The Ministry of Finance has released a new draft proclamation to amend some provisions of the Income Tax Proclamation No. 979/2016. Below is a summary and analysis of the key proposed changes under the draft Income tax proclamation.
- Taxpayer Categories: The categories of taxpayers have been redefined, with specific thresholds for Category A and B taxpayers based on their annual gross income.
- Presumptive Tax Basis: Instead of calculating tax based on actual profit, Category B taxpayers will pay tax based on estimated income brackets tied to their annual sales volume.
- Tax Schedule: The draft proclamation introduces a progressive tax rate table for Category B taxpayers (referred to as “Schedule ሐ”) that assigns tax rates based on sales ranges. For example:
– 0 – 100,000 birr → 2%
– 100,001 – 500,000 birr → 3%
– 500,001 – 1,000,000 birr → 5%
– 1,000,001 – 1,500,000 birr → 7%
– 1,500,001 – 2,000,000 birr → 9%
- Exclusion of Professionals: Professional service providers (e.g., lawyers, accountants, engineers) are excluded from Category B, regardless of their income level. They must maintain full financial statements and comply with Category A obligations.
- Separate Accounting Records: Any taxpayer engaged in multiple business activities must maintain separate accounting records for each line of business.
- Cash Transaction Limits: Cash payments exceeding 10,000 birr in a single day must be made through bank transfers or other approved electronic methods.
- Digital content creators must: Register for a taxpayer identification number, Maintain proper financial records and report annual income from all platforms.
- Non-Resident Service Providers: Non-resident service providers who use online mechanisms such as TV, radio, satellite, internet platforms, or similar digital channels are now required to pay tax in Ethiopia on income derived from Ethiopian users or audiences. Online platforms that facilitate payments to Ethiopian residents will be required to report earnings to the tax authority, regardless of whether the content originated in Ethiopia or abroad.
- Revocation of Tax Incentives: Any income tax exemptions or privileges granted under other laws, directives, or guidelines that are not reaffirmed in the draft proclamation will be revoked.
- Technical service providers (including those offering engineering, legal, financial, IT, architectural, and similar services) who operate in Ethiopia for more than 91 days in total during a tax year are deemed to have a taxable presence in the country. As a result, they are subject to Ethiopian income tax on the income earned from those services.
- Minimum Tax: The amended law introduces a minimum tax of 2.5% on gross income for businesses whose declared profit results in a tax liability below 2% of gross income. This tax is creditable against the regular income tax but not refundable.
- Royalty Fees and Dividend Tax Rates: Royalty income earned by a resident individual is taxed at 10% for general royalties and 5% if the royalty is from cultural or traditional works. Royalty income earned by a non-resident is taxed at a flat rate of 15% and dividend income is taxed at 15% for non-residents.
- Taxation of Capital Gains: Capital gains from the sale of shares or immovable property will now be taxable if the underlying asset is located in Ethiopia and the gain exceeds 20% of the asset’s value. This applies to both residents and non-residents.
- Taxation of Indirect Transfers: The law covers indirect transfers of Ethiopian assets through offshore entities. If a foreign company transfers shares in another foreign company that derives value from Ethiopian assets, the gain is taxable in Ethiopia.
- Withholding Tax on Repatriated Profits: A 15% withholding tax applies to profits repatriated by non-resident companies operating through a permanent establishment in Ethiopia.
Disclaimer: The information provided in this insight is prepared based on the draft proclamation and is subject to change. Readers are advised to consult the final version of the law or seek professional guidance for the most accurate and up-to-date details.
