Public Finance and Taxation Chapter Four

CHAPTER FOUR
Ethiopian Tax System
4.1 Direct taxes
Under The Ethiopian tax system of direct taxes, scheduler tax system, in which the tax liability
of a taxpayer is determined based on the schedule of each income. This implies the loss incurred
in one schedule is not allowed to compensate from the income generated in the other schedule.
Accordingly as it is depicted in article 8 of the income tax pro 979/16, direct taxes are classified
in to five schedules.
 Schedule ‘A’, income from employment;
 Schedule ‘B’, income from rental of buildings;
 Schedule ‘C’, income from business;
 Schedule ‘D’, other income;
 Schedule ‘E’, exempt income.
Ethiopia levies tax on residential jurisdiction basis. As per the income tax proclamation, every
resident of Ethiopia who gets income from within the country or abroad is charged under the act
on transferring the amount to Ethiopia. That is the income tax is applied to the Ethiopian
resident taxpayer on their world wide income. According to the Income Tax Proclamation,
residence of Ethiopia includes resident individual; resident body; and the Government of the
Federal Democratic Republic of Ethiopia, and any Regional State or City Government in
Ethiopia.
 A resident of individual is an individual who has a domicile in Ethiopia; is a
citizen of Ethiopia who is a consular, diplomatic, or similar official posted
abroad; and is present in Ethiopia, and continuously or intermittently, for more
than 183 days in a one-year period.
 A resident body is a body that is incorporated or formed in Ethiopia; or has its
place of effective management in Ethiopia.
Moreover, the tax system of the country is also applied to non-residents with respect to their
Ethiopian source of income. That is foreign resident is liable to pay tax to Ethiopian tax
authority for its income generated in the territory of the country.
Residential tax levy jurisdiction can create double taxation problem and thus double taxation
avoidance treaty is required between countries. Foreign tax credit is allowed by the income tax
proclamation for a resident that derives foreign source of during a given tax period. However,
the tax credit will not exceed the tax payable in Ethiopia.
4.1.1 ACCOUNTING FOR EMPLOYMENT INCOME TAX
4.1.1.1. Employment Income Tax in Ethiopia
Income as defined in the proclamation includes every sort of economic benefit including non
recurring gains in cash or in kind from whatever source derived and in whatever form
paid, credited or received. Taxable income shall mean the amount of income subject to tax
after deduction of all expenses and other deductible items allowed as per the law.

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“Employee” means an individual engaged, whether on a permanent or temporary basis, to

perform services under the direction and control of another person, other than as an independent
contractor, and includes a director or other holder of an office in the management of a body, and
government appointees and elected persons holding public offices;
4.1.1.2. What is Employment Income Tax?
Employment income includes any payment or gain in cash or in kind received from
employment by the employee subject to certain exemptions.
According to Pro 979/16 of Art 12 Employment income includes the following excluding the
exempted incomes under schedule ‘’E’’
a) Salary, wages, an allowance, bonus, commission,
b) The value of fringe benefits received by an employee in respect of a past, current,
or future employment*;
c) Employees termination compensation
*As it is indicated in the income tax regulation No 410/2017 Article 8 the list of fringe benefit
includes the following:
 debt waiver;  private expenditure;
 household personnel;  property or service;
 housing or accommodation  an employee share scheme;
 discounted interest loan;  vehicle;
 meal or refreshment;  residual fringe benefit
However, the amounts of tax the aggregate tax liability on fringe benefit shall not exceed 10%
the basic salary of the employees (for detail refers the regulation).
4.1.1.3. The Employment Income Tax Rate: Article 11
The employee's income tax system divides taxable income into different tax brackets. These are
a range of income bands with different tax rates. The tax payable on income from employment
shall be charged, levied and collected at the following rates:
Deductions for
Employment Income Employment Income
short cut method
(per month) Birr Tax Rate
0 –600 0% 0
601-1,650 10% 60
1,651-3,200 15% 142.50
3,201-5,250 20% 302.50
5,251-7,800 25% 565
7,801-10,900 30% 955
Over 10,900 35% 1500
Employment income tax (EIT) = (Taxable income)* the tax rate in which the taxable income
falls- deduction allotted for the given rate
Taxable income= Gross income less Direct Exemption except the Common Exemption that is
600 birr

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4.1.1.4. Employment Income Exemption Indicated in Schedule “E”

List of exempted employment income allowances indicated in the proclamation (Art 65) and
income tax regulation (Art 54) and relative directives includes the following:
 The first six hundred birr (600 birr) of monthly income tax of the employees
 An allowance in lieu of means of transportation granted under a contract of
employment with limit that will be issued by the ministry directive. Currently 25%
of the basic salary but not exceeded 2,200 birr is free from tax
 Transport expenses and per diem payments to an employee travelling on a tour of
duty subjected to limit currently per diem payment is exempted up to 4% of the basic
salary of the employee or 225 birr which is the higher
 a cash indemnity allowance paid by an employer to an employee, but only to the
extent that the allowance compensates the employee for shortfalls on money counts;
 Employment income of not exceeding five years paid to expatriate professionals
recruited for transfer of knowledge by investors engaged in export business in
accordance with a directive to be issued by the Minister;
 Income from employment received by unskilled employee working for the same
employer whether continuously or intermittently for not more than thirty (30) days
within any twelve m.nth period.
 An amount paid by an employer to cover the actual cost of medical treatment of an
employee including Premium payments made by an employer on behalf of an
employee under employees, medical insurance scheme
 Hardship allowance subject to limit issued by the ministry directive
 Food and beverages provided for free to an employee by an employer conducting a
mining, manufacturing, or agricultural business subjected to limit issued by the
ministry
 Allowances paid by the Government of the Federal Democratic Republic of
Ethiopia to employees engaged in public service in a foreign country
 Allowances paid to members and secretaries of boards of public enterprises, public
bodies, or study groups established by the Federal or a State Government or City
administration;
 contributions by an employer to a pension, provident, or other retirement fund for
the benefit of an employee provided the monthly total of contributions does not
exceed 15% of the monthly employment income of the employee;
 an amount exempt from tax to the extent provided for under an international
agreement example remuneration of diplomatic personnel of foreign countries
 a public award for outstanding performance in any field or an award granted under
Article 135 of the Tax Administration Proclamation
 an amount as compensation for personal injury or the death of another person
 a scholarship or bursary for attendance at an educational institution
 maintenance or child support payments
 salaries paid to domestic servants
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4.1.1.5. Declaration and Payment of Employment Income Tax

As it is indicated in article 88 of the income tax, proclamation the obligation to fill employment
income tax is given to employer. That is the employer shall withhold tax from the gross amount
of each payment of employment income made to the employee at the rate applicable to the
employee. In addition, if an employer is aware that an employee has more than one employer and
that the other employer, or none of the other employers, is withholding tax based on the
aggregated employment income, the employer shall withhold tax based on the aggregated
employment income and shall file the withholding employment income tax declaration within 30
days after the end of months in which the withholding income was paid.
However; if an employee has more than one employer for a calendar month or a self withholding
obligation, the employee shall file a tax declaration within 30 days from the end of every three
months (Art.96). That is an employee employed by an international organization or working in
an embassy, diplomatic mission, or other consular establishment in Ethiopia of a foreign
government or employed by an entity exempt by law from tax withholding obligations shall
withhold tax from the employment income received from such entities.
The statement shall be in the form and furnished in the manner prescribed by the Tax Authority
4.1.1.6. Payroll Records and Preparation
Payroll register: - this is a multi column register (form) for the payment of salaries at the end of
the payroll period. The source document for preparing the payroll register includes, Letter of
employment, Letter of Promotion, Letter of Demotion, Attendance list, Time card and Relevant
payroll and labor proclamation.
Payroll Components includes: Employee Name and Employee ID, Earning Columns (parts),
Deductions, Net pays, Signature
1. Earning
A. Basic Earning /Salary/: Monthly salary of an employee that is paid for carrying out the
normal work of employment. Basic earning refers to the amount agreed between the employer
and the employee at a time of employment, and will be clearly stated in the letter of employment.
Basic salaries are the bases for making other calculation in relation to earning like bonus,
compensations, severance pay, overtime…etc..
B. Allowance: - Additional monthly payment to the employee for one of the following reasons
 Position allowance or Acting allowance: - Sum paid for a person for assuming a certain
position.
 Housing allowance: - a monthly allowance paid to an employee to cover for house
facility, when the employer is obliged to provide house but falls to do so and taxable
income.
 Transportation /fuel/ allowance: - an allowance paid to an employee for to cover the
cost of transposition from office-home-office or work related transportation costs.
 Cash indemnity allowance: - allowance paid for cashiers to cover the risk of possible
cash shortage. Cash indemnity is used to cover accidental shortage not intentional
shortages,

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 Hardship allowance: - an allowance paid to an employee for in convenience caused by

the employer in the form of unexpected transfers, hazardous working areas …etc.
 Desert Allowance: - a monthly allowance given to an employee assigned to a relatively
hot region. All hot regions (places) may not entitle an employee to a desert allowance.
 Representation allowance: - Allowance paid to employees whose work requires them to
entertain customers and gusts..
C. Over time payment: - is a payment for extra hours worked beyond the regular working
hours
Labor Proclamation Number 42/1985 E.C. (1993G.C.): Defines the basic legal frame work
for contract of employment, regular working hours limit, overtime rates, compensation pay,
leave benefits, employment termination procedures …etc.
 Maximum regular working hour’s 8hrs/day, or forty eight hours a week, but the current
practice is maximum 44 hours per week and 192 hours per month. i.e.:
o Monday to Friday 8hours per day X 5 = 40hours
o Saturdays 4 hours per day = 4hours
44 hours
Or there are 22 days in a month; 22 X 8hours /day = 176 hours
There are 4 Saturdays in a month; 4 X 4 hours/day = 16 hours
192 hours
Over time payment = regular hourly salary rate* rate for the duration of overtime work
Regular hourly rate = monthly basic salary divided by normal working hours per month
Overtime rate
Ordinary time: from 6 in the morning (AM) to o’clock to 10 o’clock in the evening (PM)
Over time rate =1.25 * Regular hourly rate
Late hours: from 10PM up to 6 AM, Over time rate =1.5 * Regular hourly rate
Weekly rest days: Over time rate =2 * Regular hourly rate
Public holydays: Over time rate =2.5 * Regular hourly rate
D. Bonus: - is a material (money) reward for better or best performance by managers or other
employees. Bonus could be based on net income for managers or based on monthly salary
(basic salary) for other employees. Bonus to top manager is most of the time based on
annual income of the business enterprise.
2. Gross /earning/ Salary: - is computed by totaling all the earning i.e. Basic Salary + Allowances,
if any + Overtime payment, if any + Severance pay, if any + compensation, if any + bonus, if
any + … etc.
3. Taxable income: - includes all earning except for non taxable incomes as specified under
exemption discussed above.
4. Deduction: - These are subtractions form the gross earning, so as to identify the net pay of an
employee.
a. Statutory deduction: - deduction enforced or imposed by low.

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Currently, Pension contribution in Ethiopia applies to both public & private employees as per of
the following rate (Proc. No. 714/2011)
 7% (of the basic salary) by the employee
 11% (of the basic salary) by the employer.
Voluntary deduction: - these are not imposed but are voluntary deductions Example: Credit
association, credit purchase …etc.
b. Others: - Like court order, fines, absence …etc.
5. Net pay: - the net pay is the difference between the gross earning of an employee and the total
of the deductions.
6. Signature: - When an employee receives his/her pay he will sign to confirm that he have
received the net pay.
4.1.1.7. Computation of Employment Income Tax
Employment income tax payable by an employee is determined by multiplying the employee’s
monthly taxable income by prescribed employment income tax rates. Even if there are different
methods used to calculate employment income tax payable, for the sake of this course we will
use the short cut method.
Employment income tax = (Taxable income)* the tax rate in which the taxable income falls-
deduction allotted for the given rate
Taxable income= gross income less direct exemption except the common exemption that is
600 birr
Example 1: suppose ABC Company has the following employees and assume that the normal
working hours per week are 44 hours.
No Employees name Basic salary Over time work Transportation
allowance
1 Tadesse Abate 4500 - -
2 Tedros Ephrem 6000 4 hours in the ordinary time and -
10 hours in the late time
3 Adane Tesfaye 12,000 12 hours in the weekly rest days 2,500
Required:
A. Compute the gross earning
B. Compute the taxable income
C. Compute the pension fund contribution by the employee and employer
D. Compute the employment income tax
E. Compute the net payee
F. Prepare the payroll
Solution:
1. Tadesse Abate
A. Gross earning =4500
B. taxable income is also =4500
Deductions

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C. Pension contribution
By the employee: 7%* of basic salary=0.07*4500=315
By the employer: 11% of the basic salary=0.11*4500= 495
D. EIT=taxable income * tax rate- deduction(adjustments)
4500*0.20-302.50= 597. 50
E. Red Cross society contribution 20 birr
F. Net pay= gross earning - pension contribution- income tax- Red Cross society
contribution: 4,500-315-597.50 -20 = 3,567.50
2. Tedros Ephrem
A. Gross earning =basic salary+ over time
Over time per hour = basic salary/monthly working hours
=6000/ (192hours) = 31.25
Ordinary over time = 10*31.25*1.25=390.625
Late time overtime = 15*31.25*1.5=703.125
Total over time payment= 1,093.75
Gross earning = 6,000+1,093.75= 7,093.75
B. Taxable income is also =7,093.75
C. Pension contribution
By the employee: 7%*of basic salary=0.07*6000=420
By the employer: 11% of the basic salary=0.11*6000= 660
D. EIT=taxable income * tax rate- adjustments
7093.75*0.25-565= 1208.44
G. Net pay= gross earning- pension contribution- income tax- Red Cross society
contribution: 7093.75 – 420 - 1208.44 - 20= 5445.31
3. Adane Tesfaye
A. Gross earning =basic salary+ over time+ fuel allowances+ position allowance
Over time per hour = basic salary/monthly working hours
=12,000/ (192hours) = 62.50
Weekly rest days over time payment = 12*62.50*2=1,500
Gross Earning = 12,000+1,500+2,500 +500 = 16,500
B. Taxable income =Gross earning – fuel allowances exemption
C. The fuel allowance is exempted up to 25% of the basic salary but not exceed 2,200 birr.
0.25*12,000=3000 this is higher than the maximum limit 2,200
D. Therefore only 2,200 birr is exempted while the rest of transport allowance (2500-
2000=300) is taxable.
Taxable income= 16,500 - 2,200=14,300
Deduction
E. Pension contribution : By the employee: 7%*of basic salary=0.07*12,000=840
By the employer: 11% of the basic salary=0.11*12,000= 1320
F. EIT=taxable income * tax rate- adjustments 14,300*0.35-1,500= 3,505
G. Credit association contribution = 12,000*0.10= 1,200
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Payroll Register
for the month ended Jan. 30/2009 E.C
Earning  
Gross Taxabl
Earnin e
Basic Allowance Over Time g Income Deduction Net Pay
Empl Tax pens Credi Red
oyee Ty Amo Amo Duratio ion t Ass. Cross
Type
Nam pe unt unt n Amo Cont. Soc.
e Salary unt Cont Total
Tades
se 4,500.0 4,500.0 315.0
101 Abate 0   - _ -  0 - 0 4,500.00 597.50 0 - 20.00 932.50 3,567.50
Tedro
s Ordinar
Ephre 6,000.0 y and 1,093. 7,093.7 1,208. 420.0
102 m 0   - _ - late time 75 5 7,093.75 44 0 - 20.00 1,648.44 5,445.31

Adan
e
Tesfa 12,000. 2,500. positi 500.0 weekly 1,500. 16,500. 14,300.0 3,505. 840.0 1,200.
103 ye 00 fuel 00 on 0 rest days 00 00 0 00 0 00 20.00 5,565.00 10,935.00

22,500. 2,500. 500.0 2,593. 28,093. 25,893.7 5,310. 1,575 1,200.

00   00   0   75 75 5 94 .00 00 60.00 8,145.94 19,947.81

2200 of the fuel allowance for Adane Tesfaye is exempted

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Computation Employment income Tax on Bonus

Computation of bonus has the following steps:
A. Determine the amount of bonus to be paid for the employees
B. Calculate the monthly tax amount using the basic salary
C. Divided the bonus amount in 12 months because bonus is paid for outstanding performance
that employees achieved in the year. However if the employees have service duration of
less than 12 months the amount of bonus should divided to the numbers of months in which
the employees serves in the year.
D. Calculate the monthly income tax using the taxable income you get in “C”
E. Find the difference of the monthly income tax you get in step “D” and “B” and multiply by
12 months or by the service duration of the employees in the year expressed in months.
This is the total tax to be paid from the bonus.
F. Net pay= total bonus-tax amount on the bonus
Example two: Consider the employees of the ABC plc. The management of the company
decided to give bonus two months’ salary for permanent employs worked more than six
month and 1 month basic salary for theses that are hired after January1 for the year 2008
E.C.
No Employees Name Date of Employment Basic Salary Total Bonus
1 Tadesse Abate Jan 30/2008 EC 4500 4500
2 Tedros Ephrem Sep 11/2007 EC 6000 12,000
Required:
A. Compute the total tax that must be paid from the bonus of the employees
B. Compute the net bonus paid to each individual
Solution
1. Tadesse abate
A. Taxable income using the basic salary
4500*0.20-302.50=597.50
B. The total bonus is divided to the service duration during the year that is
4500/5=900
By adding to the basic salary you will get (4500+900=5400)
C. The income tax after bonus is 5400*.25-565=780
D. Total tax from bonus (780-597.50)*5=937.50
The net pay =bonus-tax (4500-937.50=3562.50
2. Tedros Efrem
A. Taxable income using the basic salary
6000*0.25-565=935
B. The total bonus is divided to 12 months 12,000 /12=1000
By adding to the basic salary you will get (6000+1000=7000)
C. The income tax after bonus is
7000*.25-565=1185
D. Total tax from bonus (1185-935)*12=3000

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The net pay =bonus-tax (12,000-3000=9000

4.2.8. Accounting Treatment for Employment Income Tax
To explain the journal entries consider the above ABC plc payroll register and recorded in the
general journal as follows.
Dat
e  Items post ref. Debit Credit
 28,093.7
salary expenses   5  
Cash      19,947.81
  Employees Pension cont. payable      1,575
  Employment income tax payable      5,310.94
  Credit association contribution payable 1,200.00
  Red cross society contribution payable 60
To record the employees’ pension contribution and employment income tax
Date   post ref. Debit Credit
  Payroll expenses    2,475  
  Employer Pension cont. payable      2,475
To record the employer pension contribution
Date   post ref. Debit Credit
  Employees Pension cont. payable    1,575
Employer Pension cont. payable 2,475
  Employment income tax payable    5,310.94
Credit association contribution
  payable 1,200.00
Red cross society contribution payable 60
Cash 10,620.94
When it is declared and paid to tax authority
4.1.2. Accounting for Rental Income Tax
Rental income tax includes all forms of income arising from rent of building and rent of furniture
and equipments if the building is furnished. In Ethiopia the rules for rental income tax is
indicated in the income tax pro. 979/16 from Art 13 up to Art 17, the income tax proclamation
classifies income from renting of building as Schedule B income.
There are different parities that involve in renting of the building: the lessor and lessee. The
lessor is the owners of the building and provides rental service to another person. The lessee is
an individual or an entity who rents the building directly from the lessor. The lessee is the
physical processor and users of the building.
However there may be sub-lessor that is a third party who leases a building directly from the
lessee for residential, business or any other use. In this circumstance the lessee becomes a sub-
lessor is a person or entity who further leases the whole or part of the building with the
permission of the lessor.
4.1.2.1. Taxable Rental Income Tax

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According to the income tax, proclamation taxable income from renting of building includes the
gross amount of income derived by the taxpayer from the rental of a building for the year
reduced by the total amount of deductions allowed to the taxpayer for the year. The gross
income from rental of building includes:
 All amounts derived by the taxpayer during the year under the lease agreement, including
any lease premium or similar amount;
 All payments made by the lessee during the year on behalf of the lessor according to the
lease agreement;
 The amount of any bond, security, or similar amount that, during the year, the taxpayer is
entitled to retain as a result of damage to the building and that has not been used by the
taxpayer in repairing the damage to the building;
 The value of any renovation or improvement made under the lease agreement to the
building when the cost was borne by the lessee in addition to the rent payable to the
taxpayer.
More over if, a taxpayer leases a furnished building, the gross amount of income derived by the
taxpayer from the lease of the building shall include any amount attributable to the lease of the
furniture or equipment. The taxable rental income does not include exempted incomes.
4.1.2.2. Rental Income Tax Rates
The rental income tax rates are two types. The first rate is applicable to bodies at flat rates of
30% of their rental income tax. The second rate is applicable to individual taxpayers in the
following manner.
Deduction or
Taxable Rental Income Rental Income
Adjustments for
(per year) Birr Tax Rate
short cut method
0 -7,200 0% 0
7,201-19,800 10% 720
19,801-38,400 15% 1,710
38,401-63,000 20% 3,630
63,001-93,600 25% 6,780
93,601-130,800 30% 11,460
Over 130,800 35% 18,000
Rental income tax (RIT) =Taxable income*Tax rate-Adjustments
4.1.2.3 Computation of Rental Income Tax
The computation of rental income tax is two types for these who do not have an obligation to
maintain books of accounts and for theses who maintains books of accounts (category A and
B tax payers).
In computing the taxable rental income for a tax year of a taxpayer who does not maintain
books of account, a deduction (rental expenses) shall be allowed for the following amounts:

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a) any fees and charges, but not income tax, levied by a State or City Administration in respect
of the land or building leased and paid by the taxpayer during the year;
b) an amount equal to fifty percent (50%) of the gross rental income derived by the taxpayer
for the year as an allowance for the repair, maintenance, and depreciation of the building,
furniture, and equipment.
In computing the taxable rental income for a tax year of a taxpayer who maintains books of
account, a deduction shall be allowed for any expenditures to the extent necessarily incurred
by the taxpayer in deriving rental income and paid during the year including:
a) The cost of the lease of land on which the building is situated;
b) Repairs and maintenance;
c) Depreciation of the building, furniture and equipment;
d) Interest and insurance premiums; and
e) Fees and charges, but not income tax, levied by a State or City Administration in
respect of the land or building leased.
Here if the allowable deduction exceeds the gross income earned from renting of the building,
there is a Rental Loss. Hence loss carry forward is allowed for the tax payers and the detail of
loss carry forward scheme is discussed in section 4.4 of this chapter.
The taxable rental income of a sub-lesser of a building for a tax year shall be the difference
between the total rental income received by the sub-lesser during the year and the total
rental income paid to the lesser of the building plus other expenses to the extent necessarily
incurred by the sub lesser to generate the income. Here, the owner of a building who allows a
lessee to sub-lease the building shall be liable for the rental income tax payable by the lessee if
the lessee fails to pay the tax.
Gross Income from leasing activities XXX
Less: Allowable deductions XX
Taxable income XXX
Rental Tax = Taxable income X Tax rate less Adjustments

4.1.2.4. Rental Income Tax on Advance Collection

The amount of rent income received or receivable by a lessor for the rental service of the tax year
is normally a basis to compute the rental income tax due for that tax year. In certain
circumstances a lessor may receive from the lessee rent payments in advance that covers a period
longer than one year. The computation of rental income tax due on advance payment depends up
on the category of tax payers.
If the lessor maintains books of account (category A and B tax payers), accrual basis of
accounting is applied recognize the transaction of the rental activities. According to accrual
basis of accounting if a lessor receives advance rent payment that cover more than one year from
the lessee, the lessor rental income tax such receipts is computed in the tax year in which the rent
services is actually rendered. In other words the unearned rental income is differed to the tax
year that the rental service will be rendered.

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If the lessor does not maintains books of account (category C tax payers), cash basis concept
is applied for his rental operation. The amount of rental income tax liability is computed in the
period in which the advance payment is received. Here, the advance payment covers more than
one year tax period; the tax is calculated for each year by perorating the advance collection to the
number of the years that covers it.
4.1.2.5. Declaration and Payment of Rental Income Tax
The time allowed for declaration of taxable income and payment of taxes the same as that of
schedule ‘C’ tax. Remember that a taxpayer who has taxable income from rent shall declare the
income (Art 83).
 Category A taxpayers Within 4 months after the end of fiscal year
 Category B taxpayers Within 2 months after the end of fiscal period
 Category C taxpayers Within 1 month after the end of the fiscal period
4.1.2.6. Record Keeping Obligations Related to Rental Income: the income tax proclamation
979/2016 clearly indicates the record keeping obligation related to Category of “A” and “B”
taxpayers engaged in renting of buildings. That is these taxpayers who are liable for tax under
Schedule “B” shall keep the following record of accounts:
 Rental income received;
 Fees and charges paid to a State or City Administration in relation to the building;
 Any expenditures incurred in relation to the building;
 A register of rental buildings showing the acquisition date, the cost of acquisition, any
costs of improvement in relation to the building, and the current net book value of the
building;
 Any sub-lease arrangement in respect of the building.
4.1.2.7. Journalizing Transaction Related to Rental Income Tax
Transaction related to the payment of rental income tax is recognized as follows:
General Journal
Dat
e  Description Items post ref. Debit Credit
  Rental income tax expenses      Xxxxxxx  
  Rental income tax payable        Xxxxx
If there is withholding rental income tax the transaction is
recognized as follows

Dat
e  Description Items post ref. Debit Credit
  Rental income tax expenses      Xxxxxxx  
Prepaid withholding rental income tax Xxxxx
  Rental income tax payable        Xxxxx

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Illustration1: suppose w/ro Abeba has rented her building in Julay8, 2007 E.C. for monthly
rent of birr 10,000 and leases on land paid to A.A city administration during the year was birr
3,000. In addition, she was category “C “tax payer.
Required: Compute the annual rental income tax of w/o Abeba for the year ended July7, 2008
E.C
Solution: Gross rental income: ……………………….10,000*12= 120,000
Less allowable deductions
Lease on land…………………………….…………………….. (3000)
Repair, maintenance and Depreciation
(50%of the gross rental income)……….0.5*1200,000……….(60,000)
Taxable Income ………………………………………………. 57, 000
Tax payable …………… (57,000*0.20-3630)………………….7,770
Illustration 2: Suppose Abay PLC has rented his building found in AA, Arada Sub-city
for monthly rental of Birr 120,000 in July, 2007 EC. The company also provides the
following financial information in relation to the building:
 Cost leases paid on land………………………………...12,0000
 Book value of the building at the end of fourth year…….6,000,000
 Insurance premiums paid on the building ………………..30,0000
 Outstanding loans taken for construction(at 9.5% interest)….2,000,000
 Wages of building administrators and cleaning expenses……..70,0000
Required: Compute the Rental income tax paid at the end of the year 2008 E.C and journalize
the rental income tax at july 7, 2008.
Solution: Gross rental income ……………..( 120,000*12)…………………………..1,440,000
Less allowable Deductions:
 Leases paid on land…………………………12,0000
 Depreciation expenses on building………….300,000
(.05*6,000,000)
 Insurance premium………………………….30,0000
 Interest expenses(.095*2,000,000)…………..190,000
 Wages and general expenses…………………70,000………………………….(602,000)
Taxable Income …………………………………………………………………………838,000
Since the taxpayer is Body the rental income tax rate applied is 30%
Rental Income tax (838,000*0.30) ……………………………………………………251,400
Journal entry
Item
Date  Description s post ref. Debit Credit
 251,40
 Sense 30,2008 Rental income tax expenses     0  
  Rental income tax payable        251,400
When the rental income tax is declared and paid to the tax authority within the four months after
the end the year, the transaction will be recorded as follows:

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Item
Date  Description s post ref. Debit Credit
 OCT. 20, 2008 Rental income tax payable      251,400  
  Cash in bank        251,400
4.1.3. ACCOUNTING FOR INCOME TAXES FROM BUSINESS
One of the major tax revenue sources to the Ethiopian government is undoubtedly business
income tax (business profit tax) that the government charges from the annual gross of business.
Currently the tax which, is collected from business income is computed per schedule “C”.
Accordingly this section is devoted to indicate the basic concept, computation and accounting
treatment of transactions related to Ethiopian business income tax law in accordance to the new
income tax proclamation of 979/2016, tax administration proclamation 983/2016 and income tax
regulation No 410/17 and Tax Administration Regulation 407/2017.
4.1.3.1. Category of Taxpayers, and Tax Reporting period
For the purposes of payment of business tax, taxpayers are categorized in to three namely,
Category A, Category B, and Category C.
Category ‘A’ includes any company incorporated under the laws of Ethiopia or in a foreign
country (Bodies) and individual tax payers having annual Sales turnover of Birr 1,000,000.00
and above. Those who are categorized under ‘A’ have to maintain all records and accounts which
will enable them to submit a balance sheet and profit and loss account disclosing the gross profit,
general and administrative expenses, depreciation, and provisions and reserves (together with the
supporting vouchers). Pay tax within 4-month period starting from end of their tax year
(from Hamle 1 to tikimit 30).
Category ‘B’ includes those individual taxpayers having annual sales turnover of more than Birr
500,000.00 and less than Birr 1,000,000.00. They have to submit the profit and loss statement
together with the supporting vouchers. Pay tax with in 2 month period of time starting from
end of their tax year (from Hamle 1 to Nehasie 30).
Category ‘C’ includes all taxpayers who are not classified under the other two categories and
whose annual turnover is estimated at Birr 500,000.00 or less. Pay tax with in 1 month period
of time starting from end of their tax year (from Hamle 1 to 30). They pay tax based on
standard assessment schedule annexed to the income tax regulation Here theses tax payer
engaged in business transport service shall pay the withholding tax from employment income
together with their business income tax.
4.1.3.2. Preservation of Books and Accounts
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 for category “A” tax Payer and
For 3 Years for category “B” tax Payer after the year of income to which such books and
documents relate.
Particularly in accordance the income tax proclamation (ITP) of article 59, Category ‘A’ tax
payers liable for business income tax shall keep books of account prepared in accordance with
the financial accounting reporting standards and, in particular shall keep the record of:
 business assets and liabilities of the taxpayer,
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 all daily income and expenditures;

 all purchases and sales of trading stock, and services provided;
 trading stock on hand at the end of the taxpayer’s tax year,;
 Any other document relevant in determining the tax liability of the taxpayer
On the other hand Category ‘B’ taxpayers liable for business income tax shall keep the
following: a record of daily income and expenditures; all purchases and sales of trading
stock; salary and wages register and any other document relevant in determining the tax liability
of the taxpayer.
Category ‘C’ taxpayers may keep a record of gross income and other records that category B
taxpayers required to maintain. In addition, if these taxpayers are employing a worker shall keep
documents showing any amount of employment income paid to the employee and any amount
withheld in tax from such income (Income tax regulation Art 59). Category C tax payer that
maintains books of accounts may pay their tax accordingly if the books of account maintained
are accepted by the tax authority.
4.1.3.3. Methods of Tax Accounting (Article 64)
The period of tax assessment is one fiscal year. 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’.
Category “A” taxpayers are required to use international financial reporting standards
(IFRS) particularly accrual basis of accounting to record their business transactions.
Category “B” shall follow simplified methods of accounting that is cash basis of accounting to
account for business income and deductible expenditures. The rate of depreciation applicable to
the depreciable assets and business intangibles of the taxpayer shall be 100%; and deduction is
allowed for the cost of trading stock acquired during the year. However, as per the income tax
regulation Art 58 these taxpayers can voluntary account on accrual basis of accounting
provided that they comply with the requirement set under international financial reporting
standards.
Long-term Contracts (Art 32): A taxpayer accounting for business income tax on an accrual
basis shall include amounts in business income and claim deductions for expenditures arising
under a long-term contract for a tax year based on the percentage of the contract completed
during the year. The computation will be made based on cost to cost method.
Change in Accounting Method: A taxpayer may apply to the Authority, in writing, for a change
in the taxpayer’s method of accounting and the Authority may, by notice in writing, approve the
application but only when satisfied that the change is necessary to properly compute the taxable
income of the taxpayer. If a taxpayer’s method of accounting changes leads to the change in the
Category of the taxpayer, the taxpayer shall make adjustments in the tax year of change to items
of income, deduction, and credit, and to any other items affected by the change, so that no item is
omitted and no item is taken into account more than once.
4.1.3.4. Depreciation of Business Asset and Business Intangible

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Depreciable asset means tangible movable asset or a structural improvement to immovable asset
that:
(1) Has a useful life exceeding one year;
(2) Is likely to lose value as a result of normal wear and tear, or obsolescence; and
(3) Is used wholly or partly to derive business income
As it is stipulated in the income tax regulation of Art 36 to 41, both diminishing value
(declining balance method) and straight line method is allowed to compute the depreciation
amount. The Business intangible and structural improvement should be depreciated only
under straight line method. Here structural improvement means a building or any other addition
or alteration to immovable asset that becomes part of, or is permanently affixed to, the
immovable asset including a road, driveway, car park, fence, or wall.
Rate of Depreciation
Depreciable Tangible Asset Straight line rate Diminishing value rate

Computer, software and data storage equipment 20% 25%

Green house 10% Not allowed
Structural improvement other than greenhouse 5% Not allowed
Any other depreciable assets 15% 20%
Depreciable assets used in mining and petroleum 25% 30%
development operation
Here under diminishing value method depreciation is computed by applying the rate on the Net
book value of the asset at the beginning of the year.
The rate of depreciation applicable for business intangible includes the following:
 Preliminary expenditure (25%): an expenditure that provides an advantage or benefit
for a period of more than one year, incurred before the commencement of a business but
not including expenditure incurred to acquire any tangible movable or immovable asset.
 Business intangible useful life more than 10 year except preliminary expenditure=
10%
 Any other business intangible 100% divided by the useful life of the intangible
If the balance of depreciable asset of the taxpayer is not more than two thousand birr the amount
shall be fully allowed deductable from the income of the tax year.
Repair and improvement expense allowable as deduction if it is not exceeded 20% of the net
book value of the asset at the end of the tax year. However, if the improvement made to the fixed
asset exceeds 20% of the net book value of the asset at the end of the tax year, the whole cost of
improvement or repair shall be added to the net book value of the asset.
Depreciation on assets such as fine art, antiques, jewelry, trading stock etc (which are not subject
to wear and tear) are not allowed. Likewise, gain obtained as a result of revaluation of assets
shall not use as a basis for determining depreciation base.
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

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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 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.
4.1.3.5. Taxable Business Income
The taxable business 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 per the tax law.
1. Allowable Deductions
In order to determine taxable income under Schedule ‘C’, the following items of expenditures
are permissible.
A) Direct cost of producing the income such as the direct cost of manufacturing,
purchasing, importation, selling and such other similar costs.
B) General and administrative expenses incurred for earning, securing and
maintaining the income
C) Depreciation expense computed in accordance the income tax regulation
D) Bad Debt Expenses To be a deductible item, the amount must have been included
previously in income, the debt must have been written off in the books, and legal
actions have been taken for the collection of the debt
E) Insurance Premium payable on insurance directly connected with the business
activity.
F) Expense incurred for the promotion of business. The maximum limit for this
expense will be set by directives to be issued by ERCA.
G) Commission paid for services rendered, provided that the amount shall not exceed
the normal rates provided by other similar businesses or persons.
H) A loss on disposal of a business asset (other than trading stock) disposed of by the
taxpayer during the year
I) Representation expense not exceeding 10% the income of the employees
J) Medical expense incurred for employees including premium payments under
employees health insurance scheme
K) Expenditures incurred in the provision of food and beverage services by Hotels,
restaurants, or other similar establishments for their employees, to the extent limit
sated by the ministry directives
L) Lease payment made for business asset held under a capital goods lease agreement is
deductable business expenditure
M) Head Office Expenses: Payment made by a permanent establishment doing business
in Ethiopia to its parent non- resident body in reimbursement of actual expenses
incurred by the parent non-resident. Body for the benefit of the permanent
establishment shall be deducted to the extent that such expense was incurred in
deriving, securing or maintaining business income.
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N. Interest expense: A deduction for any interest incurred by the taxpayer in a tax year
is allowed to the extent that the taxpayer has used the proceeds or benefit of the debt
or other instrument or agreement to derive business income.
Here deduction is not allowed if 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 or payable to a financial institution
recognized by the National Bank of Ethiopia; or a foreign bank permitted to lend to
persons in Ethiopia. Moreover, 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
schedule ‘D’ of the related person is not allowed as deduction from business income.
O. Charitable Donations under the following conditions.
a. If they are given to welfare organizations that have a record of outstanding
achievement and have a good accounting system showing the utilization of
resources.
b. If the payments are made under emergency call issued by Gov’t to defend
sovereignty and integrity and to prevent manmade or natural catastrophe,
epidemic or any other similar cause
c. If the donation is made in support of education, health, environment
protection or provided in the form of humanitarian aid other than for the
taxpayer owns employees.
(Note: Grants and donation will be allowed as deduction only if it does not
exceed 10% of the taxable income)
P. Special Reserves: Financial institutions are permitted to deduct special reserves
from taxable income in accordance with the directives issued by NBE.
Q. Reinvestment of Profit: A Regulation by the Council of Ministers allows a
deduction of reinvestment of profit (of a resident company or registered partnership)
not exceeding 5% of the taxable income every year.
2. Non - allowable deductions and losses
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:
a) An expenditure of a capital nature
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;
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;

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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;
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 to food provided for free to employees by an employer
conducting a mining, manufacturing, or agricultural business;
k) A donation or gift except as provided for in Article 24 of this Proclamation;
l) Personal consumption expenditure;
m) A loss on the disposal of a business asset by a taxpayer to a related person;
n) Expenditure to the extent disallowed under Regulations to be issued by the Council of
Ministers.
4.1.3.6. Business Income Tax Rates
The rate of business income tax applicable to a body is [30%]. While, The rates of business
income tax applicable to an individual are:
Taxable Business Income Business Income Deductions for
(per year) Birr Tax Rate Short cut method

0 - 7,200 0% 0
7,201-19,800 10% 720
19,801-38,400 15% 1710
38,401-63,000 20% 3630
63,001-93,600 25% 6780
93,601-130,800 30% 11460
Over 130,800 35% 18000
Business Income Tax = Taxable business income* tax rate less deductions
4.1.3.7. 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. They are required to submit statement
of financial position and profit loss statements.
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. . They are required to
submit profit loss statements.

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C) Category C taxpayers shall declare taxable income together with the annual
turnover, and the amount derived from the sources other than the main operation,
within one month after the end the tax year. The taxable income of category C
taxpayers will be determined through a standard assessment. The presumptive
business tax to be paid by category 'C" taxpayers shall be calculated in accordance
with the SCHEDULE attached to the income tax regulation
Declarations are to be made in prescribed forms prescribed by the tax authority accompanied by
the required supporting evidences. If a taxpayer engages in business in more than one region,
taxable income shall be declared in the respective regions.

4.1.3.8. 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.
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&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 within the time
required. Tax, of those taxpayers who have different sources of income, will be assessed on the
aggregate of all income.
4.1.3.9. Loss Carry forward (Article-26):
If the total amount of deductions allowed to a taxpayer for a tax year 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. In such case the taxpayer can carry the amount of the loss forward to the next following tax
year to be deducted in computing the taxpayer’s taxable income for that following year. The loss
will be carried forward for a maximum of five consecutive years after the year in which the loss
is incurred. The taxpayer is allowed to carry forward only two tax period losses. Here the loss
earliest year shall be deducted first and loss carry forward is allowed only if the taxpayer
maintains books of accounts showing the loss are audited and acceptable by the tax authority.
Loss Carry Back: When, at the end of the final tax year of a long term contract, a taxpayer has a
final year loss in relation to the contract that the taxpayer is permitted to carry forward under
Article 26 but if it is unable to do so for the reason that the taxpayer ceases to carry on business
in Ethiopia at the end of the contract, the taxpayer may carry the loss back to the preceding tax
year and the loss shall be allowed as a deduction and carried back ward till the loss is fully
deducted. .
If during a tax period the direct or indirect ownership of the share capital or the voting
rights of body changes more than fifty percent (50%), by value or by number, loss carry
forward and back is not allowed.
4.1.3.10. Foreign Tax Credit

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If a resident taxpayer has foreign income taxable under “Schedule C” in respect of, which the
resident has paid foreign income tax, the taxpayer shall be allowed a tax credit (referred to as a
“foreign tax credit”). The amount foreign tax credit is equal to the foreign income tax paid; or the
business income tax payable under Schedule ‘C’ in respect of the foreign income. Here, foreign
tax credit shall be allowed when:
 The resident taxpayer has paid the foreign income tax within 2 years after the end
of the tax year in which the foreign income was derived by the taxpayer or within
such further time as the Authority allows and
 The resident taxpayer has a receipt for the tax from the foreign tax authority.
If a foreign tax credit of a resident taxpayer for a tax year is not fully credited for the year, the
excess credit shall not be refunded, carried back to the preceding tax year, or carried forward to
the following tax year.
Foreign Business Losses (Art 46): in relation to a resident taxpayer for a tax year, means the
amount by which the deductible expenditures incurred by the taxpayer in deriving foreign
income taxable under Schedule “C” exceeds the amount of that income for the year. If a resident
taxpayer has a foreign loss for a tax year, the amount of the loss can carried forward to the next
five consecutive tax year and allowed as a deduction against the taxpayer’s foreign income
taxable under “Schedule C” for these years. The tax payer is allowed only to carry forward
losses foreign income only two tax period losses.
4.1.3.11. Withholding Income Tax (Art 88 to 93)
In theory withholding tax is defined as the amount of tax to be with held by the party making
payment to another party and to be transferred or paid to the tax authority as per the tax law. The
purpose of withholding tax could be to accelerate tax collection of the government. Withholding
income tax indicated in the Ethiopian tax law includes the following.
A. Withholding tax from imported goods: A taxpayer under Schedule ‘C’ importing goods for
commercial use shall make an advance payment of business income tax to the Authority
equal to 3% of the CIF value of the goods.
B. Withholding of Tax from Domestic Payments (Art 92): Except micro enterprises, bodies
having legal personality, government agencies, non-profit organizations, or non-
governmental organizations and other tax payers required to withhold tax by a directive of
the authority, shall withhold tax at the rate of 2% of the gross amount of a payment made for
the following:
 The supply of goods in Ethiopia involving more than 10,000 Birr in one transaction
or supply contract;
 The supply of services involving more than 3,000 Birr in one service contract
Here if the supplier of the transaction has failed to provide their TIN and trade license to the
withholding agent, the withholding agent shall withhold tax at the rate of 30% of the gross
amount of the payment made.
The withholding agent has the obligation to issue serially numbered receipts to persons from
whom the tax is withheld. The agent shall supply the name and TIN of the taxpayer, the amount

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withheld and the total amount of payment made. For this purpose, the records showing the
payment made and the tax withheld on payment should be maintained by withholding agent in
his office. It is also required that such records should be kept for a period of 5 years and should
be submitted to the tax authority as and when required by them.
C. Withholding of Tax from Employment Income: An employer paying employment income
to an employee who is subject to employment income tax shall withhold tax from the gross
amount of each payment of employment income made to the employee
D. Withholding of Tax from Payments to Non-residents: indicated in schedule D
E. Withholding of Tax from Dividends, Undistributed profit, repatriated profit, Interest,
and Royalties:
F. Withholding of Tax from Games of Chance Income
G. Self-withholding: for employees who works in organization that don’t have withholding
obligation
Payment of Withholding Tax: Tax that a withholding agent is required to withhold from
withholding income shall be paid to the tax authority within 30 days after the end of the month in
which the withholding income was paid
4.1.3.12. Method of Preparing Tax Returns
Business normally prepares business income tax returns (that is profit and loss statements for tax
purpose) to determine and report their taxable business income per the income tax legislation.
There are two methods used to prepare the tax returns.
Independent approach: business prepares a separate income statement for income tax reporting.
The preparation of business tax return ignores the tax exempted business income and non
deductable expenses as indicated in the tax law in the following format.
Names of the taxpayer
Business income tax return
For the tax period ending June 30, 20xx
Admissible business income
Net Sales……………………………………………………………………..……xxxx
Less cost of goods sold……………………………………………………………xxxx
Gross profit…………………………………………………………………………xxxx
Add other admissible incomes
Income from lease of business……………………………………………..…..…….xxx
Gain on foreign exchange ………………………………………..………….……..xxxx
Commission income ……………………………………………………………….xxxx
Recovery of bad debt expenses previously write off……………………………….xxxx
Gross taxable profit………………………………………………………………....xxxx
Less tax deduction expenses
Selling and distribution expenses………………………….xxxx
Utility expenses………………………………………..…..xxxx
Salary and fringe benefit expenses…………………….…..xxxx
Interest expenses ………………………….………………xxxx
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Depreciation expenses ………………....…….………..….xxxx

Advertizing expenses ……………………..…….………...xxxx
Donation expenses………………………….….………..…..xxxx
Tax business income ……………………………………………………………...xxxx
Less provision for tax………………………………..…………xxxx
Net profit tax after tax………………………………………………………………xxx
Dependence approach: in the dependence approach the annual accounting profit determined for
financial reporting purpose abased on IFRS or GAAP is taken as the primary basis for the
determination of taxable business income subjected to adjustments per the relevant provision of
the tax law. This approach does not require keeping a separate set of record for income tax
reporting purpose.

Name of the taxpayer

Business income tax Return
For the tax period ending June 30/ 20xx
Pre tax accounting income in the income statement…………………………..xxxx
Adjustments
Add back
Non deductable expenses but deducted in the income statement..............….xxxx
Admissible income but no include in the income statement…………..……...xxxx
Deduct
Deductable expenses but not charged in the income statement….……….…..xxxx
Exempted incomes but included in the income statement………….….….….xxxx
Tax business income ……………………………………………………..……...…xxxx
Less : provisions for income tax of the period ……………………………….…….xxxx
Net profit after tax ……………………………………………………….…………xxxx
Illustration
1. Mr. James is a foreign citizen neither domicile nor a habitual residence in Ethiopia. He
comes to Ethiopia for the first time on Ginbot 11, 2008 E.C for three months to give training
in connection with the shooting of cinematography film in. A.A. For this, he has been paid
remuneration of Br 50,000 by master company, an Ethiopian company. Mr. James comes to
Ethiopia for the second time on Meskerm 7, 2009 E.C. for the same job and left Ethiopia on
Tir 30, 2009 E.C. During this time, he has been paid birr 85,000 by master company.
Required:
A. Determine the residential status of Mr James for the tax year 2008 E.C.
B. Is his income chargeable to income tax in Ethiopia? And if your answer is yes under
what schedule he is liable to pay tax?
C. What would the residential status of Mr James for the tax year of 2009?
Solution
A. During the tax year of 2008 E.C. Mr James stayed only for 50 days only (Ginbot
11 to Sene 30, 2008 E.C). This implies he did not satisfy the condition for resident
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taxpayer indicated in the income tax proclamation. Therefore, Mr James is non-

resident for the tax year of 2008 E.C.
B. Yes, he is liable to pay a tax based on source of income principle, which is taxed
under schedule “D”. That is income on non-resident’s generated through
providing technical services by nonresident to Ethiopian taxpayer subjected to tax
at rate of 15% in the form of withholding tax.
C. In the tax year 2009 E.C Mr James stayed in Ethiopia for184 days implying that
he is a resident for the tax year of 2009 E.C. and his worldwide income is
subjected for tax.
2. Adane merchandise enterprise PLC has the following buildings
 Office building acquired in July, 2005 E.C. at the cost of birr 1,500,000
 Factory building acquired in September 1, 2008E.C at the cost of birr
10,000,000 birr
Required: Compute the depreciation expense for the tax year ending June, 30/ 2008 E.C.
Solution
Deprecation of building is 5% straight line.
Depreciation expense for office building is 1,500,000*0.05= 75,000 and Factor building
is 10,000,000*0.05=500,000 per year. So depreciation expense of building for the year
2008 E.C is birr 575,000.
3. XYZ plc financial statement shows the following information (the company diminishing
value)
 The cost of computers birr 185,000 and accumulated depreciation in June, 30/ 2007 E.C
birr 120,000.
 During the 2008 E.C tax period the company under takes the following transactions.
 Three computer and printer was purchased at the cost of Birr 30,000
 Software products costing Br 10,500 was purchased
 Seven used computers with cost of Br 48,000 and accumulated depreciation Br
45,000 was sold for Br 18,000
 Compensation of Br 3,000 was received from the vender since two of the computers
acquired during the current tax year were slightly damaged during in transit. The
company incurred Br 1,000 to maintain the computer and place them in workable
condition.
Solution
Depreciation Base
Beginning Book value balance of the pool (185,000-120,000)………………………….Br 65,000
Plus
 Purchase of cost of computer, printer and maintenance cost………Br 30,000
 Purchase cost of software product……………………………… Br10,500 40,500
Aggregate value of the pool ………………………………………………………………105,500
Less

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 Sales Proceeds ………………………………………………………(18,000)

 Compensation received ……………………………………… (3,000) (21,000)
Depreciation base for the tax Year ending June 30, 2008 E.C ……………………………84,500
Depreciation expense = 84,500*0.25= 21125
4. The following was extracted from HM plc fixed asset record maintained for financial
reporting purpose for the tax years ended June, 30 2007 E.C (use diminishing value)
 The cost of pool machines at the beginning of tax year 2007 E.C. was 1,800,000 and
accumulated depreciation Br 500,000
 The company acquired new machine costing Br 50,000 in the tax year 2007 E.C
 The company had sold two used machines during the tax year, 2007 as follows
Acquisition cost Accumulated depreciation Selling proceeds
200,000 170,000 83,800
95,000 90,000 48,000
Required: compute the depreciation expenses deductable from gross business income of the tax
year 2007 E.C.
Solution
Book value of the pool machinery at the beginning of tax year (1,800,000-500,000)
………..1,300,000
Plus: acquisition cost during the year………………………………………………..……50,000
Aggregate value of the pool……………………………………………………………1,350,000
Less: sales proceeds from disposal during the year…………………………………… (131,800)
Depreciation Base at end of tax year 2007 E.C…………………………………………1,218,200
Depreciation expense for the tax year (1,218,200*0.20)…………………………………243,640
5. On January 2008 E.C. Belaye General Importer was imported trading goods costing Br
1,000,000, fright incurred Br 310,000 and insurance charges Br 120,000. Determine the
amount withholding tax paid by the tax payer.
Withholding tax on import= 3% of CIF 0.03*(1,000,000 + 310,000+ 120,000) = Br 42,900
6. During the tax year ended 2008 E.C Glorious PLC under takes the following transaction and
determine whether or not the transaction are subjected to withholding income tax
A. On Jan 1, 2008 sold electronic items to XYZ plc for one transaction Br 9,000
There is no income tax to be with hold because the transaction is less that Br 10,000
B. On march 15, sold electronic items on account Br 20,000 with term 3/30,n/120 to XYZ
plc in a single transaction.
There is no income tax to be with hold because payment has not been effected.
C. On April 10, the company collected the outstanding receivables for sales made in March
15, the entity receives Br 19,000 in cash after deduction of the withholding tax Br 400
(0.02*20,000) and cash discount 3% 0f 20,000 Br 600.
Here the withholding tax is 2% of the gross amount does not affected by sales
discount.
D. on April 30, the company sold electronic items to HM plc for cash of Br. 20,000 in one
invoice. The company receives Br 19,600 after deduction of WIT of Br 400.

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E. On June, 25 the company provided maintenance service to XYZ plc for cash of Br 5,000.
In this case the payer with holds 2% of the gross payment Br 100.
If we assume that the taxable business income of Glorious PLC is Br 50,000 the total
business income tax liability of the taxpayer will be (0.30*50,000) less WIT paid during the
tax year(500) = Br 14,100.
7. Suppose X Bank Ethiopia Share Company has its head office located in A.A and its financial
statement for the tax year ended June 30, 2008 E. C shows the following information.
Particulars Head Office Kenya South Sudan Tanzania
Taxable Business income (in Br) 100,000 100,000 30,000 60,000
Tax rate of respective countries 30% 20% 30% 40%
Required: compute the business income tax payable to the Ethiopian tax authority.
Solution
Particulars Head Office Kenya South Sudan Tanzania
Taxable Business income (in Br) 100,000 100,000 30,000 60,000
Tax rate of respective countries 30% 20% 30% 40%
Income tax liability to respective countries 30,000 20,000 9,000 24,000
Income tax liability to the Ethiopian tax
authority on foreign source of income (A) _ 30,000 9,000 18,000
Less foreign tax credit (B) _ 20,000 9,000 18,000
Business income tax payable to Ethiopian tax
authority 30,000 10,000 _ _
That is Br 40,000 business income tax payable to the Ethiopian Tax authority.
8. The HM plc financial statement for the tax year ending June 30, 2008 E.C shows the
financial information.
HM PLC
Income Statement
For the year ended, June 30, 2008 E.C
Net Sales Br.327, 000
Less: Cost of Goods Sold 155,000
Gross Profit 172,000
Less: Operating Expenses:
Salaries and Wages Br.22, 000
Representation 6,000
Utilities 3,100
Supplies 1,200
Advertising 9,100
Entertainment 2,200
Depreciation 20,000
Interest 2,500
Miscellaneous 1,300 67,400
Operating Income Br.104,600

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Additionally the following information was obtained for tax reporting purpose.
 The Br.55, 000 ending inventory cost was determined based on the FIFO method. If the LIFO
or Average Cost method had been used, the amount would have been Br.58, 000 and Br.52,
000, respectively.
 Salaries and wages comprise Br.1, 000 disallowable provident fund of employer’s
contribution.
 Representation expense calculated at 25% of basic salaries of the employees.
 The Br.15, 000.00 depreciation was reported on the original cost of the Br.120, 000.00
building; and the Br.5, 000.00 depreciation was also reported on the original cost of the Br.50,
000 vehicles. The accumulated depreciation at the beginning of the tax year for Building and
vehicle was Br 45,000 and Br 30,000 respectively. The company used straight line method for
Building and declining balance method for depreciating the vehicle.
 The interest is on Br.25,000, and 10% simple annual interest borrowed from a recognized
financial institution By NBE in 2008 E.C. The highest interest rate by NBE and commercial
banks for the current year was 6%.
Required: Compute the business income tax payable for the tax year using independent and
dependent approach.
Solution:
1. In accordance to the tax law taxpayer should use weighted average for inventory valuation
as a result the cost of goods sold is understated by 3,000 birr
2. The salaries and benefit are overstated by 1,000
3. Since only 10% of the basic salaries of the employees are allowable as representation
allowance to be deducted from the gross income, that is only 2,400 are allowable
deductions, as a result the representation allowance is overstated by 3,600.
4. For building the depreciation rate is 0.05 and using straight line method the annual
depreciation will be 120,000*0.05= 6000 and the depreciation rate for vehicle is 20% if we
use the diminishing value method and the depreciation expense of the year will be (50,000-
30,000)*0.20= 4,000. This implies the total depreciation allowable as deduction will be
6000+4000=10,000 and hence the depreciation is overstated by 10,000.
5. The full interest expense is allowed as deduction because it is paid to financial institutions
recognized by NBE.
6. Entertainment expense is not allowed as deduction
Independent approach
HM PLC
Tax Return
For the year ended, June 30, 2008
Net Sales Br.327, 000
Less: Cost of Goods Sold 158,000
Gross Profit 169,000
Less: Operating Expenses:
Salaries and Benefits Br.21, 000
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Representation 2,400
Utilities 3,100
Supplies 1,200
Advertising 9,100
Depreciation 10,000
Interest 2,500
Miscellaneous 1,300 (50,600)
Taxable Income Br.118,400
less Provision for business income tax (118,400*0.30)………..…………….…………(35,520)
Profit after tax……..……………………………………………………………………….82,880

Using dependent approach

HM PLC
Tax Return
For the year ended, June 30, 2008
Accounting profit ………………………………………………………………….Br 104,600
Add back
Salaries and Benefits Br.1, 000
Representation 3,600
Depreciation 10,000
Entertainment expenses 2,200
Deduct Cost of goods sold (3,000)
Taxable business income 118,400
Less Provision for business income tax (118,400*0.30) ……………………………... (35,520)
Profit after tax………………………………………………………………………………82,880
4.1.4. Other Income (Schedule “D” Tax)
Incomes which are not specifically included under Schedule “A”, Schedule B and Schedule C is
categorized under this schedule. Schedule D income includes;
4.1.4.1.. INCOME OF NON-RESIDENTS
A non-resident who has derived an Ethiopian source dividend, interest, royalty, management fee,
technical fee, or insurance premium shall be liable for non-resident tax at the rate specified as
follows:
 For an insurance premium or royalty , 5% of the gross amount of the premium or
royalty;
 For a dividend or interest, 10% of the gross amount of the dividend or interest;
 For a management or technical fee, 15 % of the gross amount of the fee
However, the income generated by non-residents through permanent establishment cannot be
taxed under this category. Rather, it is taxed under schedule “C” or “D”.
4.1.4.2. Taxation of Non-resident Entertainers

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A non-resident entertainer or group of non-resident entertainers who has derived income from
the participation by the entertainer or group in a performance-taking place in Ethiopia shall be
liable for income tax at the rate of 10% on the gross income derived from the performance
without deduction of expenditures.. Here, entertainer” includes musician and sports person;
“group” includes a sporting team; and “performance” includes a sporting event.
4.1.4.3. Taxation of Royalties
Royalty refers to 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 film, and films
or tapes for radio or television broadcasting, any patent, trademark, design or model, plan, secret
formula, or process, or for the use or for the right to use of any industrial, commercial or
scientific equipment, or for information concerning industrial, commercial or scientific
experience.
Royalties is subject to a tax at a flat rate of 5%. The withholding agent who effects royalty’s
payments, withholds the foregoing tax and accounts to the Tax Authority. However, if the payer
resides abroad and the recipient is a resident, the recipient must pay the tax on royalty income.
This tax is final in lieu of income tax.

4.1.4.4. INCOME FROM GAMES OF CHANCE

This form of income is derived from winning at games of chance (lotteries, Tom bolas, and other
similar activities). This income is subject to tax at the rate of 15%, except for winnings of less
than Br. 100 similar to income from rendering technical activities the payer must withhold or
collect the tax and account to the Tax Authority. This tax is final in lieu of income tax
4.1.4.5. DIVIDENDS
The taxable Income is income received in the form of dividend from a share company or
withdrawals of profits from a private limited company. Resident of Ethiopia who derives
dividend and non resident who derives Ethiopian sources dividend that is attributable to a
permanent establishment are liable to pay dividend income tax. Dividend Income is subject to
tax at the rate of 10% of the gross amount of the dividend. The withholding agent (payer) shall
withhold or collect the tax and account to the tax Authority. This tax is final in lieu of income
tax.
4.1.4.6. INCOME FROM CASUAL RENT
The taxable income under this category is income derived from casual rental of property (land,
building, or moveable asset) not related to a business activity. This type of income is subject to
tax at a flat rate 15% of the annual gross income. This tax is a final tax in lieu of a net income
tax.
tax.
4.1.4.7. INTEREST INCOME
A resident of Ethiopia who derives interest and non resident who derives Ethiopian source
interest that is attributed to permanent establishment, are liable for income tax at the rate of:
 5% of the gross amount of the interest derived from savings deposit with a financial
institution that is a resident of Ethiopia,; or
 10% of the gross amount of the interest in any other cases
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The payer must withhold the tax and account to the Tax Authority. This tax is a final tax in lieu
of income tax.
4.1.4.8. Windfall Profit: windfall profit” means any unearned, unexpected, or other non-
recurring gain. The directive issued by ministry of finance and economic cooperation determines
the tax rate imposed on windfall profit.
4.1.4.9. GAINS ON TRANSFER OF CERTAIN INVESTMENT ASSESTS
Gains obtained from the transfer (sale or gift) of building held for business, factory, and office
and a share of companies is taxable under this category. Such income is taxable at the following
rates:-
- Building held for business, factory, and office at the rate of 15%, and
- Shares and Bonds at the rate of 30%
Nonetheless, Gains obtained from the transfer of building held for residence is exempted from
tax provided that such building is fully used for dwelling for two years prior to the date of
transfer.
Computation of Capital Gain Tax
In computing capital gain tax, you should follow the following procedures;
STEP 1.Determine
1.Determine the historical cost of the building or the par-value of the Share, as
appropriate.
STEP 2 Determine allowable deductions which includes
- taxes paid for the land and the buildings
STEP 3 Determine proceeds from the transfer of capital assets
STEP 4 capital gain taxes equals tax rate mentioned above times the amount obtained after
deducting the sum of step1 and step 2 from step 3.
Example
ABC Co. sold a building, which is held for business for Br. 1,000,000, which is acquired at a
cost of Br. 1, 200,000. Depreciation until time of sale amounts Br. 500,000 and property tax paid
for the building Birr 50, 000.
Calculate the capital gain tax payable by ABC Co.
Solution
■ Book value of the Building = Cost – Accumulated Depreciation
= 1,200,000 – 500, 000
= 700, 000
■ Property tax on the building is allowable deduction. Br. 50, 000
Capital gain tax =( Br. 1000, 000 – (Br. 700,000 + Br. 50,000)) 15%
= Br. 250,000 X 15% = Br. 37500
4.1.4.10. Undistributed profit
Tax shall be paid at the rate of 10% on the net undistributed profit of a body in a tax year to the
extent that it is not reinvested, in accordance with the directive to be issued by the ministry of
finance and economic cooperation.
4.1.4.11. Repatriated Profit

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A non-resident body conducting business in Ethiopia through a permanent establishment shall be

liable for tax at the rate of 10% on the repatriated profit of the permanent establishment.
4.1.4 .12. Other Income
A person who derives any income that is not taxable under Schedule A, B, C, or D is liable for
income tax at the rate of 15% on the gross amount of the income.

4.2 INDIRECT TAXES

Indirect taxes occupy a dominant position, as direct taxes, in the tax policies of many
governments. Especially, in developing countries like Ethiopia the lion share of the government
revenue were collected from indirect taxes. As the term indicates, the tax is not directly falling
for payment on the taxpayer, but is indirectly paid as a part of the price of goods the consumers
consume. In other words the incidence and impact of these taxes lies in different taxpayers.
Indirect taxes which are levied and collected in Ethiopia includes value added tax, turnover tax,
excise tax, custom duty and sure tax.
Accordingly this chapter comprises five section sections. The first section deal with basic
concepts and tax accounting for Value Added Tax, the second section deals with turnover tax,
the third section concerned with excise tax, and the fourth and fifth section deals with customs
duty, surtax and stamp duty in Ethiopia.
4.2.1. Basic Concept of VAT
Value added Tax (VAT) is also known as General sales tax (GST) or Consumption tax.
According to Carl S.Shoup VAT is defined as a consumption tax charged on the value added to
goods and services (or intermediate products by importers, Manufacturers, and traders at each
stages of production and distribution process. the salient elements embodied on the definition
are:
 VAT is a consumption tax in the sense that individuals pay VAT when they are money
spends on goods and services.
 VAT is imposed on the incremental value of goods and services made at each stages of
production and distribution process.
 VAT is imposed not only on tangible goods but also on services
 VAT has a wider scope: it is levied and collected from importer, producers, wholesalers
and retailers.
 The tax burden is visible at each stages of production and distribution process
4.2.2. Merit and Demerits of VAT
The main advantages of VAT includes the following
 Avoids cascading of effect of tax (tax on tax)
 It is more comprehensive and equitable tax system
 Reduces a possibilities of tax evasion since the tax burden is distributed to different
entities
 It is neutral: since the VAT paid on purchase is credited from the collected tax during
sales, it has neutral effect on the production.

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 Promotes capital investment and saving since it is consumption tax does not affect saving
and investment
 Enhances export and there by foreign exchange wealth
 It generates more revenue to the government since it has a broad base
Even though, VAT has the above merits it is seriously criticized by many scholars. Some of the
drawbacks includes: It is regressive in nature in the sense that unless the main basic goods are
exempted it adversely affect the low level income of citizens. Moreover, implantation of VAT
system requires organized financial system and advanced economic structure. The cost of
collection and administration is high.
4.2.3. VAT Related Terms
In order to understand the concept of VAT it is better to make familiar with the following basic
terms
 Supply/transaction:
Supply/transaction: sales or delivery of goods to another entity and rendering services
to another person
 Taxable supply/taxable transaction:
transaction: good and services on which VAT is chargeable
either at standard rate or zero rate
 Exempted supply: supply: good and services, which are not subjected to charge of VAT, they
are out of the scope of the VAT.
 Mixed supply:
supply: providing mixture of taxable and exempted in one supply
 Composite supply: supply: occurs when mixture of goods is supplied in such a way that is it is
impossible to separate the supply in to components.
 VAT registered/ taxable person: person: a person who supply of goods and services and
registered for VAT or liable to be registered by the tax authority.
 VA T return:
return: it is a form filled by the taxable person and submitted to the tax authority
every month
 Tax point:point: the time in which the tax is imposed
4.2.4. Principal Components of VAT
VAT has two principal components that are Input VAT and Output VAT.
Input VAT: is VAT paid or payable by a taxable person on purchase of goods and services. It is
not the components of the cost of purchase rather it is deducted from the collected VAT on sales.
Output VAT: is the VAT collectable by taxable person at the time of taxable sales. Output
VAT is not a component of sales revenue of the person rather it is a liability to the taxable
person, which is collected by him on the behalf of the tax authority.
Net VAT Liability:
Liability: is the difference between the input VAT and output VAT. When the output
VAT exceeds the input VAT the taxpayer has a Net VAT liability or payable, on the other hand
if the input VAT exceeds the output VAT shows the Net VAT credit/Net VAT refundable.
4.3.5 Computation of Net VAT Liability
Net VAT liability is the excesses of output VAT over the input VAT for a given tax accounting
period. It can be computed using one of the following three methods:
Credit/Invoice method: Net VAT liability is equal to Output VAT less Input VAT. This method
widely used in many countries
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Subtraction Method:
Method: Net VAT liability is calculated by subtracting the cost from the selling
price and applying the tax rate on the difference.
Addition Method:
Method: the net VAT liability is calculating by adding the payment made to the
factors of production (wage, rent, interest etc) and profit margin and then applying the tax rate to
the sum.
4.3.6 VAT in Ethiopia
The introduction of value Added Tax (VAT) is probably the most important tax development in
the world. VAT has been introduced for the first time almost 50 years ago, and its applications
remained confined to a handful of countries until the late 1960’s. Today, VAT is applied in over
120 countries. This makes about 4 billion people or 70% of the world’s populations live in
countries with a VAT. In these countries VAT raises about $18 trillion in tax revenue, roughly a
quarter of all governments revenue. The Federal Democratic Republic of Ethiopia recently has
joined the over 120 countries of the world that have already adopted VAT into their tax system.
VAT was introduced in Ethiopia by proclamation No 285/2002 with the following main
objectives.
 To collect tax on the value added whenever a sales transaction is conducted
 To minimize the damage caused by attempts to avoid and trade the tax and ascertain the
profit obtained by tax payables.
 To enhance economic growth and to improve the ratio relationship between gross
Domestic Product and Government Revenue.
 To enhance saving and investment as it is essentially a consumption tax and does not tax
capital.
VAT replaced the former sales tax because of the following deficiencies:
 Sales tax was collected at single stage of production or distribution
 Sales tax is a tax on tax it creates cascading effect and
 VAT reduces tax evasion more than sales tax
4.2.7. Scope of Application for VAT
In Ethiopia VAT is levied, charged and collected on a taxable supply made in Ethiopia by
taxable person for consideration in the course or furtherance of taxable activity carried by the
taxable person during the accounting period. Specifically, taxable supplies fall in the scope of
VAT when the supply is:
 subjected to VAT
 made in Ethiopia or partly in Ethiopia
 made by VAT registered person
 For consideration. Consideration may refer to everything received in return for the supply
of goods or provision of services.
 Made in the normal (ordinary) activity of the business or to develop, advance and
progress of the taxable activity of a business carried by a person who supplies them.
Taxable person per the Ethiopian VAT law includes:
 a registered person – a person who is registered or required to be registered,
 a person carrying out taxable import of goods, with respect to such import,
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 a non-resident person who performs services without registration,

 with respect to such services and a VAT withholding agent ( a buyer that purchase
taxable supply from VAT registered persons and obliged by the tax authority to withheld
the required tax with respect to its purchases and pays the tax withheld to the tax
authority.
4.2.8. Types of VAT Registration
According to VAT law Ethiopia provides three types of registration for its VAT administration
purpose depending up on the criteria to be meet and the nature of the business activity: -
mandatory registration, voluntary registration, and trade sector requirement registration.
A. Obligatory Registration
A person who carries on a taxable activity is required to be registered if:
 At the end of any period of the 12 calendar months the person made taxable transactions
whose value exceeds Br. 1,000,000.
 There is a reasonable ground to expect that the person’s taxable activity shall exceed Br.
1,000,000 at the beginning of any period of 12 calendar months.
B. Voluntary Registration
Even if the annual gross income of a taxpayers is less than Br 1,000,000 in 12 months of VAT
accounting period, the taxpayer can voluntary registered for VAT if the person regularly supplies
or renders services at least 75% of his taxable goods and services to VAT registered persons, in
any 12 months period.
C. Trade Sector Requirement for Registration
Some persons who carry out taxable supply may compulsory registered for VAT regardless of
their annual sales turnover because of the nature of trade sector engaged. Specifically, these
persons that engaged in highly priced and highly demanded taxable activities and trade
sectors that requires high initial capital and which have high production volume. These sectors
includes
 Gold and ornament material traders
 Electronic materials traders
 Importers
 plastic and plastic product manufacturers
 shoe factors
 Contractor above grade 10 (grade 1-9)
 Computer and their accessories traders
 Lather and Lather product manufacturers
4.2.8 Divisional VAT Registration
A registered person may conduct taxable activities in different branches or divisions. In such
cases, the registered person must be registered only in the name of the registered person at its
main address or its head office. However, upon application in writing by a registered person
operating in corporate form, allows the registered person to register one or more of its branches

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or divisions as separate registered persons if it is satisfied that the branch or division maintains
an independent accounting system and its distance from its head office is more than 100 km.
If a division is registered separately it must file a VAT return for each accounting period.
Besides, each separately registered part of the entity is subject to all of the obligations imposed
on a registered person, but it remains a part of the entity.
In line with the above, supplies made by a separately registered division to the head office or
between separately registered divisions are treated as supplied between related persons for tax
purposes, but the supplier must issue tax invoices for those transactions and the recipient can
claim tax credits on the purchases. Expenses allocated by the head office to a separately
registered division may also be treated as taxable supplies by the head office. For purposes of the
registration threshold, the supplies of each separately registered division are included as supplies
of the entity.
Each separately registered division will be issued a taxpayer identification number and VAT
certificate number that identify it as a division of the entity. The registered division, following
separate registration, must issue tax invoices listing its unique taxpayer identification number
and VAT certificate number.

4.2.9 . Cancellation of Registration

A registered person can apply to have his registration cancelled he/she ceases to make taxable
transactions. The person must apply in writing for cancellation of registration within 30 days of
the date he ceases to make taxable transactions. He must also indicate if he intends to make
taxable transactions within twelve months from the date of application.
Cancellation of registration can also be initiated by a registered person if at any time after a
period of three years of his most recent registration, his total transaction for the period of 12
months then beginnings are expected to be not more than Br. 1,000,000.
The authority is expected to approve an application for the cancellation unless it has reasonable
grounds to believe that the person will make taxable transactions at any time within 12 months
from the date of cessation.
The cancellation of VAT registration takes effect at the time the registered person ceased to
make taxable transactions or if the registered person has not ceased to do so, at the end of the
accounting period during which the person applies to the authority for cancellation. While the
cancellation of registration generally takes effect on the date of cessation, the authority can
cancel the registration retroactively if it’s satisfied that the person did not make taxable
transactions since the registration took effect.
When registration is cancelled the registered person is deemed to have sold the goods on hand in
a taxable transaction. Any obligation or liability including the furnishing of returns, in respect of
anything done by that person while the person was a registered person, is not affected by
cancellation of registration.

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Following cancellation, the authority will remove the person’s name and all other details from
the VAT register and the person is required to return the issued certificate of registration back to
the authority.
4.2.10. VAT Rates
In Ethiopia there are two types of VAT rates Zero rate and Standard supplies.
Zero VAT rate:
rate: it is applied on zero rate supplies. In this case, the input VAT incurred on
purchase to make taxable supply as allowed as to be credited. The taxable persons who supplies
zero rate supplies charges zero rate on its supplies indicating have no VAT liability. The
following supplies/ transaction are subjected to zero rates:
 Export of goods and services
 Rendering international transport services
 Disposal or transfer of taxable activity as a going concern
 Supply of gold to the national bank of Ethiopia (NBE)
Here, these taxpayers eligible to request VAT refund paid on purchase or on row materials used
to produce these good and service subjected to zero rate.
Standard Rate: the standard rate is 15%, which is applied on standard rated supplies. The input
VAT incurred to make taxable supply is allowed to be credited and the taxable person has a
responsibility to charge 15% of output VAT on its taxable activity.
4.2.11. VAT Exempted Supplies: In the case of exempted supplies, the input VAT incurred on
purchase cannot be claimed rather it is included in the cost of purchase. In accordance with the
VAT proclamation, regulation and directives the following good and service supply is exempted
from VAT:
a. Supply or import of basic food items such as agricultural crops, milk, flour, bread,
Enjera, and edible palm oil etc
a. rendering educational service and child care services
b. sale or transfer of a used dwelling, or the lease of dwelling;
c. rendering of financial services;
d. supply or import of national or foreign currency (except for that used for numismatic
purposes), and of securities;
e. The import of good to be transferred to the National Bank of Ethiopia.
f. The rendering by religions organizations of religious or church related services;
g. The import or supply of prescription drugs specified in directive issues by the Minister of
Health, and the rendering of medical services.
h. The supply of goods and rendering of service in the form of humanitarian aid, as well a
import of goods transferred to state agencies of Ethiopia and public organizations for the
purpose of rehabilitation after natural disasters, industrial accidents, and catastrophes;
i. The supply, kerosene, and water;
j. Goods imported by the government, organizations, institutions or projects exempted from
duties and other import taxes to the extent provided by law or agreement.
k. Supplies by the post office authorized under the Ethiopian Postal Services Proclamation,
other than services rendered for a fee or commission.
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l. The provision of transport;

m. Permits and license fees;
n. The import of goods to the extent provided lender schedule 2 of the customs Tariffs
Regulations;
o. The supply of goods or services by a workshop employing disabled individuals if more
than 60% of the employees are disabled;
p. The import or supply of books and there printed materials to the extent provided in
regulations.
4.2.12. Value of Taxable Supplies
Value of the taxable supply is the amount of the taxable supply on which the VAT base is
charged.
 Value of taxable supplies for price consideration= Purchase cost/production cost
excluding input VAT+ Profit margin. In other words it is the difference between the
Selling price and Input VAT.
 Value of taxable supplies on import is (CIF value + customs duty + excise tax)
 The value of taxable supply in case of exchange and free supply we will considers the fair
market value of the goods
 The value of supplies on own uses the cost of the goods and services
 the value of supplies in case of transfer of assets as going concern= the acquisition cost of
the assets
 The value of taxable supplies for VAT inclusive price = the Price divided by (1.15)
Adjustment of the Value of a Taxable Transaction
Adjustment of the value of a taxable transaction in relation to a taxable transaction made by a
registered person is necessary when
a. the transaction is cancelled;
b. the nature of the transaction is changed;
c. the previously agreed consideration for the transaction is altered, whether due to a
reduction of prices or for any other reason; or
d. the goods or services are returned in full or in part to the registered person.
If a registered person has, as a result of occurrence of one or more of the events described above
must provide a VAT invoice, and the amount of VAT shown on the invoice is incorrect, or
shown an incorrect amount of VAT on a VAT return, then appropriate adjustment should be
made.
4.2.13. Tax Credit
Parts of the supplies made by a registered person during a tax period are taxable transactions, the
amount of tax creditable is determined as follows:
a. in respect of a supply or import received which is directly allocable to the making of
taxable transactions, the full amount of tax payable/paid in respect of the supply or
import is allowed as a credit;

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b. in respect of a supply or import received which is directly allocable to the making of

exempt transactions, any amount of tax paid in respect of the supply or import is not
allowed as a credit
c. In respect of a supply or import received which is used both for the making of taxable
and exempt transactions, the rules of apportionment of the credit will be determined by a
directive to be issued by the Minister of Revenue.
Moreover, no credit is allowed for VAT on a taxable transaction to or import of a passenger
vehicle by a person unless the person is in the business of dealing in, or hiring of, such vehicles,
and the vehicle was acquired for the purposes of such business. Tax credit is allowed, however,
if the person is engaged in the business of transporting passengers for hire and the vehicle was
acquired and is licensed for that purpose.
 “passenger vehicle” means a road vehicle designed or adapted for the transport of eight
or fewer seated persons, including a double cab which, and
Credit is not allowed on a taxable transaction to, or import by, a person of goods or services
acquired for the purposes of entertainment or providing entertainment, unless the person is in the
business of providing entertainment and the supply or import relates to the provision of taxable
transactions involving entertainment in the ordinary course of that business. For a tax credit to be
allowed the person must be engaged in the business of providing taxable transactions involving
transportation services and the entertainment is provided to passengers as part of the
transportation services.
 “Entertainment” means the provision of food, beverages, tobacco, accommodation,
amusement, recreation, or hospitality of any kind by a registered person whether directly
or indirectly to any person in connection with a taxable activity carried on by the
registered person.
4.2.14. Claiming Input VAT at the Time of Registration
Input VAT incurred on purchase before VAT registration can be claimed to be credited at the
time of registration if the following condition satisfies:
 the input VAT must be incurred or payable and must be related to goods and or
services ,and capital asset acquired for business
 the goods and or capital asset must be on hand and not fully consumed at the time of
registration
 the good and capital asset must have been purchased or imported not more than six
months prior to the date of registration
Example:
Example: Hanan Super market has been registered for VAT on 1 Jan 2008 E.C. the taxpayer
incurs the following VAT on purchase before registration.
 July 10 ,purchase computer inventory excluding VAT at Br 50,000 from VAT registered
tax payers
 August 10, pay Br 20,000 for service received including VAT
 Sep 14, purchase Vehicle at cost of 500,000 plus VAT
 Oct 19, purchase inventory at Br 100,000 plus VAT of which 50,000 of inventory value
excluding VAT was on hand at the time of registration.
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Required: compute the VAT claim at the time of registration

Solution
VAT incurred on inventory on hand…………………….50, 000*.015=7,500
VAT incurred on Vehicle ………………………………500,000*0.15=75,000
Pre registration input VAT claim………………………………………82,500
claim………………………………………82,500
4.2.15. Input VAT Claim at the time of Deregistration
When a registration is cancelled the goods on hand are considered to be sold at their cost
implying that the input VAT will be the same as the output VAT. On the other hand the inputs
VAT claim for fixed assets on hand at the time of deregistration is determined by considering
acquisition cost, book value, total useful life and remaining useful life. Here the book value
deemed as selling cost of the capital asset at the time of registration.
Book Value= (remaining useful life/total useful life)*Acquisition cost
Total useful life for building and construction is 20 years, computer and related assets 4 years,
and other capital assets five years.
VAT creditable= Book value*0.15
4.2.16. Input VAT Claim in making Taxable and Exempted supplies
According to the VAT Law, input VAT incurred to make taxable supply is fully credited or
claimed. But, the Input VAT incurred on purchases which is used to make exempted supplies is
not allowed to be credited rather it is considered as cost of purchase.
In case of Input VAT incurred on purchase used to make composite supply, the input VAT
claimed is determined by the following formula
Input VAT claimed = Total input VAT*(value of total taxable supplies divided by total
value of supplies)
If the total value of taxable supplies over total value of supplies is greater than 90% full amount
of the Input VAT is claimed.
4.2.16. Input VAT Claim for Capital Asset under Construction
No input tax credit is allowed for VAT incurred by registered person on a building or other
capital assets under construction for the purpose of taxable activity. However, if such asset is
completed and used for the purpose of the registered person taxable activity and starts to
generate income, the input tax is credited starting from the month that the asset starts to generate
income.
Alternatively the input tax incurred by the registered person can be capitalized as cost of the
capital asset constructed and subjected to the depreciation in accordance with the income tax
law.
4.2.17. Tax Accounting for VAT
Tax accounting for VAT includes recording of VAT transactions, computation of Net VAT
liabilities and preparation and declaration VAT return.
1. Filing tax return
Every registered person is required to file a VAT return with the Authority for each accounting
period, whether or not tax is payable in respect of that period and pay the tax for every
accounting period by the deadline for filing the VAT return. The VAT return for every
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accounting period must be filed with no later than the last day of the calendar month following
the accounting period.
In cases where a registration takes place with retroactive effect, the registered person is required
to pay VAT for taxable transactions taking place since the coming into effect of the registration
and is entitled to a VAT credit according to credit procedures for registered persons. In addition,
the corresponding transactions are to be reflected on the first return filed by the registration
person and are considered as taking place during the month to which the return relates. In this
event, the registered person is entitled to issue VAT invoices for the transactions shown on the
return.
2. Form and Manner of Filing Returns
A return must be made in the form and furnished in manner prescribed by the Authority, and
must include the information necessary to calculate the tax payable for the accounting period and
be furnished in the manner prescribed by the Authority.
3. VAT Refund System
If at least 25 percent of the value of a registered person’s taxable transactions for the accounting
period is taxed at a zero rate, the Authority will refund the amount of VAT applied as a credit in
excess of the amount of VAT charged for the accounting period within a period of two months
after the registered person files an application for refund, accompanied by documentary proof of
payment of the excess amounts.
In the case of other registered persons, the amount of VAT applied as a credit in excess of the
amount of VAT charged for the accounting period is to be carried forward to the next five
accounting periods and credited against payments for these periods, and any unused excess
remaining after the end of this five month period will be refunded by the authority within a
period of two months after the registered person files an application for refund, accompanied by
documentary proof of payment of the excess amounts.
If the Authority does not pay the refund by the date specified in the proclamation, for a registered
person who has overpaid tax and hence entitled to a refund, then, the Authority will pay the
person entitled to the refund, interest set at 25% (twenty five percent) over and above the highest
commercial lending interest rate that prevailed during the preceding quarter. In general, if the
Authority does not pay the refund in a timely manner it must pay interest calculated from the
date on which the refund was due until the date on which the payment of the refund is made.
The proclamation provides, however, that the Authority is not obliged to refund excess credits if
the amount to be refunded is not more than 50 Birr. If the amount eligible for refund is 50 Birr or
less, this amount can be carried forward and credited against tax due in the subsequent
accounting period.
Where a registered person applying for a tax refund has failed to furnish a required return, the
Authority may withhold payment of any amount refundable until the registered person furnishes
such return.
4. Recognition of VAT Transactions
 Taxable import Transaction
Inventory or other account………………xxxx
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Prepaid WIT………………………………xxxx
VAT Account (receivable)……………….xxxx
L/C or cash…………………………xxxx
Inventory cost includes Invoice cost or the estimated valued determined by ERCA, insurance
cost, freight charge, excise tax, customs duty, surtax, cost of customs warehousing, inspection
and other costs.
 Taxable Local Purchase
Inventory or other specific assets…………xxx
VAT account………………………………xxxx
Cash or pyable………………………………………xxxx
WIT payable*……………………………………......xxxx
*if it meets the criteria indicated in the WIT
 Local sales
Cash (receivable)……………….xxxx
Prepaid WIT*……………………xxxx
Sales……………………………………xxxx
VAT account (payable)………………...xxxx
 Exported Transaction
Cash (receivables)………………………xxxxx
Sales………………………………xxxx
4.2.18 VAT Withholding by Buyer
To minimize the damage that may cause by attempting to evade VAT and to ascertain the
collection of accurate VAT by the gov’t introduced VAT withholding by VAT amendment
proclamation No 609/2008.
Accordingly, the following entities are considered as VAT withholding agents:
 Federal gov’t organizations or agencies
 Regional gov’t agencies
 City administration agencies and
 Public enterprise
These VAT withholding agent is obliged to withhold the required amount of VAT that should
have been paid to a taxable supplies on the transaction if the value of the transaction exceeds Br
5,000 and must be declare and pay to the tax authority with 30 days from the end of the month
in which the VAT is withheld.
Recording sales made to VAT withholding agent
Cash or receivable………………………..…xxxx
VAT withheld……………………………….xxxx
Prepaid WIT…………………………………xxxx
Sales………………………………………………..xxxx
VAT account……………………………………….xxxx

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Illustration 1: LG Company is a VAT registered taxpayer located in A.A and its books of
account for October, 2008 E.C shows the following transaction excluding VAT.
 Purchase of Inventory from VAT registered Br 1,500,000 and non VAT registered Br
30,000
 Import inventory at CIF value Br 2,500,000 , Excise tax and customs duty Br 265,000
 Selling and admin expenses incurred Br 432,000 and 32, 000 was for entertainment
 Sales 900,000 units at VAT exclusive price Br 6 to local market and export 300,000 units
at VAT exclusive price Br 6.5 per unit.
Required: determine the Net VAT liability (VAT Return) for the month of OCT, 2008 E.C
Solution
Output VAT
Sales to local market (900,000*6)*.15…………………810,000
Export (300,000*6.5)*0.00……………………………..0
Total output VAT………………………………………………………810,000
VAT………………………………………………………810,000
Input VAT
Local purchase (1,500,000*0.15) ............................…... 225,000
Import (2,765,000* 0.15)……………………………….414,750
Taxable expenses (400,000* 0.15)……………………….60, 000
Total Input VAT………………………………………………………………… (699,750 (699,750))
Net VAT liability…………………………………………………………………110,250
liability…………………………………………………………………110,250
Illustration 2
Belen PLC is a VAT registered taxpayer that sells electronic materials in A.A. In June, 2008 E.C
the company undertakes the following transaction
1. June 1 purchase inventory from YBZ company for cash at price Br 8,000 plus VAT
2. June 5, purchase inventory from KK plc at Br 18,000 + VAT
3. June 10, import inventory at C=80,000, insurance 7,000, freight charge 10,000, customs
duty and excise tax 48,5000. In addition the company also incurs 2,00 customs ware
house cost before VAT is paid
4. June 13, purchase consulting service at Br 800+ VAT
5. June 15, paid telephone bill to ethio-telecom Br 6,000+ VAT
6. June 18, defective inventory costing 2,000 excluding VAT charges purchased on June 1
from YBZ company was returned to the supplier
7. June 20, withdrawal of by an owner inventory costing before VAT Br 2,000 for personal
use
8. June 22, sales of inventory to various customers at price Br 300,000 +VAT and the CGS
was Br 200,000
9. June 25, sales of inventory to XYZ plc at 200,000 +VAT and the CGS was Br 110,000
10. June 28, sales of inventory to A.A university at price 300,000 + VAT and the CGS was
200,000
Required: journalize the above transaction by considering perpetual inventory system
Solution
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1. Inventory ………………… 8,000

VAT account ……………..1,200
Cash………………………………9,200
2. Inventory………………………………18,000
VAT……………………………………2,700
Cash………………………………………20,340
WIT payable (0.02*18,000)………………360
3. Inventory…………………………147,500
VAT (147,500*0.15) ……………..22,125
Prepaid WIT (97,000*0.03) ……….2, 910
Cash……………………………172,535

4. Consulting service expense…………………800

VAT account………………………………..120
Cash…………………………………………920

5. Utility expense………………6,000 Here telecom service is not subjected to WIT

VAT account ……………….…900
Cash…………………………………6,900
6. Cash (Account receivable)………………..2,300
Inventory…………………………………2,000
VAT account……………………………….300
7. Drawing account ……………..2,300
Inventory…………………………………2,000
VAT account……………………………….300
8. Cash………………………….345,000
CGS………………………….200, 000
Sales……………………………..300,000
VAT account …………………….45, 000
Inventory………………………….200, 000
9. Cash…………………………………….226,000
Prepaid WIT (200,000*0.02)……………4,000
CGS…………………………………….110, 000
Sales…………………………………200,000
VAT account …………………………..30, 000
Inventory………………………………110,000
10. Cash……………………………………….294,000
Prepaid WIT (300,000*0.02)……………….6, 000
VAT withheld………………………….......45,000
CGS……………………………………….200, 000
Sales…………………………………..300,000
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VAT account …………………………..45, 000

Inventory………………………………200,000
4.3.1 Turnover Tax (TOT)
In Ethiopia TOT was introduced by proclamation No 308/2002 so as to enhance fairness in
commercial dealings, to make a complete coverage of the tax system, and to enable the non VAT
registered taxpayers to discharge their responsibility. A turnover tax is imposed on those persons
who are not required to register for VAT, but supply taxable goods and services in the country.
As a result, persons who are engaged in the supply of goods and rendering of service (which are
taxable), and who are not required to register for VAT have to pay turnover tax on the value of
goods they supply or on the value of services they render.
4.3.1.1. Turn over tax rate:
1. 2% (two percent) on Goods sold locally
2. for Services rendered locally;
i. 2% (percent) on Contractors, grain mills, tractors and combine-
harvesters;
ii. 10% (ten percent) on others services rendered locally such as
consultancy, auditing, legal advice, hotel, printing, advertizing,
laundry, etc.
4.3.1.2. Computation Base for TOT
TOT is calculated and levied on the gross receipt or selling price that the supplier receives from
supply of taxable goods and services. In exchange for supply of goods and rendering services,
the base for imposition of TOT is the market price of goods supplied or services rendered. If the
owner consumes its good and services for its personal use the TOT will be computed by
considering the cost of purchase.
4.3.1.3. Turnover Tax Exempted Supplies
Some supplies are exempt from paying turnover tax. While determining the turnover for tax
purposes these items are excluded. The following persons and transactions are exempted from
payment of turnover tax.
 Transactions such as sale, transfer or lease of dwelling house; rendering of financial
services;
 Supply of national or foreign currency and securities;
 Rendering of church related services by religious organizations;
 Supply of drugs (specified by Ministry of Health);
 Rendering of educational and child care services;
 Supply of humanitarian services as humanitarian aid;
 Supply of electricity, kerosene and water;
 Provision of transport;
 Permits and license fees;
 Supply of goods and services of a workshop where more than 60% of the employees
are disabled;

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 Supply of books and printed materials; and

 Any other items specified through a directive issued by the MEFEC
4.3.1.4. Tax Period
Tax period is the period for which the turnover is determined and tax is paid to the concerned tax
authority. The declaration and payment of TOT depends up on the category of tax payers:
 Non VAT registered Category “A” taxpayer are required to declare and pay TOT every
Month
 Non VAT registered Category “B” taxpayer are required to declare and pay TOT
quarterly ( within one month after the end of every three months
 Category “C” taxpayer are required to declare and pay TOT Annually from Hamle1 to
Hamle 30 by Presumptive taxation
4.3.1.5. Tax Accounting for TOT
Non-VAT registered Category “A” and “B” taxpayers who supplies taxable good and services
are required to maintain books of accounting. The VAT and TOT incurred on purchase by these
taxpayers are considered as cost of purchase. While sales transaction is made these taxpayers
should collect TOT by applying the correct TOT rate. The journal entries made during purchase
and sales are stated as follows.
Purchase of goods and services
Inventory or other account………………………xxxx
Cash or payable …………………………xxxx
Sales of goods and services
Cash…………………….xxxx
Sales……………………..xxx
TOT payable……………..xxx
Example I: ABC Traders had taxable turnover of Birr 120,000.00 for the three-month ended
on ‘September’ 30, 2007 E.C. Assuming that the taxpayer belongs to category ‘B’, how much
will be the turnover tax payable by the trader? Tax rate 2%
Quarterly turnover Birr 120000
Tax rate 2%
Turnover tax 120000X2% = Birr 2400
Example 2:
HM PLC is a Non VAT registered taxpayer that sells alcohol drinks in A.A. In June, 2008 E.C
the company undertakes the following transaction
1. June 1 purchase inventory from YBZ company for cash at price Br 50,000 plus VAT
2. June 5, purchase inventory from non VAT registered taxpayer at Br 8,000 excluding TOT
3. June 10, sales inventory to w/ro Genet at Br 60,000 including TOT
4. June 10, sales inventory to YM PLC at Br 40,000 excluding TOT
Required:
Required: Record the above transaction
Solution
1. Inventory ………………… 57,500

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Cash………………………………56,500
WIT payable (50,000*0.02)………1,000
2. Inventory………………………………8,160
Cash………………………………………8,160

3. Cash……………………………58,823.52
Sales……………………………………….58, 823.52
TOT payable……………………………....1,176.48

4. Cash……………………………40,000
Prepaid WIT…………………….800
Sales……………………………………….40, 000
TOT payable……………………………......800

4.4.1 EXCISE TAX

Excise tax is an indirect tax or a specific tax levied and collected on imported and locally
produced goods, which are hazardous to health and causes social problem, demand inelastic
basic good and luxurious goods.
Excise taxes constitute an important source of revenue to the governments in underdeveloped
countries. In Ethiopia, excise taxes have expanded owing to increase in production, and increase
in new products that are coming within the purview of tax. In the industrial development of a
country, excise taxes function as an important tool in developing the economy. Excise tax in
Ethiopia covers only goods produced in the country and goods imported to the country. This
helps reduce the administration cost of collection to a certain extent. Usually excise taxes are
imposed on advelorem basis. It is the determination of duty or tax based on the value of goods.
Ethiopian excise tax is not an exception to this rule.
It has been observed universally that the burden of excise tax is falling heavily on the poor than
on the rich. Care should be taken by governments to prevent this situation. At the same time,
excise tax should not adversely affect production. It should enable increased production and
equitable distribution of wealth and income among different sections of the economy. Tax
policies should be designed to encourage new business units in the manufacture of taxed
commodities or expand the existing units to increase production. Excise taxes are also used to
regulate consumption and production of certain commodities. Imposing high tax rates on
selected items does this. High tax rates on liquor aim at reducing the consumption of liquor,
which reduces external costs because alcoholism generates external costs in the form of
automobile accidents.
With a view to increase the revenue of the government to provide for public goods and services,
and to reduce the consumption of specific goods, the Government of Ethiopia levies excise tax

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on selected items of goods that are supplied in the country. The current excise tax proclamation,
which came into effect at the beginning of 2003, contains reduced tax rates and taxable items
compared to the previous proclamations. This may be seen as a step taken by the government to
encourage the local production. As per the excise tax proclamation No 307/2002, the items of
goods that are subject to excise tax in the country are:
 goods imported to the country and
 goods produced locally
4.4.1.1. Tax Base for computation of Excise Tax
Each taxpayer is liable to compute his or her tax liability-the amount of money he or she owes.
The base of calculation for goods locally produced is the cost of production multiplied by its
excise tax rate. However, the cost of production means direct labor and raw material cost
incurred in the production process, cost of indirect inputs and overhead costs, but does not
include depreciation costs of machineries.
In calculating excise tax payable on textile and textile products locally produced in a factory and
vehicles assembled locally, the tax paid on import of inputs that are used to produce such goods
shall be deducted.
Likewise, cost + insurance + freight (CIF) + customs duty multiplied by excise tax rate is the
base of computation for goods imported into the country.
4.4.1.2. Declaration and payment Period
Excise tax on imported items is paid at the time of clearing those goods from customs area.
According to sub article 2(a2) of article 6 of the proclamation 307, excise tax on locally
produced goods is to be paid, not later than 30 days from the date of production. However this
provision is amended by the directive No 18/2009, which allows for the excise tax to be paid
within 30 days of the next month following production.
Note: Please refer the current excise tax rate which is revised as of this year
for calculation purpose.
4.5.1 Stamp Duty
Stamp duty is a tax levied on legal documents or instruments that requires affixing of seals. The
type of documents subject to stamp duty and the practice in relation to this varies throughout the
world. Under the Ethiopian law, the Federal government has the power to levy and collect
federal stamp duty. Stamp duty is regulated by Stamp duty Proclamation No.110/1998 (the
“Proclamation”) as amended by Proclamation No.612/2008.
4.5.1.1 Documents Subject to Stamp Duty
Under the stamp duty Proclamation, the following documents are charged with stamp duty:
 Memorandum and Articles of Association of business organizations, cooperatives or any
other form of associations;
 Award;
 Bonds; warehouse bond;
 Contract and agreements and memorandum thereof;

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 Security deeds: any instrument whereby borrower or guarantor gives to a lender a charge
upon a part or the whole of his property;
 Collective agreement;
 Contract of employment;
 Lease, sub-lease and transfer of similar rights;
 Power of attorney; and
 Document of title to property
4.5.1.3 Exemption from Stamp Duty
Under the Proclamation the documents and bodies are relieved from stamp duty includes, Public
bodies, goods imported for sale by traders, Share certificates and Embassies and Consulates
Who Should Bear the Cost?
In general, the beneficiary of the instrument is liable for the payment of stamp duty:
 In case of a lease, the lessee is liable
 In case collective agreement, the employer and the employee are jointly and severally
liable
 In case of employment contract, the employer is liable
 In case of award, parties to an award are jointly and severally liable
 In case of documents transferring title to property, the transferee is liable
 In case of contract, parties to the contract or agreement are jointly and severally liable
 In case of security deeds, the borrower shall be liable
 A person making (drawing) or issuing an instrument in Ethiopia shall, upon its execution,
be liable for payment of stamp duty; provided , however, when an instrument is made or
issued
4.5.1.4 Stamp Duty Rate
There are two types of stamp duty rates, namely fixed duty and on value duty. Unlike fixed duty,
on value duty is an amount which varies based on the value of the products, services or property
on which it is levied. Since there is no detailed guideline in practice and, as a result of that, tax
officers working on stamp duty report that they require only payment of 1% of the value of the
debt guaranteed even in the event where several assets are given as pledges in a single
instrument.
4.6.1 Customs Duty and computation Taxes imposed on imported Goods
In Ethiopia generally there are five taxes imposed on imported goods. These includes Customs
duty, WIT, excise tax, VAT and Surtax. In the previous we have discussed the VAT, excise tax
and WIT and hence in this section only customs duty and surtax will be discussed.
4.6.1 Customs Duty
The first of the five taxes levied on import items is customs duty. The term customs duty denotes
taxes imposed on goods entering or leaving the country. ERCA collects customs duty only on
import items as no tax on export is levied. The government waived taxes on export items on
purpose- just to encourage export. However, there is a 150 percent export tax particularly on
certain hides and skins of animals. ERCA collects Customs duty based on the rules stipulated in
the customs proclamation No. 859/2014 and other regulation and directives.
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Customs duty has 6 bands or groups of rates which are applied to imported goods. These bands
of rates are 0%, 5%, 10% 20%, 30% and 35%. From these bands of rates one can see that the
minimum customs duty rate is 0(zero) while the maximum is 35 percent of the CIF (Cost +
Insurance + Freight) value of an imported item. ERCA collects customs duty on a great variety
of goods which can be classified into two categories. The classification is based on the primary
purpose of the imported goods. Those import items used for productive purpose, items to be re-
exported and for public use are classified in category one while import items for all other (non
productive) purpose are classified in category two.
Category 1
Accordingly, raw materials, semi finished goods, producers goods, and import items for public
use such as minibuses, buses etc fall under category one. Raw materials can be processed or
unprocessed materials that would be used as industrial or agricultural input while producers’
goods are goods such as capital goods and others imported by business organization for
productive purposes. To encourage business organizations involved in activities such as
producing goods and services, special privileges are granted to them including the exemption of
customs duty and other taxes. As a result, raw material, and producers goods are largely zero (0)
rated.
Though there is up to a 10 percent customs duty rate applied to some of them. For example the
importation of agricultural production inputs such as a tractor is charged with 10 percent customs
duty rate. The importation of raw material and producers goods are highly encouraged for they
promote domestically produced goods which replace imported goods and helps to save cash flow
out of the country. Generally speaking, the more the imported goods are to be used for
productive purpose, the more would get the customs duty rate near to zero.
Semi finished goods are also classified under category one. These goods are imported into the
country for further processing and their importation is encouraged next to raw materials and
producers goods. ERCA charges semi finished goods at a 10 and 20 percent customs duty rate.
Category 2
Imported goods which are classified in category two are items such as consumer or finished
goods imported for personal use or for a nonproductive purpose. Consumer goods may also be
sub classified into durable and non-durable goods. Durable consumer goods are goods like
automobiles, furniture that have an expected useful life of three or more years. Non-durable
goods such as foods, gasoline, articles of clothing etc that are depleted or discarded relatively
soon. The highest customs duty rates are usually applied to consumer goods. For example, an
automobile is heavily taxed at a 35 percent customs duty rate on the grounds that it is imported
for personal use while ambulances which are primarily used for public use is imported free of
customs duty and other taxes. The general principle in setting customs rate in Ethiopia is that the
more the imported item is to be used solely for personal use the higher the rate of customs duty
and other taxes. Full information on rates of customs duty on each item to be imported can be
obtained from the Ethiopian Customs Tariff prepared based on the harmonized commodity
description and coding system (H-S).
4.6.2 Surtax
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Surtax is the fourth of the five taxes imposed on import items. Surtax was introduced in the
Ethiopian tax system on April 9, 2007. The council of Ministers issued a regulation to levy 10
percent surtax on imported goods. The imposition of surtax was necessitated to build the
financial capacity of the government for interventions to solve the rise in the cost of living which
is affecting consumers with low and medium income level.
Ten percent of the sum of cost, insurance, freight, customs duty, excise tax, and VAT is the base
of computation for surtax on all goods imported into the country. However, the following items
and services are exempted from payment of surtax.
Fertilizer, Petroleum and lubricants, Motor vehicles for freight and passenger and other special
purpose motor vehicles, Air craft, spacecraft and part thereof , capital (investment goods) and
some medicines, raw materials and other goods which are already decided by law to be tax free.
4.6.3 Computation of taxes Imposed on imported Goods
To determine customs duty and other taxes on the imported goods the importer may use the
following seven key steps.
 The first step is to identify the duty paying value of the automobile. The duty paying value of
any import item is the actual total cost of the goods i.e. cost + insurance + freight. Cost
stands for the transaction value and other related costs or payment made in exchange for the
purchase of an item. Insurance represents the money or premium that is paid to deliver the
item to be imported up to a prescribed customs port. Freight is money paid for the
commercial means of transport for delivering the imported item up to the first customs port.
 Step two calculates customs duty payable: by applying the customs duty rate on the duty
paying value
 Step three compute excise tax if the imported item is subjected to excise tax., the importer
multiplies the sum of duty paying value and customs duty by excise tax rate
 Step four compute VAT, In this step, the importer multiplies the sum of duty paying value,
customs duty, excise tax by value added tax
 The fifth step, to calculate surtax, involves multiplying the sum of duty paying value,
customs duty, excise tax, VAT, by surtax rate
 The sixth step is to calculate withholding tax. In this step, the importer multiplies the duty
paying value by withholding tax rate i.e. 60,000 x 3%. The result is 1800 birr which is the
withholding tax to be paid.
 The last step involves adding the payable customs duty, excise tax; value added tax, surtax,
and withholding tax to arrive at the figure of the total payable customs duty and other taxes.
Among these tax custom duty, excise tax, and surtax are added to the cost of the imported goods
to determine cost per unit in the cost sheet. However, prepaid WIT and VAT cannot be included
in the cost of the imported goods.
Generally the formula for calculating customs duty and other taxes imposed on imported goods
are summarized as follows
DPV =Cost + Insurance + Freight
Customs duty= DPV x CUDU =A
Excise tax= (DPV + A) x EXTA= B
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VAT= (DPV + A + B) x VAT=C

Surtax= (DPV + A + B + C) x SURTAX =D
Prepaid WIT= DPV x WHT = E
Total tax payable = A + B + C + D + E
Where, DPV= Duty Paying Value, CUDU= Customs Duty Rate, EXTA = Excise Tax Rate
SURTAX= Surtax, and WHT = Withholding Tax rate
4.6.4 Journalizing imported goods and customs duty and other taxes paid
First the importer must build its cost sheet to determine the cost of the imported goods. The cost
of imported goods includes CIF value, custom duty, excise tax, sure taxes, bank services charges
related to L/C services, and other costs such as transistors’ services charge, transport costs
incurred from the customs office up to the importer warehouse and unloading costs. Once the
cost sheet is build by the importer the transaction will be recorded as follows.
Inventory ……………………………xxxx
Prepaid WIT…………………………xxxx
VAT account………………………...xxxx
L/C or cash………………………………xxxx
Incase customs data base price higher than the commercial invoice, the customs duty and other
taxes should be computed by using the customs data base price and the difference between the
customs price and commercial invoice is treated as customs difference account during recording
the transaction.
Inventory ……………………………xxxx
Prepaid WIT…………………………xxxx
VAT account………………………...xxxx
L/C or cash………………………………xxxx
Customs difference………………………xxxx
Illustration
AB general importer imports 10 latest Toyota Double Cup Pickup vehicles with Motor Engine
power 3,600, Origin Japan and manufactured in 2016 for resale in A.A. The purchase cost of one
Vehicle was Br 600,000, Insurance Premium paid for all cars BR 100,000 , Transport costs paid
up to A.A Kality customs office for all vehicles Br 200,000, Bank services charges, Transitory
and other costs incurred Br 200,000. The customs duty rate of such vehicle is 35%
Required:
1. Compute the customs duty and other taxes paid during import when the Ethiopian
customs valuation system (ECVS) indicates the same price
2. Record the transaction
3. Compute the customs duty and other taxes paid on import if the Ethiopian customs
valuation system shows the purchase price per vehicle is Br 700,000
Solution 1.

1.Types of tax Tax Base Rate Tax Payable

Customs Duty 6,300,000 35% 2,205,000

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Excise Tax 8,505,000 100% 8,505,000

VAT 17,010,000 15% 2,551,500
Surtax 19,561,500 10% 1,956,150
Prepaid WIT 6,300,000 3% 189,000
Total Tax Payable   15,406,650
Building the Cost sheet
Bank service
DPV or CIF Customs Excise charge and Total Cost Cos per
value Duty Tax Surtax other costs of Import unit
8,505,00 1,956,15 1,916,61
6,300,000 2,205,000 0 0 200,000 19,166,150 5
2.
Inventory 19,166,150
VAT account 2,551,500
Prepaid WIT 189,000
Cash or L/C 21,906,650

3. Here the tax computation will be conducted using the price indicated in the ECVS
Types of Tax
tax Tax Base Rate Payable
Customs
Duty 7,300,000 35% 2,555,000
Excise
Tax 9,855,000 100% 9,855,000
VAT 19,710,000 15% 2,956,500
Surtax 22,666,500 10% 2,266,650
Prepid
WIT 7,300,000 3% 219,000
Total Tax 17,852,15
Payable   0

Building the Cost sheet

Bank service
DPV or Customs Excise charge and Total Cost of Cos per
CIF value Duty Tax Surtax other costs Import unit
2,217,66
7,300,000 2,555,000 9,855,000 2,266,650 200,000 22,176,650 5

Inventory 7,300,000

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VAT
account 2,956,500
Prepaid
WIT 219000
Cash or L/C 9,475,500
Customs Difference* 1,000,000
*Value of the vehicles per ECVS- Commercial invoice 700,000*10- 600,000*10= 1,000,000

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