost of production for goods produced locally; whereas for
goods imported the base of computation would be the cost of production, insurance and freight costs.

Customs Duty
Any good imported or exported would be subject to: Payment of d u t i e s an d t a x e s a cc o rdi n g to
the tariff of Harmonized Commodity Description and coding system; Payment of duties and taxes
according to the preferential tariff rate where goods are imported from the preferred country; Payment
of duties and taxes at the rate in force on the day the declaration of the goods are presented to, and
accepted by the customs office.

Stamp Duty
The following instruments shall be chargeable with stamp duty:
 Memorandum and articles of association of any business organization, cooperative or any other form
of association;
 Award; Bonds; Warehouse bond;
 Contract and agreements and memoranda;
 Security deeds;
 Collective agreement;
 Contract of employment;
 Lease, including sub-lease and transfer of similar rights;
 Notarial acts;
 Power of attorney;
 Documents of title to property.
Rate of Stamp Duty:
The stamp duty on each instrument to be charged levied and collected at the following rates:

No. Instruments chargeable Basis of Rates of

with Stamp Duty Valuation Stamp Duty
1 Memorandum and articles of Flat
association of any business
organizations, or any association:
a) upon 1st execution Birr 350
b) upon any subsequent execution Birr 100

2 Memorandum and articles of

association of cooperatives
a) upon 1st execution Flat Birr 35
b) upon any subsequent execution Birr 10

3 Award on value a) determinable

value 1%
b) undeterminable
value Birr 35

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 4 Bonds on value 1%
5 Warehouse bond on value
6 Contracts and agreements and Flat Birr 5
memoranda
7 Security deeds on value 1%
8 Collective agreement
Flat Birr 350
a) on 1st execution
Birr 100
b) on any subsequent execution
9 Contract of employment Salary 1%
10 Lease including sub-lease and on value 0.5 %
transfer thereof
11 Notarial act Flat Birr 5
12 Power of attorney Flat Birr 35
13 Register title to property on value 2%

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