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SCHEDULES OF INCOMEcontd.

International experience shows that the following are also deducted while calculating personal income tax: Medical and dental expenses Charitable and political contribution Insurance premiums Portion of retirement income Child care credit Business and travel expenses

Schedule B Income/Income from rental of buildings. Tax Rate 30 % on taxable income of corporate entities Based on the following schedule for persons
2.

Taxable income from rental (per year)


Over Birr To Birr

Income tax payable

0
1,801 7,801 16,801 28,201

1,800
7,800 16,800 28,200 42,600

Exempt threshold
10 15 20 25

42,601
Over 60,000

60,000

30
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SCHEDULES OF INCOMEcontd.
2.

Schedule B Income/Income from rental of buildings... Contd. Deductions in computing taxable rental income Taxes paid with respect to the land and buildings leased; except income tax. For taxpayers that are not maintaining books of account, one fifth (1/5) of the gross income received as rent of buildings, furniture, and equipment as an allowance for repairs, maintenance and depreciation of such buildings, furniture and equipment. For taxpayers maintaining books of account deductible expenses include the cost of lease (rent) of land, repairs, maintenance, and depreciation of buildings, furniture and equipment as well as interest on bank loans and insurance premiums.
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Schedule C Income/Business Income Tax Income tax is imposed on the taxable business income realized from entrepreneurial activity. Taxable income tax is determined per tax period on the basis of the profit and loss account or income statement drawn in compliance with Generally Accepted Accounting Standards and subject to income tax proclamation and directives issued by the tax authority. Tax Rate Taxable business income of bodies is taxable at the rate of 30%. The highest rate before the recent tax reform was 50%. Taxable income of other taxpayers is taxed in accordance with the following Schedule C. The rate ranges between 1035%. The highest rate before the recent tax reform was 89%.
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Schedule C Income/Business Income Tax Schedule C Tax Rate for unincorporated entities
Income tax payable

Taxable Business Income (per year)

Over Birr 0 1,801


7,801 16,801 28,201 42,601 Over 60,000

To Birr 1,800 7,800


16,800 28,200 42,600 60,000

Exempt threshold 10
15 20 25 30 35
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Tax rate of central government corporate business taxes in some OECD countries in 2000
Country
Australia

Corporate business tax rate


33

Canada
France Germany Italy Japan Netherlands Spain Sweden United Kingdom

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33 30 36 38 35 35 28 33

United States

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SCHEDULES OF INCOMEcontd.
3.

Schedule C Income/Business Income Tax Deductible expenses Deductions are allowed for the purpose of earning, securing, and maintaining, that business income to the extent that the expenses can be proven by the taxpayer subject to the limitations specified by the income tax proclamation. Non-Deductible expenses The cost of the acquisition, improvement, renewal and reconstruction of business assets that are depreciated pursuant to Article 23 of the Income Tax proclamation. An increase of the share of capital of a company or the basic capital of a registered partnership. Voluntary pension or provident fund contributions over and above 15% of the monthly salary of the employee.
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Schedule C Income/Business Income Tax Non-Deductible expensescontd. Declared dividends and paid out profit
3.

shares Interest in excess of the rate used between the NBE and the Commercial Banks in excess of 2%. Damages covered by an insurance policy. Punitive damages and penalties. The creation or increase in reserves, provisions and other special funds unless otherwise allowed by the income tax proclamation. Income tax paid on Schedule C income and recoverable Value Added Tax.
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SCHEDULES OF INCOMEcontd. 3. Schedule C Income/Business Income Tax Non-Deductible expensescontd. Representation expenses over and above 10% of the salary of the employee. Personal consumption expenses. Expenditures exceeding the limits set forth by the income tax proclamation and regulation. Entertainment expenses. Donation or gift. The Council of Ministers allows donations or gifts provided for public use to be deducted.

SCHEDULES OF INCOMEcontd. 3. Schedule C Income/Business Income Tax Loss carry forward If the determination of taxable business income results in a loss in a tax period, that loss may be set off against taxable income in the next 3 tax periods, earlier losses being set of before later losses. A net operating loss may be carried forward and deducted for two periods of three years. 4. Schedule D Income/Other Income Royalties 5% Income from rendering of technical service 10% Income from games of chance 15% Dividends 10% Income from rental of property 15%
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SCHEDULES OF INCOMEcontd. TAXPAYERS Corporate entities and sole proprietors For the purpose of tax payment, taxpayers in Ethiopia are categorized as follows:

Category A taxpayers- are taxpayers with an annual income of over 500,000 Birr. They are obliged by law to maintain book of accounts. They declare business profit tax within the four months of their accounting period. Category B taxpayers- are taxpayers with an annual income of between 100,000 and 500,000 Birr. They are obliged by law to maintain book of accounts. They declare business profit tax within the two months of their accounting period. Category C taxpayers- are taxpayers with an annual income of less than 100,000 Birr. They are not obliged by law to maintain book of accounts. They declare business profit tax within one month of the fiscal year.

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VALUE ADDED TAX PROCLAMATION NO. 285/2002 VAT replaced the single stage sales tax and was introduced in Ethiopia with the aim to: o Enhance revenue generation o Modernize tax administration o Promote export o Combat tax fraud and evasion o Avoid tax cascading

A person who is registered or is required to be registered . A person carrying out a taxable import of goods to Ethiopia A non-resident person who performs services without registration for VAT (Reverse Taxation).

TAXPAYERS OF VAT

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VALUE ADDED TAX PROCLAMATION NO. 285/2002contd. The standard tax rate on every taxable transaction by a registered person, every import of goods, other than exempt import, and an import of services is 15%. Zero rated taxable transactions: Export of goods or services Rendering of transport or other services directly connected with international transport of goods and services. The supply of gold to the national Bank of Ethiopia A supply by a registered person to another registered person in a single transaction of substantially all of the assets of a taxable activity or an independent functioning part of a taxable activity as a going concern.
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VAT rates in selected countries


Country Algeria Botswana China Denmark France Hungary Norway Senegal South Africa Lesotho Netherlands VAT rate 17 10 17 25 19.6 25 24 18 14 10 19

United Kingdom

17.5

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VALUE ADDED TAX PROCLAMATION NO. 285/2002contd. Exempt transactions The sale or transfer of a used dwelling or the lease of a dwelling. The rendering of financial services. The supply or import of national or foreign currency and of securities. The import of gold to be transferred to the NBE. The rendering by religious organizations for religious or church related services. The import or supply of prescription drugs specified in directives issued by the Ministry of health, and the rendering of medical services. The rendering of educational services provided by educational establishments.
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VALUE ADDED TAX PROCLAMATION NO. 285/2002contd. Exempt transactionscontd. The supply of goods and rendering of services in the form of humanitarian aid. The supply of electricity, kerosene, and water. Goods imported by the government, organizations, institutions, or projects exempted from duties and other import taxes to the extent provided by law or by agreement. Supplies by the post office authorized under the Ethiopian Postal Services Proclamation. The provision of transport service. Permits and license fees. The import of goods to the extent provided under Schedule 2 of the Customs Tax Regulations. The supply of goods or services employing disabled individuals, if more than 60% of the employees are disabled. The import or supply of books and other print materials to the extent provided in regulation.
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VALUE ADDED TAX PROCLAMATION NO. 285/2002contd. Registration 1. Obligatory registration- a person who carries on taxable activity and is not registered is required to file an application for VAT registration with the Authority if:
At the end of any period of 12 calendar months the person made during that period, taxable transactions the total value of which exceeded 500,000 Birr; or At the beginning of any period of 12 calendar months there are reasonable grounds to expect that the total value of taxable transactions to be made by the person during the period will exceed 500,000 Birr.

2.

Voluntary registration- a person who carried on a taxable activity and is not required to register for VAT, may voluntary apply to the Authority for such registration, if he is regularly supplying or rendering at least 75% of his goods and services to registered persons.
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TURNOVER TAX PROCLAMATION NO. 308/2002 Turnover tax (TOT) is an equalizing tax to VAT. TOT imposed on persons not registered for VAT ( those that have an annual taxable transaction of less than 500,000 Birr) allows them to fulfill their obligations and also enhances fairness in commercial relations and makes complete the coverage of the tax system. TURNOVER TAX RATE 1) 2% on goods locally sold 2) For services rendered locally:
a)

Exemptions Similar to the list included under VAT.

b)

2% on contractors, grain mills, tractors, and combine harvesters 10% on others

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EXCISE TAX PROCLAMATION NO. 307/2002

Excise tax is levied to improve government revenue by imposing the tax on selected goods ( it is specific tax as opposed to VAT and TOT).

The tax is levied on luxury goods and basic goods which are demand inelastic. Imposing the tax on goods that are hazardous to health and which are cause to social problems is believed to reduce the consumption thereof.

o o o

19 excisable products Tax rate ranges from 10%-100% Base of computation of excise tax: The cost of production for locally produced goods Cost, insurance and freight (C.I.F.) for imported goods
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EXCISE TAX PROCLAMATION NO. 307/2002 Tax rates of goods that are liable to excise tax when either produced locally or importedcontd. 1. Any type of sugar . 33% 2. Drinks a) all types of soft drinks and powder soft drinks 40% b) alcoholic drinks (bear& stout, wine and whisky) 50% c) other alcoholic drinks 100% 3. All types of pure alcohol 75% 4. Tobacco and tobacco products a) Tobacco leaf. 20% b) Tobacco products 75% 5. Salt. 30% 6. Fuel (super benzene, regular benzene, petrol, gasoline and other motor spirits) 30% 7. Perfumes and toilet waters 100% 8. Textile and textile products. 10% 9. Personal adornment made of gold, silver and other materials. 20%

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EXCISE TAX PROCLAMATION NO. 307/2002 Tax rates of goods that are liable to excise tax when either produced locally or importedcontd. 10. Disk washing machine for household use 80% 11. Washing machine for domestic purposes 30% 12. Video decks 40% 13. Television and video camera.. 40% 14. Television broadcast receivers. 10% 15. Vehicles
a) up to 1300 c.c b) from 1301-1800c.c

16. 17. 18. 19.

c) above 1800 c.c

30% 60%

Carpets 30% Asbestos and asbestos products20% Clocks and watches 20% Dolls and toys 20%

100%

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Customs duty 0% (Exempt) mainly raw materials and capital goods for investment 5-35% for other imports. RECENT CHANGES IN THE TAX SYSTEM Land use fee and agricultural income tax According to the revised land use and agricultural income tax proclamations of Regional States in 1998 E.C.: The minimum combined land use fee and agricultural income tax per farmer is Birr 5. The maximum combined land use fee and agricultural income tax per farmer is Birr 80. Those farmers that have 4 and above hectares of land pay 80 Birr.

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RECENT CHANGES IN THE TAX SYSTEMcontd. Presumptive tax ( category C taxpayers)

The lowest and highest profitability rates identified for 69 business sectors in 1995 EFY were 23% and 70%, respectively. The lowest and highest profitability rates in 1997 EFY were lowered to 7.5 % and 10%, respectively. This has exempted a number of taxpayers from presumptive tax.

Up to Birr 24,000 annual business income is exempted when the tax is calculated for those business sectors with 7.5% profitability rate. Up to Birr 18,000 annual business income is exempted when the tax is calculated for those business sectors with 10% profitability rate.

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A person who earns 200 Birr monthly salary (2,400 Birr annual income) pays tax. Those traders with annual income of 18,000-24,000 birr are exempted from presumptive tax. This is contrary to the principle of equality. It has also adversely affected the income of regional states and city administrations

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Categories of tax levy jurisdictions

The tax levy jurisdiction are mainly categorized in to three: territorial, residential, and national. 1.Territorial tax levy jurisdiction- this tax levy jurisdiction is based only on the income generated from economic activities within the territory of a given country. The income

tax law that was in force in Ethiopia up to June 2002 was


based on territorial tax levy jurisdiction. 2.Residential tax levy jurisdiction- a resident within a country pays tax on the incomes generated from the

country of residence and abroad. The current income tax


law in Ethiopia is based on residential tax levy jurisdiction.

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Categories of tax levy jurisdictionscontd. Residential tax levy jurisdictioncontd. According to the Income Tax Proclamation issued in July 2002, an individual shall be resident in Ethiopia, if he: a) has a domicile within Ethiopia; b) has an habitual abode in Ethiopia; and/or c) is a citizen of Ethiopia and a consular, diplomatic or similar official of Ethiopia posted abroad. An individual who stays in Ethiopia for more than 183 days in a period of 12 calendar months either continuously or intermittently is considered as a resident for the entire tax period.

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Categories of tax levy jurisdictionscontd. Residential tax levy jurisdictioncontd. A body is resident in Ethiopia, if it: a) has its principal office in Ethiopia; b) has its place of effective management in Ethiopia; and/or c) is registered in the trade registry of the Ministry of Trade and Industry or Trade bureaux of Regional Governments as appropriate. Foreign tax credit is allowed by the income tax proclamation for a resident that derives foreign source of during a given tax period. The tax credit will not exceed the tax payable in Ethiopia. Residential tax levy jurisdiction can create doable taxation problem and thus double taxation avoidance treaty is required between countries.

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Categories of tax levy jurisdictionscontd. 3. Nationality tax levy jurisdiction- a national of a given country is supposed to pay tax on the world wide income earned. Tax credit method is required to lessen the burden on a taxpayer as a result of double taxation. The tax system of the USA is based on nationality tax levy jurisdiction. Ethiopians residing abroad, except consular, diplomatic or similar official of Ethiopia posted abroad, are not expected to pay tax to the tax authorities in Ethiopia for the current tax system is anchored on residential tax levy jurisdiction.

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End of chapter 3

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