CHAPTER 4
4. Ethiopian Tax System
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4.1. Structure of Ethiopian Tax
System & Administration
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Schedules of Income Taxes in Ethiopia
Federal Income Tax Proclamation
979/2016 provides for the taxation of
income in accordance with the following
schedules:
1) Schedule A, Income from
employment;
2) Schedule B, Income from rental of
buildings;
3) Schedule C, Income from business;
4) Schedule D, Other income;
5) Schedule E, Exempt income. 3
4.2. Income Taxes
4.2.1 Accounting
For Employment
Income Tax
Schedule ‘A’
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Meaning of Income Tax & Taxable Income
Meaning of income tax
It refers to the tax based on the amount of
taxable income of a taxable person.
Taxable income
It is the amount of income on which a tax
liability is computed and payable.
It is the income that is reported to the
government for the purpose of calculating
income tax liability.
TI = Gross income – Allowable Deductions.
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Taxable Person
Meaning of Taxable Person
Is a person who is liable to pay tax in
accordance with income tax laws.
(Income Tax Proclamation No. 979/2016)
Under Ethiopian tax law a “person” means
i) Any individual: natural person or human being
ii) Any body: share company, PLC, public enterp.
iii)Any associations of persons: > 2 forms assn.
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Types of Taxable Person
Two types by the Ethiopian Tax law
a) Resident, &
Based on Residential Status
b) Non-resident
Taxed in Ethiopia Based
on his global income.
Taxed in Ethiopia Based on his
income generated only in Ethiopia.
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1) A resident person for a tax year means
i) An individual (natural person) who;
Has a domicile in Ethiopia
Is a citizen of Ethiopia working as a
diplomat, consular, or other similar official
posts abroad.
Who stays in Ethiopia for more than 183 days
in a period of 12 calendar months either
continuously or intermittently. /6 month & 3 days/
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A resident person for a tax year means…….
ii) A body or association of individuals
which has,
Its head (principal) office in Ethiopia,
Effective management in Ethiopia, /boards of D/
Registration in the MoTIn or regional Trade
Bureaus,
A permanent establishment (a fixed place of
business in the form of administrative,
branch, factory, workshop, building site,
etc.) of a non-resident body in Ethiopia.
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2) A Non-resident person for a tax year means
If none of the conditions of a resident
person are satisfied.
Example: Determine their residence status:
1) Mr. Binda, a Kenyan National, come to stay in
Ethiopia on Tahisas 29, 2015 e.c:
2) Mr. Binda, a Kenyan National, come to stay in
Ethiopia on Tahisas 27, 2015 e.c:
3) Binda Share company whose head quarter is
in A.A, Ethiopia, has a branches in UK, USA,
KN.
4) An Ethiopian Company, without share
capital, wholly managed from outside
Ethiopia.
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2) A Non-resident person for a tax year means
If none of the conditions of a resident
person are satisfied.
ExampleS: (Calculate Tahisas up to Sene 30,2015)
1) Mr. Binda, a Kenyan National, come to stay in
Ethiopia on Tahisas 29, 2015 e.c: NR 182d
2) Mr. Binda, a Kenyan National, come to stay in
Ethiopia on Tahisas 27, 2015 e.c: R 184d
3) Binda Share company whose head quarter is
in A.A, Ethiopia, has a branches in UK, USA,
KN. R HQ
4) An Ethiopian Company, without share
capital, wholly managed from outside
Ethiopia. R Fixed place of business
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Scope of Ethiopian Income Tax
Ethiopian income tax applies on the
principles of residence.
Residents of Ethiopia pay tax to
Ethiopian government on their
worldwide income, whether derived in
Ethiopia or Outside Ethiopia.
Non-resident of Ethiopia are taxed on
their Ethiopian Source income only.
Foreign income is not taxable by
Ethiopian Government. 12
The current income tax Laws(statutes) in Ethiopia
The following are the principal ingredients of the
current income tax instruments in Ethiopia:
A) Income Tax Proclamation No. 979/2016, which
has been issued by the HPR on 18th day of August,
2016.
B) Income Tax Regulation No. 410/2017, issued on
24th of August, 2017, by the council of Ministers
following the issuance of the proclamation for the
implementation & regulation of income tax laws.
C) Income Tax Directives (or circulars, directions,
guidelines): issued by ERCA & MOFED following
the proclamation & regulation. Prepared in the
form of letter & other instruments.
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Schedules of Income in Ethiopia
Article 8 (1) of Proclamation 979/2016
provides for the taxation of income in
accordance with the following 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
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Schedule ’A’: Employment Income Tax
Employment income tax refers to the tax
imposed on employment income of an
employee.
It is the tax on earnings/income of
individuals.
Definition of Income: Income shall mean
every sort of economic benefit including non-
recurrent gain in cash or in kind, from
whatever source derived and in whatever
form paid, credited or received.
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From Income definition, the following points are noted
Economic Benefit: salary, allowance, free
meals, free air fly ticket, free rent, etc. provided
by employer
Non-Recurring Gains: casual, lump sum
receipt
Forms of Income: cash or in kind-Market
value
Source of Income: any legal income
Basis of Income: received in cash or it has
accrued to the tax payer.
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Definition of Employment Income
Also called personal or Schedule ”A”
income
It includes any payments or gains (benefits)
in cash or in kind received from
employment.
It encompasses benefit in cash or kind
received by an employee for services given
to employer
The payments received include from
current, previous, & future employments
for something done as an employee or
termination of the employment.
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Definition of Employee
Any individual, other than a contractor,
engaged (whether on a permanent or
temporary basis) to perform services under
the direction and control of the employer.
Definition of Employer
Refer to any entity such as central gov’t,
state gov’t, public enterprise, company,
firm, individual, association, etc. at whose
command services are rendered.
Employers exercise a supervisory control in
respect of the work entrusted to him.
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Scope of Employment Income
The Major Employment Benefits Are As Follows:
a) Basic Salary/Wage/Earning:
It is a regular flat payment to which a worker is
entitled to receive.
It is a regular payment to an employee for
carrying out the normal work of employment.
Normal working hours shall not exceed 8 hours
per day or 48 hours per week.
It is a base for calculation of bonus,
compensation, severance pay, annual leave pay,
overtime, etc.
It shall be paid in cash, OR may be paid in
kind-which shouldn’t exceed 30% of the wages
paid in cash.
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b) Over time earning /OT/
It is the amount payable to an employee for
overtime work performed.
It is a payment for work done in addition to
the normal working hours.
Overtime work is the work done in excess
of the regular working hours or days.
It is a work performed in excess of 8 hours
per day or 48 hours per week.
A worker may not be obliged to work OT.
The OT shall not exceed 2 hrs in a day or 20
hrs in a month or 100 hrs in a year.
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Overtime Payment Determination
i) Bases
Regular/Ordinary hourly rate of an
employee is a base for overtime
computation.
Regular hourly rate or basic salary per hour,
is a payment per hour for the regular/
normal working hours.
It is calculated as follows:
Regular Hourly Rate = Monthly Basic Salary
Normal Working Hours Per Month
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ii) Overtime Rates
There are 4 OT payment rates in Ethiopia.
a) For OT work performed b/n 12:00 in the
morning and 4:oo in the evening. 1/4th or 1.25
or 125% times his/her ordinary hourly rate.
b) For OT performed b/n 4:00 night and 12:00
morning. 11/2 or 1.5 or 150% time his/her
regular hourly rate.
c) For OT performed on Weekly rest days. 2 or
200% times his/her regular hourly rate.
d) For OT performed on a Public Holiday. 21/2 or
2.5 or 250% times his/her regular hourly rate.
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c) Allowances
Allowances are additional special payments or
benefits accrue to employees for various reasons.
Types:
I. Transportation (fuel) allowance
II.Position (Acting) allowance: Office Responsibility.
III.Housing (House Rent) allowance
IV.Hardship (Disturbance) allowance: Dangerous Working A.
V.Desert (Bad climate) allowance: Hot or Cold Climate.
VI.Education allowance: To cover educational or Tuition fee of employees
VII. Cash Indemnity allowance: Cashiers for possible cash
shortage.
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VIII. City compensatory allowance: subsidize living cost of cities.
IX.Representation allowance: Employees who represent the company.
X. Milk allowance: Free milk given to production dep’t employees.
XI.Telephone allowance: assuming for official use.
XII.Academic allowance: To encourage academic, research & training.
XIII.Uniform allowance: Purchase or repair of wearing during work.
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D) Per-Diem
Per-Diem is a payment of daily expenses of
an employee incurred for duty.
Like expenditure for Food, Bed(Hotel),
Transportation, and others.
The reimbursement of such expenses is
called Per-Diem.
It is common in most governmental
organizations
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E) Bonus
Bonus is a payment to employees,
usually based on their salaries, when
businesses are making attractive profit
–because of best performance of
employees.
Annual bonus is common in CBE,
Dashen Bank, etc.
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F) Commission
Commission is remuneration to an
employee for his/her additional activity
required by the employer.
For instance, to promoter sales, an employer
may give remuneration (commission) to
sales personnel (employee) in proportion to
sales volume achieved by employee.
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G) Employer’s Pension/Provident Fund to Employees
Pension/provident fund, is a fund reserved
by both the employees & the employer in
the name the employees.
Purpose: To pay employees or their
heirs when they retire from services.
For Pension fund, Government Employee
pays 7% & employers pays 11%. Total=18%
For Provident Fund, Private sector
employees pay 7% & their Employers pays
11%. Total = 18%
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H) Employment Termination Payments
It refers to any compensation received by an
employee from his employer in connection
with termination of his employment
contract.
Termination may take place either by
resignation, dismissal, compulsory
retirement, attaining superannuation or
voluntary retirement. These payments are;
i. Severance pay: 1month Latest B.S + 1/3 of monthly latest B.S
ii.Compensation payment: 1month latest B.S
iii.Job search payment: Severance pymt + 2m L.B.S. when
contract is ended due to bankruptcy or lawful reduction of work force.
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Determination of Employment Income Tax
A) Basis of charge:
Employment income is taxed at source either on due
basis or on receipt basis, whichever is earlier.
Due Basis: Tax is chargeable when the income is due
to the employees.
Receipt Basis: Tax is deducted when paid by the
employer.
B) Withholding agent (WA):
W.A is any person who is obliged by law to collect
tax based on tax laws and transfer it to the
government or Tax authority.
Employers are withholding agents.
Pay the withheld amount to the tax authority during
each calendar month within 30 days from the end of
each calendar month.
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C) Employment Tax Rate: SCHEDULE “A”
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D) Taxable Employment Income:
Is the amount of income from
employment which is subject to
employment income tax.
It is the base to calculate employment
income tax liability.
It includes all earnings of an employee
except exemptions.
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E) Tax Exemptions:
Refers to employment income of an employee
which is exempted from employment income
tax.
Tax exempted income is not subject to tax.
Classified in to two: Common & Direct.
i) Common exemptions: it is Birr 600 of an
employee’s monthly income. The first birr 600
monthly employment income of every employee
is not subject to employment income tax which is
excluded for tax computation.
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ii) Direct exemptions:
Are incomes from employment which are
directly exempted by the income tax laws in
force in Ethiopia.
Are exemptions by Proclamation,
Regulation, & Directives.
The direct exemptions are discussed below;
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1. Exempted Employment income by the Proclamation
a) Income from casual employment: Not
regularly employed or who doesn’t work for
more than 1 month for the same employer.
b) Contribution of retirement benefits by
employers. Pension fund & Provident fund
contributed by the employers doesn’t exceed
15% of monthly basic salary of employees is
fully exempted from tax.
c) Remuneration of Diplomatic Personnel of
Foreign Countries. Employment incomes of
diplomats, consular representatives & other
persons employed in any Embassy & who are
nationals of that state are exempted.
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d) Compensation for accident or death: in
relation to personal injuries or death of
another person are exempted from
employment income tax.
d) Specifically exempted income: by any law
of Ethiopia, international treaty or an
agreement made or approved by MOFeD
are exempted. E.g., “Vienna Convention”-
diplomatic agents are exempted from tax.
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2)Exempted Employment income by the Regulation
a) Medical expenses: paid by employer to cover cost
of medical treatment of employees are exempt from
the tax.
b) Transportation allowance: are exempted but subject
to condition by directives.
c) Hardship allowance: e.g., unexpected transfer of
work, distant working area, hazardous working
area, etc.
d) Per-Diem: paid to paid travelling or field trip exp.
e) Board allowance: allowances paid to members and
secretaries of board of public enterprises, public
bodies & study groups.
f) Income of persons employed by domestic duties:
income of domestic servants such as sweepers, Gardener, watchman or
personal attendant, etc.
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3) Exempted Employment income by the Directives
These directives state two issues.
i) If an employee uses the transportation
allowance to move from home to work
place and from work place to home, only
up to 300 birr is exempted. Any extra
allowance is taxable.
ii) If the nature of the work requires an
employee to move from place to place,
there are two conditions at the;
A. FEDERAL LEVEL, &
B. ADDIS ABABA CITY
ADMINISTRATION
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A) At Federal Government Tax Authority
If the employment income tax is collected
by the Federal Government Tax Authority
up to 1/4th of the total salary of the
employee but not exceeding Br. 800 is
exempted.
Extra amount of transportation allowance
beyond Br.800, the extra amount becomes
taxable. E.g.,
Employee Total Salary Transportation A
Binda 4200 1200
United 3000 1000
Required: Determine the amount of non-taxable & taxable transportation allowance
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Employee Binda:
1 Transportation allowance allowed for exemption: 1050 (1/4th * 4200)
2 The employee’s monthly transportation allowance: 1200
3 Maximum limit of T.Allowance allowed for exemption: 800
4 Non-taxable T.Allowance (1 or 3, which ever is less): 800
5 Taxable transportation allowance: ( 2 – 4 ) 400 (1200 - 800)
Employee United:
1 Transportation allowance allowed for exemption: 750 (1/4th * 3000)
2 The employee’s monthly transportation allowance: 1000
3 Maximum limit of T.Allowance allowed for exemption: 800
4 Non-taxable T.Allowance (1 or 3, which ever is less): 750
5 Taxable transportation allowance: ( 2 – 4 ) 250 (1000 - 750)
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B) At A.A City Admn. Tax Authority
If the tax is collected by Addis Ababa City
Administration Tax Authority, up to 15% of
the basic salary of the employee but not
exceeding Br. 600 is exempted from tax.
Extra amount of transportation allowance
beyond Br.600, the extra amount becomes
taxable. E.g.,
Employee Total Salary Transportation A
X 3200 1000
Y 5000 1000
Required: Determine the amount of non-taxable & taxable transportation allowance
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Employee “X”
1 Transportation allowance allowed for exemption: 480 (15% * 3200)
2 The employee’s monthly transportation allowance: 1000
3 Maximum limit of T.Allowance allowed for exemption: 600
4 Non-taxable T.Allowance (1 or 3, which ever is less): 480
5 Taxable transportation allowance: ( 2 – 4 ) 520 ( 1000 - 480
Employee “X”
1 Transportation allowance allowed for exemption: 750 ( 15% * 5000)
2 The employee’s monthly transportation allowance: 1000
3 Maximum limit of T.Allowance allowed for exemption: 600
4 Non-taxable T.Allowance (1 or 3, which ever is less): 600
5 Taxable transportation allowance: ( 2 – 4 ) 400 ( 1000 - 600)
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Computation of Employment Income Tax
Two widely computation methods;
A. Progression Method
B. Deduction/Short Cut/ Method
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A) Progression Method
The amount of tax is calculated for each additional layer of income of tax bracket by multiplying each by the related
additional layer income by the related tax under schedule “A”.
E.G., Binda’s Monthly Salary is Br. 4,000 & has no other
employment benefit. EIT=?
Solution
Gross earnings before any exemption 4000 Tax
Less: Common exemptions (600) ----------- 0
Taxable employment income 3400
Less: the next Br. 500 taxed at 10% (1050) *10%--- 105.00
Remaining taxable income 2350
Less: the next Br. 700 taxed at 15% (1550) *15%--- 232.50
Remaining taxable income taxed at 20% 800*20% ------- 160.00
Total employment income tax Br. 497.50
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B) Deduction/Short Cut/ Method
The employment income tax is determined by
multiplying the gross taxable employment
income before common exemptions with the
tax rate in which the taxable amount falls and
by deducting the adjustment of the related tax
bracket.
E.I.T = [(G-D)*TG]-AG, Where;
E.I.T Employment income tax.
G Gross employment income before common exemption.
D Direct exemption.
TG Tax rate in which G falls.
AG Adjustment of G.
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E.g., Assume a monthly salary of Binda is Br.
4,000 and he is not entitled to other
employment benefits.
Required: Calculate his E.I.T
Solution
E.I.T = [(G-D)*TG]-AG
= [(4000-0)*20%] – 302.50
= Br. 497.50
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The
End!
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