Académique Documents
Professionnel Documents
Culture Documents
Chapter Objectives:
After completing this chapter, you would be able to:
Define taxation, tax, duty, and tax accounting Understand why government levies taxes on citizens Discuss the evolution and history of taxation in the world and in Ethiopia Define different tax related terms Comprehend basic characteristics of taxes Identify and Calculate Different Types of Tax Rates Grasp the basic principles and canons of taxation See the effect of taxation on Economy Classify taxes on the basis of different dimensions
1.1) Taxation
Taxation is one of the systems that government uses to collect public revenues from various sources. However, taxation is the most important system of collecting public revenue in modern economic system. Taxation is the most powerful instrument in the hands of the government for transferring purchasing power from individuals to government. The money collected through taxation tax revenue is used to finance government operations. That is, the money required by the government to undertake different functions taxes is collected from the citizens. Without taxes to fund its activities, government could not exist. Thus, a government uses taxation as a system of raising the lion share of its revenue. Government uses the money collected through taxation: To pay soldiers and police; To build dams and roads; To operate schools and hospitals; To provide food to the poor and needy; To provide medical care to the elderly people; and To finance other hundreds of operations
Compiled By: Kassahun Boressa, AAU, School of Commerce, Revised in 2011
Taxation is used as a system of raising the lion share of public revenue in modern economic system to fulfill the requirement of the goods and services. Taxation depends on concepts from law, accounting, economics, public financial management, politics, behavioral sciences, etc. Thus, taxation can be considered as a part of special fields of study such as law (specifically tax law), accounting (specifically tax accounting), public financial management, economics, politics, etc. The scope of taxation includes tax policies, tax theories, tax decisions, and tax administration
Employment Income Tax Declarations Turnover Tax Declaration Excise Tax Declaration Withholding Tax Declaration Other Income Tax Declarations
Tax accountant is an individual who assists a taxpayer in preparation of tax returns and who undertakes tax planning and other related activities.
Individual property rights did not exist The king was sole owner of everything in his domain Confiscated property and tribute payment from conquered peoples (additional source of finance) Ancient Athens (Greece) Relied on publicly owned silver mines Tribute from conquered countries Few custom duties, and Voluntary contributions from citizens. Poll tax - on slaves and aliens Eisphora - a tax imposed during war times Metoikion a poll tax on foreigners (people who did not have both an Athenian Mother and Father) Ancient Roman Republic Poll Tax on all roman citizens Roman military victories brought large amount of Foreign Tribute 5% Inheritance Taxes by Emperor (Caesar) Augustus Wheat and Salt tax 1 % sales tax for most goods and 4% sales tax for slaves by Emperor Julius and the sales tax on slaves was increased to 5% by Emperor Augustus Portoria The earliest custom duty in Rome on imports and exports
Land taxes Poll taxes Inheritance taxes, Tolls (payments for the use of bridges, roads, or seaports), and Miscellaneous fees and fines. Many people paid taxes in the form of money or crops. Taxes were paid directly to the local lords. An important development toward the end of the feudalism was taxes on Property Under the system of feudalism in Western Europe (11th Century): Kings, nobles, and church rulers all collected taxes. Kings derived income from their lands, from import and export duties, and from the various feudal dues and services owed by their vassals. Scutages - payments made in lieu of military service under King Edward of England Feudal nobility refused to pay scutages In 1215, Feudal nobility forced the king to sign the Magna Carta -the king agreed to collect scutages only with the common consent The Roman Catholic Church was a major tax collector during the middle ages Tithe. The church also collected various fees, fines, and tolls.
Compiled By: Kassahun Boressa, AAU, School of Commerce, Revised in 2011
B. Medieval Ethiopia
During medieval period, in Ethiopia, taxation greatly varied from region to region and was often arbitrary There had been different obligations that were considered to be taxes including compulsory labor and compulsory hospitality This was evident during 15th century AD at the time of Emperor Zarayakobe Form 15th to 19th century AD taxation was carried out in haphazard manner It was also dependent on the will of the chief or the tax collector During Emperor Tewdros, as per Walter Plowden who was friend and consultant of the emperor, The taxes are numerous but varied according to the traditional customs of each village." C. Modern Ethiopia Emperor Menilik II carried out first important reform in taxation - a fixed tenth (tithe) was established rather than the undefined and arbitrary systems of agricultural taxes. The second major reform was the steady monetarization (monetization) of agriculture and other taxes. Emperor Haileselassie I continued the tax reforms started by Emperor Menilik II Modern tax collection procedure, tax schedules and the development of trained responsible bodies and regularly paid civil service came into existence. In 1943 (1935 E.C.) - a government body was established to collect taxes
Compiled By: Kassahun Boressa, AAU, School of Commerce, Revised in 2011
In 1944 - Proclamation No 60/1944 (1936 E.C ) was enacted and issued to be used as a tax code in collecting tax from all individuals and their jobs In 1949 - Proclamation No 107/1949 (1941 E.C) amended Proclamation No 60/1944. This second proclamation excluded agricultural income from taxes and made a tax holiday of 5 years for persons or businesses with a capital balance of less than Br 200,000. In 1954, Proclamation No 19/1954 (1946 E.C) was enacted and amended Proclamation No 107/1949. In 1961 - Proclamation No 173/1961 (1953 E.C) repealed Proclamation No 19/1954 Since then, there were few amendments to improve the tax proclamations and involved in changing tax rates from 35% up to 89% In the post-revolution period (1974 91) - significant major changes were made on the tax rate and structure of all types of taxes In 2002 - Proclamation No 173/1961 was repealed by Proclamation No 286/2002 (1994 E.C) after it served nearly 40 years. Proclamation No 286/2002 is currently in use in Ethiopia regarding income taxes
6. Tax Avoidance refers to the practice of paying as little tax as possible 7. Tax Bracket is a range of income subject to tax at the same tax rate. It is the band of taxation in which a taxpayer is in. 8. Tax Cut is the act of reducing taxes for certain reason 9. Tax Credit is an investment activity which directly minimizes the tax to be paid 10. Tax Deed is a written instrument by which title to property sold for taxes is transferred unconditionally to the purchaser 11. Tax Deduction is the amounts legally permitted to be subtracted from gross income 12. Tax Evasion is an illegal activity in which a taxpayers seek to hide taxable income by overstating expenses or understating revenues 13. Tax Exemption is a legal provision that permits to deduct specified amount from gross income as a tax free income. The term tax exempt income can be used interchangeably with tax free income. 14. Tax Exile refers to somebody who leaves a country in order to avoid paying taxes 15. Tax Favored Investment refers to an investment whose profits are taxed lower tax rate 16. Tax Function is a function of tax accountant 17. Taxable Income refers to the amount of an Individual or business income which is subject to taxation 18. Tax Heaven means a country with favorable tax rates 19. Tax Holiday is period of no taxation 20. Tax Liability is the legal obligation of a taxpayer to the government 21. Tax Liens is claim for unpaid taxes 22. Tax Levy is the total amount of taxes imposed on an individual or corporation 23. Tax Method is a method of recording trading of plant assets for tax purposes with no gain or loss 24. Tax Penalties are fines or punishments imposed on a taxpayer 25. Tax Refund an amount that a government gives back to a taxpayer 26. Tax Relief is tax savings in the form of special allowable deduction. E.g. Capital Gain loss, Business Loss 27. Tax Return is a government tax collection form 28. Tax Schedule is the official list of tax rates matched with different level of incomes 29. Tax Shelter is an investment activity that protects some of a taxpayer's income form taxes. E.g. Investment in Treasury Bills 30. Tax Subsidy refers to a government subsidy to a particular company in the form of reduced tax
1.10) Types of Tax Rates There are four different types of tax rates: statutory tax rate, marginal tax rate, average tax rate, and effective tax rate, which are discussed as follows:
Statutory Tax Rates (STRs): all the tax rates applicable to a particular type of tax. They are
legally imposed tax rates on a taxpayer. Statutory tax rates are those percentages appearing in the tax law. Marginal Tax Rate (MTR): is the tax rate that applies to the taxpayers last birr of taxable Income. It is the ratio of change in tax to taxable income Average Tax Rate (ATR): is the ratio of the amount of taxes paid to taxable income Effective Tax Rate (ETR): is the ratio of the amount of taxes paid to the total income Example 2.1: assume that income is taxed on a Schedule Exempt from Br 0 up to 150, 10% over Br 150 to 650, 15% over Br 650 to 1400, 20% over Br 1400 to 2350, 25% over Br 2350 to 3550, 30% over Br 3550 to 5000 and 35% over Br 5000. Instruction: Determine the Marginal Tax Rate, Statutory Average Tax Rate and Effective Average Tax Rate for a taxpayer with a basic salary of Br 5300 and with no special allowances.
10%
1500
6500
14000
23500
35500
50000
20%
15%
10%
5%
4000
6000
12000
15000
25%
500
1000
3000
5000
7000
Tax Accounting (ACCT-332) Tax Rate Progressive Taxation System Proportional Taxation System Degressive Taxation System
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5. Canon of Productivity (Canon of Adequacy) - the tax system should be productive enough. It should enable to collect sufficient tax revenue. 6. Canon of Elasticity (Canon of Flexibility) - this canon implies that taxes should be increased or decreased according to the needs of the government. 7. Canon of Diversity-the tax system should be diverse in nature. 8. Canon of Simplicity-a tax system should be easily understood by the Taxpayer 9. Canon of Expediency-taxes should be levied after considering all favorable and unfavorable factors from different angles such as economical, political and social. 10. Canon of Buoyancythe tax revenue should have an inherent tendency to increase along with an increase in national income even if the rates and coverage of taxes are not revised. 11. Canon of Co-ordination: according to this canon, there should be a proper co-ordination between various authorities (Federal, State and Local Tax Collecting Agencies) while imposing taxes so as to avoid double and triple taxation.
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Chapter Objectives
After completing this chapter, you would be able to:
Differentiate benefits that are included in employment income Understand the basic legal provisions (tax laws) applicable on employment income in Ethiopia Calculate taxable employment income Determine employment income tax as per the tax law of the country Determine employment income tax on severance pay, bonus and other employment benefits Account for employment income tax related transactions Complete Employment Income Tax Declaration (FIRA Form 1103) Complete Personal Income Tax Declaration (FIRA Form 1105)
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Representation allowance Transportation allowance (fuel allowance) Entertainment allowance (guest accommodation expenses) Stress allowance: a special payment made to employees whose job is stressful. E.g. air traffic controllers s. License allowance: a special payment made to licensed employees. E.g. air traffic controllers 4. Bonus: payment made to employees of businesses as acknowledgment of employees hard work and effort in generating beyond expected amount of profit. 5. Employment Termination Payment a. Severance Pay- the severance pay shall be thirty times his or her daily wages of the last week of service for the first year of service; for the service less than one year, severance pay shall be calculated in proportion to the period of service. If the worker has served for more than one year, payment shall be increased by one-third of the previous sum for every additional year of service, within the limit of a total amount of twelve months salary b. Job Search Payment c. Compensation Payment d. Annual Leave Payment e. Job Termination Bonus
o. p. q. r.
2.2) Basic Legal Provisions of EIT The legal provisions are taken form Income Tax Proclamation No. 286/2002 and Income Tax Regulation No. 78/2002. Employment Income Tax Rates
Article 11 of Income Tax Proclamation No. 286/2002 provides that the following tax rate schedule shall be applied on employment income
Schedule A
Employment Income per Month TB Over Birr To Birr st 1 0 150 2nd 150 650 rd 3 650 1,400 th 4 1,400 2,350 5th 2,350 3,550 th 6 3,550 5,000 7th 5,000 xxxxx Tax Liability Tax Rate Exempt (0%) 10% 15% 20% 25% 30% 35%
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e. Payments made to a person as compensation or gratitude in relation to personal injuries; or the death of another person. Art 3 of Regulation 78/2002 exempts the following allowances from taxation: a. Medical Allowance b. Transportation Allowance c. Hardship Allowance d. Per-diem Allowance (Daily Allowance) e. Traveling Expenses f. Board Allowances of public enterprises board members g. Income of persons employed for domestic duties
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meant for 160 normal working hours. He worked 170 hours during the month of Hamle 2006. Assuming that all overtime work is done on employee rest days and the employee received Br 300 transportation allowance according to the employment contract, determine the taxable employment income. Required: determine taxable employment income
Example 2.2: Ato Daniel is a loan officer at Awash International Bank. Determine the Taxable
Employment Income of Ato Daniel if his monthly salary of Br 2,800 is for 176 Normal Working Hours and the Employers Contribution to Provident Fund is 20% of Daniels basic salary.
Example 2.3: Ato Samuel is head of Human resource department of BB Family Pvt. Ltd. Co.
Assume the following He gets a monthly salary of Br 2,640 for 176 normal working hours; He worked 186 hours during the month of Sene 2006 and all overtime work is done from 6:00 A.M. to 10:00 P.M. He is entitled to receive a Transportation Allowance of Br 1000 Required: determine the Taxable Employment Income of Ato Samuel
Example 2.4: the employment contract between Ato XY and his employer stated that Ato XY will receive a basic salary of Br 940 net of tax (after the tax is deducted) and the employer agreed to pay Br 110 tax to the tax authority on the basic salary amount. The normal working hours are 150. Determine the taxable income for the month of Nehase and Pagumen assuming that Ato XY worked 170 Hours and all overtime work was done on employee rest days
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B. Deduction Method
EIT = Taxable Employment Income @ Marginal Tax Rate Deduction
C. Addition Method
EIT = Addition + [(TEI Lower Tax Bracket) @ Marginal Tax Rate] The Addition is equal to the EIT amount payable on the Previous Tax Bracket
Example 2.5: Assuming a Taxable Employment Income of Br 1,000, determine employment income tax under Progression, Deduction, and Addition Method Example 2.6: Determine the Employment Income Tax to be paid by Ato Girma for taxable employment income of Br 3,600 for the month of Hamle 1999 under the three Employment Income Tax calculation methods
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If there is any remainder after determining the full number of months, the severance pay is treated separately as one month taxable income for tax purposes. Example 3.7: Assume that the contract of employment is terminated when the basic salary of the employee is Br 2,000. Determine the Employment Income Tax on the Severance Pay of Br 12,000
Reading Assignment: Employment Income Tax on Ordinary Annual Bonus Employment Income Tax on Weekly and Bi-Weekly Salary and other employment benefits
Exercise: You are given the following: basic Salary, Overtime Hours, Overtime Duration, Allowances of Employee of SHINA Plastic Factory Pvt. Ltd. Co. for the Month of September 1999 E.C.
S. No. 1 2 3 4 5 6 7 8 Employee Name ABY CAM GFD KKK LMA WZB ZFW SBH Basic Salary Br 3,200 4,800 1,600 2,400 2,880 1,760 2,080 1,080 Normal Working Hours 160 160 160 160 160 160 160 160 Overtime Hours 20 5 8 12 10 10 Overtime Duration 6:00A.M -10:00 PM 10:00PM -6:00 AM Weekly Rest Days Public Holidays Weekly Rest Days Weekly Rest Days Allowances 1000 (PA) 500(TA) 500 (TA) 500 (TA) 500 (TA) 500 (TA) 500 (TA)
Required:
A. Determine the Gross Employment Income, Taxable Employment Income and the Employment Income Tax B. Prepare the Employment Income Tax Return i.e. Complete Form 1103 (Employment Income Tax Declaration) to be filed with FIRA. C. Show all the accounting entries
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Federal Democratic Republic of Ethiopia Ministry of Revenue Federal Inland Revenue Authority
Schedule A
Employment Income Tax Declaration Form (Income Tax Proclamation No.286/2002 & Income Tax Regulation No. 78/2002 3. TIN
0000121361
4. TAN 000112
8. Tax Period Page 1 of _2__ Month Year Sep. 1999 Document Number (Official Use Only)
K) Tax WH 997.50 1096.25 254.50 477.50 575.00 246.50 350.50 114.50 4112.25 (Line 30)
I) Cost Shari ng
M) Net Pay
N) Emp. Sign
4700.00 5025.00 1860.00 2850.00 3240.00 1820.00 2340.00 1080.00 22915.00 (Line 20)
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FORM 1103
Employment Income Tax Declaration (Continuation Sheet for Form 1103)(Form 1104) (Income Tax Proclamation No. 286/2002 & Income Tax Regulation No. 78/2002) 2. TIN 3. Tax Period
Federal Democratic Republic of Ethiopia Ministry of Revenue Federal Inland Revenue Authority
1. Taxpayers Name (Company Name) SHEENA Consultancy Pvt. Ltd. Co.
Year 1999
L) Cost Sharing
S000127
SBH
January 2005
1,080
1,080
114.50
965.50
Totals from Previous Continuation Sheet(s) if Used Carry Totals from Final Continuation Sheet to Page 1 of EIT Declaration, Form 1103
Signature :
Employer Seal
FORM 1104
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Chapter Objectives
After completing this chapter, you would be able to:
Understand the concepts of Rental Income Tax in Ethiopia Identify the lessee, lessor, and sub-lessor and understand who should pay rental income tax Determine Gross Rental Income and Taxable Rental Income Know deductible expenses for Rental Income Tax purposes Calculate Rental Income Tax for taxpayers maintaining books of accounts and not maintaining books of accounts Understand briefly the Rental Income Tax Declaration (FIRA Form 1201)
over the number of years covered by the amount paid for tax purposes. Responsibility of the Local Administration: Informing to the Tax Authority
3.2) Basic Legal Provisions for Rental Income Tax (RIT) The legal provisions are taken form Income Tax Proclamation No. 286/2002 and Income Tax Regulation No. 78/2002. 3.2.1) Taxable Rental Income (TRI) Taxable Rental Income = Gross Rental Income Deductible Expenses Determination of Gross Rental Income
Gross Rental Income shall include: All payments in cash and all benefits in kind received by the lessor (owner of the building) from the lessee; All payments made by the lessee on behalf of the lessor according to the contract of lease; for example if the lessee agreed to pay brokerage cost on behalf of the lessor. The value of any renovation or improvement made under the contract of lease to the land or building, where the cost of such renovation or improvement was borne by the lessee in addition to rent payable to the lessor; If the tax payer leased furnished quarters the amounts received attributable to the lease of furniture and equipment shall be included in Gross Rental Income in addition to the above rental incomes.
Compiled By: Kassahun Boressa, AAU, School of Commerce, Revised in 2011
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Schedule B
TB 1st 2nd 3rd 4th 5th 6th 7th Range of Rental Income 0 1800 1,800 7,800 7,800 16,800 16,800 28,200 28,200 42,600 42,600 60,000 ***** 60,000 T RI 6,000 9,000 11,400 14,400 17,400 Tax Rate Exempt (0%) 10% 15% 20% 25% 30% 35%
Less: deductible expenses Land and building tax....................................................................xxxxx Annual lease payment on land.......................................................xxxxx Cost of repairs and maintenance....................................................xxxxx Depreciation of building................................................................xxxxx Depreciation of furniture and equipment......................................xxxxx Interest on bank loans....................................................................xxxxx Adverting expense to call tenant...................................................xxxxx Other expense, if any incurred to generate rental income.............xxxxx Insurance premiums.......................................................................xxxxx Total deduction.............................................................................. (xxxxx) Taxable rental income................................................................... xxxxx
Taxable Rental Income for those Taxpayers not maintaining Books of Accounts
Rental Income Received....................................................................... Add: The Following Amounts Amount on the lease of furniture.......................................................... Amount on the lease of equipments...................................................... Payments made by the lessee on behalf lessor ..................................... Cost renovation or improvement paid by the lessee............................. Gross Rental Income............................................................................. Less: Rental Payment............................................................................ Net Rental Income (NRI) ..................................................................... Less: Deductible Expenses Land and building tax, if any................................................................xxxx x Allowance for repairs, maintenance & depreciation (20%@NRI).......xxxx x Total deductible expense Taxable rental income........................................................................... xxxxx xxxxx xxxxx xxxxx xxxxx xxxxx (xxxxx) xxxxx
(xxxxx) xxxxx
Deduction Method
RIT = Taxable Rental Income @ Marginal Tax Rate Deduction TB 1st 2nd 3rd 4th Over 0 1,800 7,800 16,80 0 To 1,800 7,800 16,800 28,000 Tax Rate Exempt 10% 15% 20% Deduction 0.00 180.00 570.00 1,410.00
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Addition Method
Under this method, Rental Income Tax is determined by multiplying any Taxable Rental Income above the minimum level of the Tax Bracket by the tax rate and adding the given addition for each tax bracket as follows: TB Over To Tax Rate Addition st 1 0 1,800 0% Exempt 2nd 1,800 7,800 10% 0.00 rd 3 7,800 16,800 15% 600.00 4th 16,800 28,200 20% 1,950.00 5th 28,200 42,600 25% 4,230.00 6th 42,600 60,000 30% 7,830.00 th 7 60,000 ***** 35% 13,050.00
RIT = Addition + [(TRI Lower Tax Bracket) @ Marginal Tax Rate] Illustrations on Rental Income Tax Example 3.1: Assume ATO AYELE, the owner of AYU BUILDING, let out (leased) the
Building at Br 2,000,000 per annum. In addition to this, the lessee will incur Br 100,000 cost for repair and maintenance of the building. Assume further that Ato Ayele maintains books of Accounts and the cost of the building is Br 20,000,000 and the following expenses are incurred by the lessor: Cost of Lease payments on Land.......................... Br 100,000 Land and Building Tax.......................................... 4,800 Other Deductible Expenses................................... 5,200 Required: Determine the Gross Rental Income, Taxable Rental Income, and Rental Income Tax
Example 3.2: WELINEGUDENA SHARE COMPANY leased its building for Br 200,000 for
cash per month. The lessor is responsible to make renovation and improvement in the building by incurring Br 100,000 per year as per the lease term. The cost of building is Br 10,000,000 the Share Company paid Br 100,000 for the lease hold Land. Required: Determine Gross Rental Income, Taxable Rental Income and Rental Income Tax Liability
Example 3.3: ATO ZINABU leased his furnished building for Br 2,000 per month and the
equipments and furniture were leased for Br 1,000 per month. He paid Br 1,200 land and building tax to Addis Ababa Municipality. Determine Gross Rental Income, Taxable Rental Income and Rental Income Tax Liability assuming that the house was vacant for four months during tax year 1999
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Chapter Objectives
After completing this chapter, you would be able to:
Understand what business income tax is Identify taxable entities as per the tax law of the country Know the three different categories of business taxpayers Apply tax accounting methods allowed by the Tax Law currently enforce Differentiate items that are allowed to be deducted from gross income Identify non-deductible expenses Know revenues of incomes exempted from business profit tax Determine taxable business income for different categories of business taxpayers and body and non-body Compute business income tax for small, medium and large businesses Understand the concepts of foreign tax credit, withholding income tax, investment tax credit and loss carry back and carry forward
The legal provisions are taken form Income Tax Proclamation No. 286/2002 and Income Tax Regulation No. 78/2002. 4.1) Legal Forms of Businesses and Taxable Entities
According to Ethiopia: Commercial Code of Ethiopia, there are seven forms of business organizations in Sole Proprietorship It is a taxable entity but not legal entity General Partnership it is both taxable and legal entity Limited Partnership it is both taxable and legal entity Joint Venture - It is a taxable entity but not legal entity Private Limited Company - it is both taxable and legal entity Share Company - it is both taxable and legal entity Co-operative - it is a legal entity but it may or may not be a taxable entity
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c. d. e. f.
Requirements for registered vouchers, etc Number and types of financial statements to be prepared for tax purposes Tax Year Declaration of Income and time of payment of tax liability
1. Category A Taxpayers a. Category A Taxpayers shall include the following persons and bodies: Any business having an annual turnover of Br 500,000 (Five Hundred Thousand Birr) or more; Any company incorporated under the laws of Ethiopia or in a foreign country Share Companies b. They have to maintain accounting records c. They have to use registered vouchers d. Category A taxpayers shall submit to two statements to the Tax Authority: a balance sheet and a profit & loss statement (income statement) e. The tax year can be either the government fiscal year or the accounting year of the body f. They shall submit the Tax Declaration Form to the Tax Authority within 4 months 2. Category B Taxpayers a. Category B shall include any business having an annual turnover of Br 100,000 and above (100,000 to 499,999.99). b. They have to maintain accounting records c. They have to use registered vouchers d. Category B taxpayers shall submit only a profit and loss statement to the Tax Authority e. The tax year can be either the government fiscal year or the accounting year of the body f. They shall submit the Tax Declaration Form to the Tax Authority within 2 months 3. Category C Taxpayers a. Category C Taxpayers include, unless already classified in Categories A and B, Taxpayer whose annual turnover is estimated by the Tax Authority as being up to Birr 100,000. Category C taxpayers shall pay tax in accordance with Schedule 1 and 2 attached with Regulations No. 78/2002 b. Maintaining books of accounts is encouraged by the Tax Authority for Category C Taxpayers but not mandatory c. They are not required to use registered vouchers d. They are not required to submit any financial statement to the tax authority e. The tax year is the government fiscal year f. Category C taxpayer shall, within the period of 7th day of July to the 6th day of August every tax year, declare to the Tax Authority. One month from the end of the tax year.
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Schedule C
Taxable Business Income per Year TB Over Birr To Birr st 1 0 1,800 2nd 1,800 7,800 rd 3 7,800 16,800 4th 16,800 28,000 th 5 28,200 42,600 6th 42,600 60,000 th 7 60,000 ***** Business Income Tax Tax Rate Exempt (0%) 10 15 20 25 30 35
3) Presumptive Tax is a predetermined amount of tax paid by small businesses whose annual sales is less than Br 100,000. The tax is estimated by estimating annual sales (daily sales)
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16. Trading Stock Disposed (Cost of Goods Sold) - The cost of trading stock disposed during a tax period is determined on the basis of the Average Cost Method Example 4.1: BIRTY Share Company has the following beginning and purchased of merchandise Inventory during the Tax Year 1998 (Assume a tax year from Hamle 1 to Sene 30) Date Particulars Quantity Unit Cost Hamle 1, 1997 Beginning Inventory 2,000 100 Tikmet 16, 1998 Purchased Inventory 2,600 110 Megabit 22, 1998 Purchased Inventory 3,000 105 Sene 13, 1998 Purchased Inventory 2,500 106 Required: determine cost of trading stock disposed during the tax assuming that 2,700 units were on hand as of the end of the tax year 17. Depreciation Expense (Article 23) Method of Depreciation for Tax Purposes 1. Fine Art, Antiques, Jewelry, Trading Stock and Other Business shall not be depreciated. 2. The Acquisition or Construction cost, and the cost of Improvement, Renewal and Reconstruction, of buildings and constructions shall be depreciated individually on a straight-line basis at five per cent (5%) 3. The Acquisition or Construction cost, and the cost of Improvement, Renewal and Reconstruction, of intangible assets shall be depreciated individually on a straight-line basis at ten percent (10%) 4. The following two categories of business assets shall be depreciated according to a Pooling System at the following rates: A. Computers, information systems, software products and data storage equipment at twenty five percent (25%) B. All other business assets at twenty percent (20%) Depreciation Base under Pooling Method Depreciation Base during the Tax Year = Book Value at the Beginning + Cost of Assets Acquired Disposal of Assets If the depreciation base is a Negative Amount, that amount shall be added to taxable profit and the depreciation base shall become zero. If the depreciation base does not exceed Br 1,000, the entire depreciation base shall be a deductible business expense
Example 4.2: Assume ABC Spare Parts Pvt. Ltd. Co. uses the Tax Year Hamle 1 to Sene 30
and has the following plant assets: Computers, Information System, Software and Data Storage. Date of Purchase Acquisition Cost Yekatit 10, 1996................................ 16,000 Ginbot 01, 1996................................. 6,000 Nehase 07, 1996................................ 7,000 Tahsas 19, 1997................................. 3,500 Instruction: Compute Depreciation Base and Depreciation Expense for Tax Year Ending Hamle 30, 1996, 1997 and 1998 assuming that ABC Spare Parts Pvt. Ltd. Co. sold old Computer at Birr 3000 on Megabit 23, 1996
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Example 4.3: The following data were obtained from the accounting records of ZENA Pvt.
Ltd. Co. On Hamle 1, 1997, beginning of the current tax year, the Store Equipment account shows a book value of Birr 170,000. At the beginning of the tax period, the company sold one of the equipments for Birr 25,000 cash and acquired a new one for Birr 85,000 on account. Determine the amount of Depreciation Expense to be recognized on the store equipment and the depreciation base for the store equipment for the tax year ending Sene 30, 1998 as per Art.23 of Income Tax Proclamation No.286/2002
4.7) Exemptions
The following categories of income shall be exempt from payment of business income tax hereunder: Awards for adopted or suggested innovations and cost saving measures Public awards for outstanding performance Income specifically exempted from income tax by the law in force in Ethiopia, by international treaty or by an agreement made or approved by the Ministry of Revenue The revenue obtained by the Federal Government, Regional State Governments and Local Governments of Ethiopia; and the National Bank of Ethiopia from activities that are incidental to their operations
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3. Addition Method BPT = TBI Lower Tax Bracket @ Marginal Tax Rate + Addition TB 1st 2nd 3rd 4th 5th 6th 7th Over Br 0 1,800 7,800 16,800 28,200 42,600 60,000 To Br 1,800 7,800 16,800 28,000 42,600 60,000 ***** Tax Rate Exempt 10% 15% 20% 25% 30% 35% Addition 0.00 0.00 600.00 1950.00 4230.00 7830.00 13050.00
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Directives issued by the Tax Authority. Accordingly, the Taxable Business Profit is the can be determined by subtracting costs & expenses from annual revenues. Taxable Business Profit = Annual Revenues Cost of goods sold Operating Expenses Example 4.4: SHALA Merchandising Enterprise is a Category B taxpayer but not a body. The enterprise reported Br 300,000.00 sales revenue; Br 200,000 Cost of goods sold and Br 62,000 operating expenses during the tax year ending Sene 30, 1997. Determine the Taxable Business Income and Business Profit Tax to be paid.
Example 4.6: Assume Oromia Cooperative Bank Share Company made Br 10,000,000
loans and advances during the tax year ending Sene 30, 1998. Assume also the bank has the following income and expenses for the same Tax Year: Interest Income...........................................................Br 12,000,000 Service Charge Income.............................................. 1,600,000 Interest Expense......................................................... 10,050,000 Administrative and General Expenses....................... 1,600,000 Advertising Expenses................................................. 400,000 Instruction: Determine the Taxable Business Profit of the Bank for the tax year ended Sene 30, 1998 if the technical reserve on the loan and advance was Br 1,300,000.00 and five year tax holiday period for the business.
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Expenses of Br 1,200,000.00. Required: Determine the Taxable Business Income and Business Profit Tax during the tax year ended June 30, 2002 and Record the necessary transaction
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Representation Expense above 10% of the Basic Salary................................................................... xxxxx Personal Consumption Expenses...................................................................................................... xxxxx Entertainment Expenses.................................................................................................................... xxxxx Donation or gift made to organizations not listed............................................................................. xxxxx Other expense if any......................................................................................................................... xxxxx Total Non-Deductible Expenses....................................................................................................... xxxxx Less: Allowable Expenses (If not claimed) Expenses incurred for earning business income................................................................................ xxxxx Deprecation Expense........................................................................................................................ xxxxx Irrecoverable Bad Debts Expense..................................................................................................... xxxxx Total Deductible Expense................................................................................................................. (xxxxx) Taxable Business Profit for tax purpose........................................................................................... xxxxx
For income tax purposes the taxpayer files the returns of income (statement of income in the prescribed Form) along with accounts. The statement furnished may not be correct in all respects. Hence, the taxable income is calculated in the following manner: If the tax payer has deducted any expense which is non-deductible, then such amount is to be added back with his net profit given in the furnished return of income. Likewise if the tax payer has not claimed any expense that is deductible, then such amount is to be deducted from the net profit shown in the accounts Illustration on Business Profit Tax: from GAAP Based Income statement to Tax based Profit and Loss Account A number of small spare part businesses established a business named Excellent Spare Parts Share Company. The GAAP based Profit & Loss Account for the financial year ended June 30, 2004 is as follows:
Excellent Spare Parts S.C. Profit and Loss Account For the Tax Period 1st July 2003 to 30th June 2004
Sales....................................................................................... Less: Cost of Goods Sold....................................................... Gross Profit............................................................................ Less: Operating Expenses Administrative expenses........................................................ 100,068.65 Selling and distributing expenses........................................... 2,000,322.0 0 Depreciation and amortization expense................................. 42,000.56 Bank interest and charges ..................................................... 34,217.44 Audit fees............................................................................... 27,000.35 Provision for Stock Obsolescence......................................... 41,985.00 Total Operating Expenses...................................................... Taxable Business Profit for the Year..................................... Provision for Profit tax at 30%.............................................. Net Income or Profit.............................................................. Legal Reserve......................................................................... Balance Carried Forward to Balance Sheet........................... * Such amounts are rounded to the nearest birr amount Additional Information: The following information was available from the records of the firm.
Compiled By: Kassahun Boressa, AAU, School of Commerce, Revised in 2011
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Loss Br 18,491 on Consignment sales was not included Vehicle rent expense was overstated by Br 6,700 Administrative and general expense of Br 22,500 of the sister company was included in the income statement Advertising expense include Br 8,700 expense of the Sister Company Amortization expense includes Br 7000 amortization in exceeding the limit Required: Find out the taxable business income and business income tax liability of the firm for the tax year ending June 30, 2004 according to Proclamation No 286/2002 and Regulation No 78/2002.
Required:
A. Prepare profit and loss statement for tax purposes assuming that the enterprise is a body and use accrual basis of accounting for tax purpose for tax year ending Sene 30, 1998 as per Proclamation No. 286/2002 and Regulation No. 78/2002 B. Prepare profit and loss statement for financial year ending Sene 30, 1998 for financial accounting purposes assuming that the same cost and depreciation method as A above
Compiled By: Kassahun Boressa, AAU, School of Commerce, Revised in 2011
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Chapter Objectives
After completing this chapter, you would be able to:
Comprehend other incomes in Ethiopian Context Discuss the tax rates applicable on other incomes Calculate taxable other income Compute Royalty income tax, interest income tax, dividend income tax, capital gain tax and other income taxes Account for other income taxes Declare other income taxes
Royalty Income; Technical Service Income; Income from Game of Chance; Dividend Income; Income from Casual Rental of Property; Interest Income; and Capital Gains All sort of these incomes are taxable under the law in force in Ethiopia: the Income Tax
Proclamation No. 286/2002 and the Income Tax Regulation No. 78/2002. 5.2) Withholding of Schedule D Income Tax on Payments
The Payer of any payment subject to tax under Schedule D shall withhold from the
payment the amount of tax required by Schedule D Every Taxpayer who has Schedule D Income, not subject to withholding at source constituting a final tax, shall prepare a declaration of that income in a form prescribed by the Tax Authority. Taxpayers shall submit this declaration to the Tax Authority within two (2) months from the end of the Ethiopian Fiscal Year The tax calculated in accordance with the declaration, after the Foreign Tax Credit has been reduced from the related Schedule D income subject to taxation during the year, shall be transferred by the taxpayer to the Tax Authority simultaneously with the Declaration Form
5.3) Basic Legal Provisions on Other Income Tax The legal provisions are taken form Income Tax Proclamation No. 286/2002 1. Royalty Income (Article 31)
It is taxable at the rate of 5% - flat tax rate This tax is a final tax in lieu of a net income tax
Compiled By: Kassahun Boressa, AAU, School of Commerce, Revised in 2011
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the rate of ten percent (10%). This tax is a final tax in lieu of income tax
the following rates: A. Building held for business, factory, office 15% B. Shares of companies 30% Gains from transfer of residential building is exempt The basis of calculation of the tax is the historical cost of the building or the par-value of the share, as appropriate Inflation adjustment at a rate determined by the appropriate authority, in respect of buildings, taxes paid for the land and the building shall be allowed as deduction The cost registered with the appropriate government body Shares given in exchange under reorganization is not disposal of Shares Loss on the transfer shall be recognized and be available to offset gain for indefinite periods
5.4) Accounting for Other Income Tax 1. Other Income Tax on Royalty (Royalty Income Tax)
Royalty Income Tax = Royalty Income @ 5% Example 5.1: assume that the Famous Ethiopian musician Tewderos Kassahun (Teddy Afro) sold his album called Jaha Yastesryal at Birr 1,000,000 to Electra Music Studio. Required: Determine the amount of other income tax and record the tax liability at the time of payment to the artist and to the tax authority
Technical Service is provided to a resident person in Ethiopia Other Income Tax = Technical Service Income @ 10% Technical Service is Provided by Resident Person to person outside Ethiopia Other Income Tax = Technical Service Income @ 10% Foreign Tax Credit
Example 5.2: Assume Dr Engineer Tibebu Bekele was a consultant to the Kenyan HydroElectric Project at Mombassa. He received $100,000 form this technical service and paid $ 2000
Compiled By: Kassahun Boressa, AAU, School of Commerce, Revised in 2011
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tax in Kenya. Determine the Tax Liability of Dr. Engineer Tibebu assuming it was not deducted at source and the exchange rate for a dollar was Br 8.75 on the Date of Declaration of this Income.
Example 5.3: Assume Mr. Prajnan Goswami, an Indian Engineer, is consulting Gilegel Gibe
Hydro-Electric Project. The annual payment is 80,000 USD. Required: Calculate other income tax on this technical service income
Example 5.4: Ato Bedelu won Birr 100,000 from the lottery drawn on April 25 th 2006.
Determine the Tax Liability to be withheld by the National Lottery Administration.
Example 5.5: BURQAGUDINA Share Company distributes 50% of the Net Income to
Share Holders each year. During the tax year ended June 30, 2005 the business had a Net Income of Br 500,000. Required: Determine the Dividend Income Tax on the Dividend Distributed and record the necessary tax related transactions
Other Income Tax = Casual Rental Income @ 15% Example 5.6: Ato Nahome Hunduma rented his Land Cruiser Toyota at Br 15,000 for three months to SS Tour and Travel Pvt. Ltd. Co. Required: Determine the income tax to be withheld by the Payer SS Tour and Travel Pvt. Ltd. Co. and record the tax related transactions
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Taxes Paid for the Building ....................................................................................... Loss carried on the Sale of Building ....................................................................................... Total Deduction........................................................................ Taxable Capital Gain................................................................ Capital Gain Tax (Taxable Capital Gain @ 15%)....................
Loss carried on the Sale of Shares xxxxx ........................................................................................ Total Deduction......................................................................... (xxxxx) Taxable Capital Gain................................................................. Capital Gain Tax (Taxable Capital Gain @ 30%)..................... xxxxx xxxxx
Example 5.8: SI Business Enterprise sold its building which has a cost of Br 85,000 at Br
185,000. The Building was held for 10 years and Br 11,000 Land and Building tax was paid on the building during the 10 years period. If the average inflation rate is 5%, determine the Taxable Capital Gain and the Capital Gain Tax.
Example 5.9: Ato Jara sold his personal home at Birr 150,000 in 1996 E.C. The home was
accomplished with the cost of Birr 95,000 in 1993 E.C. Determine the Capital Gain Tax assuming that the person paid Br 2,200.00 Land and Building Tax and the applicable Prince Index is 1.25 in this regard.
Example 5.10: Ato Abebe Purchased 100 Shares from NIB International Bank S. Co. at Birr
1100 per share when the par value is Birr 1000 per share on January 1, 2003. Ato Abebe sold the shares at Birr 1700 per share on February 20, 2005. Taking year 2003 as a base year, the price index is 1.15 in 2005. Determine the tax on the Capital Gain
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Overview of Value Added Tax Components of Value Added Tax Valued Added Tax when the tax element is included and excluded Basic Legal provisions of VAT in Ethiopia Accounting for VAT Computation of VAT VAT Declaration
Chapter Objectives
After completing this chapter, you would be able to: Describe Value Added and Value Added Tax Understand Input Tax and Output Tax Compute Input Tax and Output Tax when the tax element is included in the price Discuss the basic legal provisions such taxable goods, zero-rated goods, standard rated goods, Registration for Value Added Tax, etc Account for transaction with value added tax Compute VAT Payable or VAT Refund Complete VAT Declaration on monthly basis
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Output Tax: is the Value Added Tax collected on the sale of taxable supplies (goods and services). It is the VAT collected on sales. Input Tax: - is the value added tax paid on purchases of taxable goods and services. It is the VAT paid on purchases Vat Payable Or Liability = Output Tax is greater than Input Tax Vat Refundable/Credit = Output Tax is less than Input Tax
6.3) VAT Exclusive and VAT Inclusive Price and Determination of VAT
VAT Exclusive Price In this case, purchases and sales are made Exclusive of VAT. When a VAT Return is prepared, the Output and Input Tax are determined by multiplying Sales and Purchases Price by the existing VAT Rate. VAT = VAT Exclusive Price @ VAT Rate VAT Inclusive Price In this case, purchases and sales are made inclusive of VAT. When a VAT Return is prepared, the Output and Input Tax is determined by multiplying sales and purchases by the Ratio of VAT Rate to 1 Plus VAT Rate; For example if the VAT Rate is 15%, Sales and Purchases Price which are VAT Inclusive are multiplied by 15/115 which is the same as 0.15/1.15) VAT = [VAT Inclusive Price] @ [VAT Rate / (1 + VAT Rate)]
6.4) Legal Provisions on VAT in Ethiopia The legal provisions are taken form Value Added Tax Proclamation No. 285/2002 and Value Added Tax Regulation No. 79/2002. Most transactions involve supplies of
goods and services. VAT is payable on taxable supplies made in Ethiopia by a taxable person in the course or furtherance of the taxable activity during an accounting period. The Analysis of this legal point is as follows: A. Taxable Supplies made in Ethiopia B. Taxable person refers to a taxpayer for VAT Purposes C. Course or furtherance an activity undertaken to develop, advance and progress the taxable activity by a taxable person is assumed to be undertaken in the course or furtherance of taxable activity. The supply of goods or rendering of services by an employer to his employees, including gratuitously, is a supply of goods or services in the course or furtherance of a taxable activity D. Taxable Activity - any activity, which is carried regularly by any taxable person in Ethiopia whether or not for a pecuniary profit as long as it involves or is intended to involve in whole or in part the supply of goods or services to another person for consideration. E. Accounting Period is a calendar month. 1. VAT Registration in Ethiopia VAT Registration is classified into two: Mandatory and Voluntary Mandatory Registration Any person conducting a commercial enterprise or intending to conduct a commercial enterprise may apply to get registered for VAT. The term any person for purposes of VAT registration includes: Sole proprietor, Company, Partnership, Estate of the Deceased, Trust, Incorporated Body or Unincorporated Body or Club or Association, etc. If the gross sales value or turnover of the enterprise, which is gross income for 12 calendar months, exceeds or is likely to exceed Br 500,000, the person conducting the enterprise
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must register for VAT with VAT Department of the FIRA. It is calculated ongoing basis. Turnover related to exempt supplies is not to be included in compulsory VAT registration. Voluntary Registration A person who carried on taxable activity and is not required to get registered for VAT, may voluntarily apply to the Authority for such registration, if the person regularly is supplying or rendering at least 75% of his goods and services to registered persons 2. Imposition of Tax Subject to the provisions of the VAT proclamation, there shall be levied and paid tax to be known as Value Added Tax, at the rate of 15 % of the value of: Every taxable transaction by a registered person; and Every import of goods, other than an exempt import An import of goods takes place when the goods are entered into the customs declaration. The value of a taxable import is the customs value of the goods, determined in accordance with the customs legislation of Ethiopia, plus the sum of duties and taxes (Custom Duty and Excise Tax) payable upon the import of the goods into Ethiopia, excluding VAT and income tax withholding. 3. Zero-Rated Supplies The following taxable transaction shall be charged with tax at a rate of Zero percent: The export of goods or services to the extent provided in regulations; The rendering of transportation or other services directly connected with international transport of goods or passengers, The supply of gold to the National Bank of Ethiopia; and A supply by a registered person to another registered person in a single transaction 0f substantially all of the assets of a taxable activity or an independent functioning part of a taxable activity Note: on Zero Rated supplies the registered person can claim the Input Tax Credit on purchases either it is domestic or import. The input VAT will be recovered but no Output Tax will be reported for the sales. 4. Exempt Supplies (Transactions) The following types of supplies of goods (other than by way of export) or rendition of services, as well as the following types of imports of goods, are exempt from payment of VAT to the extent provided by regulation: 1. The sale or transfer of a used dwelling, or the lease of a dwelling 2. The rendering of financial services 3. The supply or import of National Or Foreign Currency (except for that used for numismatic purposes), and of securities 4. The import of gold to be transferred to the national bank of Ethiopia 5. The re. The import or supply of prescription drugs and medical services 6. The rendering of educational services provided by educational institutions, 7. The supply of goods and rendering of services in the form of humanitarian aid, 8. The supply of electricity, kerosene, and water 9. Goods imported by the government 10. Supplies of services by the post office 11. The provision of transport be it public or freight 12. Permits and License Fees
Compiled By: KASSAHUN BORESSA, Lecturer, AAU, School of Commerce, Revised in 2011
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13. Rendering by religious organizations of religious or church related services 14. The import of goods to the extent provided under Schedule 2 of the customs tariffs regulations 15. The supply of goods or services by a workshop employing disabled individuals; 16. The import of supply of books and other printed materials; 17. The Ministry of Finance and Economic Development exempted the following by directive after the proclamation: Bread, Injera and Milk 18. Grains and their flours (As of March 2008) Note: in the case of exempt supplies, there is neither Input Tax nor Output Tax. This is to say that: No tax is collected when a person sells exempt goods and services No tax is paid when a person purchase exempt supplies. 5. Standard Rated Supplies These are supplies of goods or provisions of services which are neither exempt nor zero-rated and taxable at the standard rate of 15% 6. Mixed Supplies A supply of goods or rendering of services, which is incidental to a (main) supply of goods or rendering of services, is treated as part of the latter. The rendering of services incidental to an import of goods is part of the import of goods. A taxable transaction involving independent elements, on or more of which involves the separate supply of goods or rendering of services, which would be exempt from tax, is treated as separate transactions. An exempt transaction, which involves the separate supply of taxable goods or rendering of taxable services, is treated as separate transactions. 7. Adjustment of the value of a Taxable Transaction In relation to a taxable transaction made by a registered person Adjustment of the value of a Taxable Transaction is allowed where: The transactions cancelled; The nature of the transaction is changed; The previously agreed consideration for the transaction is altered, whether due to a reduction of prices or for any other reason; or The goods or services are returned in full or in part to the registered person. 8. Input Tax Credit The amount of VAT that is creditable is the amount of VAT paid by a registered person in respect of tax invoices or Customs Declarations issued to the person for: Imports of good that take place during the current accounting period; and Taxable transactions involving the supply of goods or rendering of services that are considered to take place during the current or preceding accounting Where only a part of the supplies made by a registered person during a tax period are taxable transactions, the amount of tax creditable for that period is determined as follows: In respect of a supply or import received to make taxable transactions, the full amount of tax paid on the supply or import shall be allowed as a credit; In respect of a supply or import received to make exempt transaction, no amount of tax payable in respect of the supply or import Shall be allowed as a credit; or
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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 shall be determined by a directive to be issued by the Minister or Revenue,
No Credit is allowed for VAT: On a taxable transaction to, or import by, a person of a passenger vehicle Unless the person is in the business of dealing in, or hiring of, such vehicles Unless the person is engaged in the business of transporting passengers On a taxable transaction, or import by, a person of goods or services acquired for the purposes of entertainment or providing entertainment Unless the person is tin the business of providing entertainment The person is in the business of providing taxable transactions involving transportation services 9. VAT Refund 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 tax authority shall 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 credits shall be refunded by the tax 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 The Authority is not obliged to refund excess credits if the amount to be refunded is not more than 50 Birr. This amount can be carried forward and credited against tax due in the subsequent accounting period
Record Keeping
A record refers to accounting records, accounts, books, computer-stored information, or any other documents. A registered person or any other person liable for tax under VAT proclamation shall maintain for 10 years in Ethiopia the following: Original tax invoices received by the taxable person, A copy of all tax invoices issued by the taxable person, Customs documentation relating to imports and exports by the person, Accounting records; and Any other records as may be prescribed by the Ministry of Revenue and useful to determine the VAT Liability
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The amount of tax payable or VAT Liability for any accounting period by a person who is
registered or is required to register is the difference between the amounts of tax charged on taxable transactions i.e. the VAT charged on sales and the VAT paid on purchases of goods and services applying the Zero Rate or the Standard Rate. Example 6.1: if a taxable person purchases birr 200,000 goods and services and sales Birr 300,000 taxable supplies during the month of Nehase, the VAT liability will be as follows: Output Tax: 300,000 @ 15 % ..................................... 45,000 Input Tax: 200,000 @ 15%....................................... 30,000 VAT Liability.......................................... 15,000
Example 6.3: Kombolcha Textile Factory Share Company made taxable sales of Birr 80,000
during the month of June 2006. It also made taxable purchases of Birr 50,000 and imported Birr 10,000 during the same month. Required: Determine the VAT Liability or VAT Refund assuming all the prices are VAT Exclusive and the VAT Rate is 15%
Compiled By: Kassahun Boressa, AAU, School of Commerce, Revised in 2011
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Example 6.4: Tabor Ceramics Share Company made taxable purchases of Birr 230,000 and Birr 138,000 taxable import. It also made taxable sales of Birr 345,000. Required: Determine the VAT Liability or VAT Refund assuming that the prices are VAT inclusive and a VAT rate is 15%.
Compiled By: KASSAHUN BORESSA, Lecturer, AAU, School of Commerce, Revised in 2011
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Chapter Objectives
After completing this chapter, you would be able to:
Define Turnover and Turnover Tax Calculate TOT Base and TOT according the tax law Account for Turnover Tax File Turnover Tax as per the filling time
7.1)
What is Turnover? Turnover refers to total revenue or Sales Turnover Tax (TOT) It is a tax imposed on almost all goods and services on the total turnover rather than on the Value Added. Turnover tax is a sales tax. A reduced tax rate is applied for Turnover Tax as compared to the VAT in most of the countries of the world Filing of Turnover Tax Return and Payment Tax payers subject to Turnover Tax shall: Pay the tax for every accounting period by the deadline for filing the Turnover Tax return. The Accounting period for the purposes of Turnover tax shall mean: For Category "A" taxpayers but are not required to register for VAT, the calendar month; For category "B" taxpayers, each three months period commencing from the first day of the Ethiopian fiscal year (tax year); For Category "C" taxpayers, the fiscal year is the accounting period. A Presumptive Turnover Tax shall be payable by Category "C" taxpayers who are not required to keep records. The base for the presumptive turnover tax shall be the total turnover used as base for the income tax.
7.2) Legal Provisions on Turnover Tax The legal provisions are taken form Turnover Tax Proclamation No. 308/2002
Rate of Turnover Tax (Article 4) The Turnover Tax shall be: 2% (two percent) on Goods Sold Locally For Services Rendered Locally; 2 % (Two percent) on Contractor, Grain Mills, Tractors and Combine-Harvesters. 10% (Ten percent) on others; these include services such as Consultancy, Training, Legal advice, Auditing, etc Base of Computation of the Turnover Tax (Article 5)
Compiled By: Kassahun Boressa, AAU, School of Commerce, Revised in 2011
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Base of computation of the Turnover tax shall be the Gross Receipt in respect of goods
supplied or services rendered Obligation to Collect and Transfer the Turnover Tax (Article 6) A person who sells goods and services has the obligation to collect the Turnover Tax from the buyer and transfer it to the Tax Authority. Hence, the seller is principally accountable for the payment of the tax. Exemptions (Article 7) The following transactions of goods and services shall be exempted from Turnover Tax: 1. The sale or transfer of a dwelling use for a minimum of two years, or the lease of a dwelling: 2. The rendering of financial services; 3. The supply of National or Foreign Currency (except for that used for numismatic purposes) and of securities; 4. The rendering by religious organizations of religious or other related services: 5. The supply of prescription drugs specified in directives issued by the relevant government agency, and the rendering of medical services; 6. The rendering of educational services provided by educational institutions, as well as child care services for children at pre-school institutions: 7. The supply of goods and rendering of services in the form of humanitarian aid: 8. The supply of electricity, kerosene, and water; 9. The provision of transport; 10. Permits and license fees; 11. The supply of goods or services by a workshop employing disabled individuals if more than 60%of the employees are disabled; and 12. The supply of books 13. Bread, Injera and Milk are exempted by the Ministry of Finance and Economic Development.
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Turnover Tax liability at the time each taxable transaction occurs. This may have the highest burden of Record keeping and Compliance cost on the taxpayers. The second is to make adjustment for all the transactions of the Tax period at the end of tax period by recording the transactions initially as sales
Example 7.3: A Category B Taxpayer Named NUFTANA Furniture PLC made the
following transactions during a Calendar Month Meskerem, Tikemit and Hidar 1998: Meskerem 1998: Birr 32,000 tables, chairs and beds were sold Tikemit 1998: Birr 27,000 Sofa, Computer Desk, And Tables were sold Hidar 1998: Birr 30,000 Office Furniture was sold Instruction: Determine the transactions and Prepare and File the Turnover Tax Return for the three months ended Hidar 1998 under both separate and adjustment recording method.
Example 7.4: PHOTO KEJELA, A Category C Taxpayer, had a gross receipts of Birr
86,000 for the Tax Year ended 30th of Sene 1998. Determine the Turnover Tax Payable for this Business.
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Chapter Objectives
After completing this chapter, you would be able to:
Understand what excise tax is Identify and excisable goods and Know the excise tax rate applicable on each good Compute excise tax base for goods imported and locally produced Calculate excise tax as per Schedule E Account for excise tax
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SCHEDUL "E"
S. No.
1. 2.
3. 4. 5. 6. 7. 8.
Types of Product Any type of sugar (in solid form) Excluding Molasses Drinks: 2.1. All types of soft drinks (Except Fruit Juices) 2.2. Powder Soft Drinks 2.3. Water Bottled Or Canned In A Factory 2.4. Alcoholic Drinks1 2.4.1. All Types Of Beer & Stout 2.4.2. All Types Of Wine 2.4.3. Whisky 2.4.4. Other Alcoholic Drinks All types of pure Alcohol Tobacco & Tobacco Products 4.1. Tobacco Leaf 4.2. Cigarettes, Cigar, Cigarillos, Pipe Tobacco, Snuff and Other Tobacco Product Salt Fuel-super Benzene, regular Benzene, Petrol, Gasoline and other Motor spirits Perfumes and Toile Waters Textile and Textile products
Tax Rate 33% 40% 40% 30% 50% 50% 50% 100% 75% 20% 75% 30% 30% 100%
8.1. Textile fabrics, knitted or woven of natural silk, rayon, nylon, wool or other similar materials 8.2. Textile of any type partly or wholly made from cotton, which is gray, white, dyed or printed, in piece of any length or width (except Mosquito net and "Abudgedi") and including blankets, bed sheets, counterpanes, towels, table clothes and similar articles 8.3. Garments Personal Adornment made of Gold, Silver or Other materials Disk washing machines of a kind for domestic use Washing machines of a kind for domestic purposes Video decks Television and Video Cameras Television Broadcast Receivers Whether Or Not Combined With Gramophone, Radio, Or Sound Receiver And Reproducers Motor passenger cars, station wagons, utility cars, and land rovers, jeeps pickups, similar vehicles (including motorized caravans), whether assembled, together with their appropriate initial equipment: A. Up to 1,300 C.C (C.C = Cylinder Capacity) B. From 1,301 C.C up to 1800 C.C C. Above 1,800 C.C Carpets Asbestos And Asbestos Products Clocks And Watches Dolls And Toys
10%
Alcohol means Ethyl Alcohol. Pure Alcohol means Alcohol of purity of 80 degree or more; 52
Time of Payment:
Unless decided otherwise, the excise tax on goods specified under the Schedule E shall be payable. When imported at the time of clearing the Goods from Customs area; When produced locally, not later than 30 days from the date of production;
xxxxx xxxxx
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FOH Costs....................................................................... Tax Base for Excise Tax................................................. Tax Rate from Schedule E........................................... Excise Tax Payable.........................................................
If the total amount FOH Cost that includes the Factory Depreciation (either depreciation on factory building or production machineries) is given, the factory depreciation shall be deducted to compute the base of computation of Excise Tax Payable as follows:
Example 8.1: META Brewery used Birr 850,000 malt; Birr 250,000 Direct Labour Cost and
Birr 400,000 FOH to produce 1,400,000 bottles of Beer during the month of Sene 1998. Required: Determine the Excise Tax Liability of the month of Hamle 1998 assuming that the FOH cost includes a factory depreciation of Birr 100,000.
Example 8.2: Assume SIRARA General Trading PLC imported Br 12,000,000.00 merchandise
from China. Br 480,000.00 and Br 120,000.00 Freight cost and Insurance cost was incurred, respectively in respect of goods imported. Required: Determine the Excise Tax Base and Excise Tax Liability
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Chapter Objectives
After completing this chapter, you would be able to:
Understand Customs duty Determine Duty Paying Value as per the customs law in the country Determine the value of imported goods using different valuation systems Understand duties and taxes collected at customs station Compute Customs Duty on Imported Goods Account of Customs Duty in the books of accounts
Government.
Goods shall mean any commodities, personal effect and animals including money. Importation of goods shall mean bringing or cause to be brought, goods through the first
custom station into Ethiopia and Exportation goods shall mean taking or cause to be taken out, goods through the final port of departure from Ethiopia. Thus, Importation and Exportation indicates that goods are crossing Customs Area of Ethiopia. The Customs Area refers to the territory of Ethiopia or boundary of Ethiopia. The goods are crossing the Ethiopian border to outside or inside. The Duty is payable at Customs Stations. Customs station shall mean any place designated as customs office at the port of entry or exit of goods, transit routes or at customs area for the control of import and export goods, collection of duties and taxes; Customs Duty is the responsibility of Ethiopian Customs Authority. The Ethiopian Customs Authority has either a branch offices or customs stations in different part of the Customs Areas to collect the Customs Duty while the head office in Addis Ababa. It has also a police force called Customs Police to enforce the Customs Laws and the Collection of Customs Duty or Tariffs and to Control the Contraband. Customs Police shall mean an armed police force assigned by the Federal Police Commission to enforce customs laws under the command of the Authority. The Ethiopian Customs Authority shall have the following powers and duties: Customs Declaration is a Form prepared by the Customs Authority in which the details of import, export or transit goods are described for the accomplishment of customs formalities.
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Ad-valorem Taxes are taxes or duties levied as a percentage of the Value of Goods and Services. Specific Tax are the taxes levied at a fixed amount, irrespective of the Value of the goods and services.
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1. Transaction Value
The transaction value method is the first method to be applied in customs valuation. Transaction value means the price actually paid or payable by the buyer for the goods
Value Method above, the customs value shall be the transaction value of identical goods sold for export to the same country of importation and exported at or about the same time as the goods being valued. "Identical goods" means goods, which are the same in all respects, including physical characteristics, quality and reputation. 3. Transaction Value of Similar Goods If the customs value of the imported goods cannot be determined under the Transaction Value of the Goods and Transaction Value of the Identical Goods above, the customs value shall be the transaction value of similar goods sold for export to the same country of importation and exported at or about the same time as the goods being valued. "Similar goods" means goods which, although not alike in all respects, have like characteristics and like component materials which enable them to perform the same functions and to be commercially interchangeable. 4. The Deductive Method If the imported goods or identical or similar imported goods are sold in the country of importation in the condition as imported, the customs value of the imported goods under the provisions of this method shall be based on the wholesale unit price at which the imported goods or identical or similar imported goods are so sold in the greatest aggregate quantity, at or about the time of the importation of the goods being valued less all local costs incurred and taxes paid by the buyer. 5. The Computed Value Method The customs value of imported goods at this stage shall be based on a computed value. Computed value shall consist of the sum of: The cost or value of materials and fabrication or other processing employed in producing the imported goods; An amount for profit and general expenses equal to that usually reflected in sales of goods of the same class or kind as the goods being valued which are made by producers in the country of exportation for export to the country of importation; The cost or value of all other expenses. If the customs value of the imported goods cannot be determined under the methods above, the customs value shall be determined using reasonable means consistent with the principles and general provisions of this procedure and on the basis of data available from free sources. With regard to Used Goods the procedure issued by the Federal Government Revenues Board shall be applicable
9.4) Duty and Taxes Collected at the Customs Station from Businesses
From businesses or commercial organizations, the following duty and taxes are collected at time of clearing from customs station: Customs Duty (Article 52 of Proclamation No 60/1997); Excise Tax (Article 6 (2) of the Excise Tax Proclamation No 307/2002);
Compiled By: KASSAHUN BORESSA, Lecturer, AAU, School of Commerce, Revised in 2011
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Value Added Tax (Article 5 of the VAT Proclamation No. 285/2002); and Withholding Tax (Article 52 of the Income Tax Proclamation No 286/2002)
station: Customs Duty (Article 52 of Proclamation No. 60/1997) Excise Tax (Article 6 (2) of the Excise Tax Proclamation No. 307/2002) Value Added Tax (Article 5 of the VAT Proclamation No. 285/2002) this is 15% of the CIF plus Customs and Excise Duty
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Chapter Objectives
After completing this chapter, you would be able to:
Understand differences between accounting standards and tax laws Understand differences between taxable income and book income Discuss Specific differences Identify permanent differences between taxable income and book income and discuss accounting treatments of permanent differences Discuss temporary differences and discuss accounting treatment for inter-period tax allocations Compute deferred tax assets and deferred tax credits Account for both deferred tax assets and credits
statement showing the amount of income subject to Tax. In general, the form and contents of the income statements for tax purposes are similar to the form and contents of the Income Statement for Financial reporting purposes. The Taxable Income in the Tax Return however, is computed with prescribed tax regulations or rules (tax code or laws). Where as, Before Tax Accounting Income or Income as per the Book or merely Accounting Income (Before Tax Financial Income) is measured in accordance with GAAPs. differences arise from some of the following reasons: Depreciation may be computed on Sum of the years Digit method for the Book Purposes but on Straight Line Method for Tax Purposes. Revenue is recognized on accrual basis at the time of Sale for Book purposes or financial reporting purposes but may be recognized on cash basis at the time of cash receipts Expenses are recognized on accrual basis for Financial Reporting purposes but may be recognized on the cash basis for the tax purposes
Permanent Differences
Some of the differences between Taxable Income and Before Tax Accounting Income are
permanent. Permanent differences are items that enter into in the determination of Before
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Tax Accounting Income but never into Taxable Business Income and item that inter Taxable Income but never into Before Tax Accounting Income. There are a variety of Tax Law provisions. Some of the provisions exclude certain revenue from taxation; limit the deductibility of certain expenses and permit the deduction of certain expenses on excess of costs incurred. Permanent Differences affect only one period in which they occur so that they do not give rise to future reversible amount.
Illustration 10.1:
Assume that Ethio Trading Enterprise (PLC) has revenue of Br 240,000.00 for tax purposes and financial accounting purposes during tax year ended June 30, 2003. It has also expenses of Br 140,000.00 for both the tax purposes and financial accounting purposes excluding insurance expense. The enterprise also purchased insurance policy of Br 36,000 on July 1, 2002 that will be allocated to the next three years evenly for financial accounting purposes but immediately deductible for tax purposes. Required: Determine the taxable business income and before tax accounting income and calculate deferred tax credit for the tax year ended June 30, 2003 assuming a flat tax rate of 30%.
Illustration 10.2: Assume that in the year ended June 30, 2004 Ethio Trading Enterprise
(PLC) reported Br 270,000 revenues for both the tax purposes and financial accounting purposes. It also reported expenses of Br 206,000 for both the tax purposes and financial reporting purposes excluding insurance expense. Required: Determine the taxable income and before tax accounting income and calculate the deferred tax credit for the year ended June 30, 2004 assuming a flat tax rate of 30%.
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Illustration 10.3: Assume that BETA Book Publishing (PLC) earned and collected Br
150,000 book publishing fee in 2003 for both the book purposes and tax purposes. The business incurred book publishing expenses of Br 140,000 out of which Br 90,000 is paid in cash. The company uses cash method of accounting for tax purposes and accrual method of accounting for financial accounting purposes. Required: Determine the Taxable and Accounting Income assuming a tax rate is 30%.
Illustration 10.4: Continuing with the above illustration, revenue earned and collected cash
for tax purposes and book purposes is the same Br 180,000. The Book publishing company incurred book publishing expenses 120,000 but paid expenses of Br 160,000 in the tax year 2004. This indicates that Br 40,000 accrued liabilities are paid during the year which is an expense of the year 2003. Required: Determine taxable income and book income assuming 30% flat tax rate in the tax year 2004.
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Chapter Objectives
After completing this chapter, you would be able to:
Define tax planning Compare and Contrast Tax Planning with Tax Avoidance and Tax Evasion Understand and apply tax planning techniques Grasp the tax planning skills Apply tax planning on corporate financing
become more tax efficient year round, taxpayers have to know the spelled out implications; warning about consequences; plenty of useful tips and others. Tax Planning has become an important feature of all business enterprises, new or old, small or big, public or private. Tax Planning is an arrangement of ones financial affairs in such a way that, without violating in any way the legal provisions full advantage is taken of all tax exemptions, deductions, concessions, rebates, allowances and other relief or benefits permitted under the tax laws so that the incidence of tax is reduced to minimum thereby ensuring that the money remaining after payment of tax is kept as high a level as possible. Tax Planning is a legitimate arrangement of ones financial activities in a manner that reduces or defers (postpones) the related Income Tax Expenses Tax Planning is a systematic way of organizing and planning for taxes. Effective business tax planning should be a year-round effort. Business Tax Planning means estimates and programmes that a company carries to minimize the Tax Liability apart from fulfilling legitimate expectations and aspiration of the people. Business Tax Planning demands a through examination of all laws of taxation as failure to recognize the tax implications of business decisions can have serious consequences for the survival and growth of the business, while a step in the right direction could mean a considerable saving of sources; a wrong step will bring disaster to the enterprise. Thus, to avoid uncertainties in future in regard to the tax liability and to avoid harassment at the hands of tax authorities in the matter of assessment, the company should resort to tax planning in its own interest.
11.2) Tax Minimization Methods: Tax Evasion, Tax Avoidance, and Tax Planning
Three methods of saving taxes have been developed in most countries of the world in the past few decades: Tax Evasion, Tax Avoidance and Tax Planning. A great deal of confusion prevails
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in the Business Sector about the correct connotation of these terms. Hence we shall attempt to explain these terms to show that Tax Planning is absolutely legal.
Tax Evasion
Tax evasion is by no means a tax planning because it is a criminal act or offence. It is a commission or omission of an act with the intention to deceive the tax authority. The taxpayer is evading and trying to escape a legally matured tax liability or obligation by dishonest and fraudulent means. Tax evasions might involve simply failing to report income or trying to create excess deductions or False Deductions. The Failure to report income can also be broken down into two subcategories: (A) Evasion of tax on income that is legally earned; and, (B) Evasion of tax on income that arises from an illegal activity such as trafficking in narcotics and other drugs. An example of tax fraud on legally earned income would be the formation of sales companies that appear to deal only with unrelated parties, but in fact deal with related parties, hiding the fact that one owns a particular tax haven corporation. These tax haven corporations are also used to hide corporate receipts or slush funds. It is dubious way of attempting to solve tax problems. Hence tax evasion is illegal, unethical and uneconomical as well. Thus, it should be condemned not only by the Government but by the Businesses as well.
Tax Avoidance
Tax Avoidance is not the same as the tax planning even though the transactions undertaken seem legal and with the spirit and intentions of the tax proclamations and regulations. Tax Avoidance is taken to refer to arrangements by which a person acting within the tax laws reduces his true tax liability, infringing in the process both the spirit and the intention of law. In other words tax avoidance is the art of dodging Tax Authority without breaking the law. It means acting within the framework of law or acting as per the language of law only in form, but murdering the very spirit of tax law and thus acting against the intention of tax laws and defeating the purpose of particular legal enactment. In short, tax avoidance is taking advantage of loopholes in tax laws. Taking advantage of tax loopholes provides a short run benefit because when the loopholes are made public, legislative step will be taken by the Tax Authority.
Tax Planning
Tax planning is a method of planning business affairs by considering the incentives and benefits provided by the legislature. Tax planning takes the maximum advantages of the exemptions, deductions, rebates, relief and other tax concessions allowed by taxation statutes leading to the reduction of the tax liability of the taxpayer. As compared to Tax Avoidance, tax Avoidance is viewed with displeasure by the tax authority as it is an art of escaping the a matured burden of tax without breaking the law and this provides only a short term benefit. On the contrary, tax planning by businesses cannot be called a crime or illegal activity or an immoral action. What constitutes a crime is tax evasion or what is undesirable is tax avoidance, but tax planning benefits the company as well as community. It enables a company to save a good deal of tax and also avoid unwarranted harassment, worry and tension.
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5. 6. 7. 8. 1. 2. 3. 4. 5. 6.
Change the structure of business Invest in tax-wise ways Use of opportunities in foreign Countries Use of losses among a related group of companies
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Chapter Objectives
After completing this chapter, you would be able to:
Define Tax Administration Understand criteria used to evaluate good tax administration Discuss types of taxes collected by Federal government and State governments Comprehend revenue sharing between Federal Government and State Governments in Ethiopia Differentiate Federal Taxpayers and State Taxpayers in Ethiopia Identify measures taken to improve tax administration in Ethiopia Understand the existing problems in tax administration
12.1)
Tax administration refers to the systematic organization and arrangement of elements to collect taxes from taxpayers and to undertake other similar activities by the Tax Authorities of the Federal Government, State and Local Governments. A good tax administration has: Management system through which it carries out its activities Tax Laws or Codes that guide the tax management system Knowledgeable Administrator All governments give much attention to Tax Administration. Tax Experts suggest a number of requirements or criteria for an effective and efficient Tax Administration. These include: Simplification of the Tax Procedures Establishment of separate units to support and develop new tax proposals and to analyze the revenue and economic aspects of changes Provision of training to employees who engages in tax assessment and estimation. There are two types of assessment: Statutory Assessment or Government Assessment and SelfAssessment Development of a good accounting system Monitoring closely the behaviour of taxpayers Numbering of taxpayers Provisions of relief to industries facing difficulty Viewing taxpayers more as a clients than as enemies Encouraging self assessment Educating taxpayers by distributing booklet, public notices, explanations, etc Decentralizations of tax Administration Encouraging Tax Withholding and Record Keeping
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Inland Revenue Authority (Federal or Regional). The Inland Revenue Authority is classified into two: Federal Inland Revenue Authority and Bureaus of Regional Inland Revenue Authorities. Federal Inland Revenue Authority and Bureaus of Regional Tax Authorities collect the all the direct costs (Employment Income Tax, Business Profit Tax, Rental Income Tax and Other Income Tax) and three of the four indirect taxes (Value Added Tax, Turnover Tax and Excise Tax). The Ethiopian Customs Authority is responsible for Collecting Customs Duty. But the responsibility for collecting is not mutually exclusive. Even though the main responsibility of the Ethiopian Customs Authority is collecting Customs Duty, it has to collect Excise Tax, Value Added Tax and Withholding Tax on imported goods on behalf of the Federal Inland Revenue Authorities and Bureaus of Regional Inland Revenue Agencies. The Ethiopian Federal Democratic Republic Constitution has separated the tax revenue to be collected by the Federal Government and State Governments (Article 95 to 100)
international organizations. But now, the case of international organizations is given to the Addis Ababa Region. It shall levy and collect income, profit, sales (VAT and Turnover Tax) and excise taxes on enterprises owned by the Federal Government. It shall tax the income and winnings of national lotteries and other games of chance. It shall levy and collect taxes on the income of air, rail and sea transport services. It shall levy and collect taxes on income of houses and properties owned by the Federal Government; It shall fix rents and services rendered by organs of the Federal Government. It shall levy and collect taxes on monopolies. It shall levy and collect Federal stamp duties. The Federal Government using the two offices FIRA and Ethiopian Customs Authority collect the above taxes
private enterprises within States shall determine and collect fees for land usufractuary rights (Land Taxes) States shall levy and collect taxes on the incomes of private farmers and farmers incorporated in cooperative associations States shall levy and collect profit and sales taxes on individual traders carrying out a business within their territory States shall levy and collect taxes on income from transport services rendered on waters within their territory They shall levy and collect taxes on income derived from private houses and other properties within the State.
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They shall collect rent income on houses and other properties they own. States shall levy and collect profit, sales, excise and personal income taxes on income of
and personal income taxes on enterprises they jointly establish. They shall jointly levy and collect taxes on the profits of companies and on dividends due to shareholders. They shall jointly levy and collect taxes on incomes derived from large-scale mining and all petroleum and gas operations, and royalties on such operations. Types of Joint Revenue 1. Jointly Established Companies Profit Tax Employee Income Tax Indirect Taxes 2. Private Companies Profit Tax Indirect Taxes Dividends 3. Minerals and Petroleum Profit Tax Royalty Revenue Sharing Ratio Federal Government State Governments As per Capital Share As per Capital share 50% 50% 70% 30% Federal Government State Governments 50% 50% 70% 30% 50% 50% Federal Government State Governments 50% 50% 60% 40%
Undesignated Powers of Taxation The House of the Federation and the House of Peoples Representatives shall, in a joint session, determine by a two-thirds majority vote on the exercise of powers of taxation which have not been specifically provided for in the Constitution. Directives on Taxation In exercising their taxing powers, Sates and the Federal Government shall ensure that any tax is related to the source of revenue taxed and that it is determined following proper considerations. They shall ensure that the tax does not adversely affect their relationship and that the rate and amount of taxes shall be commensurate with services the taxes help deliver. Neither States nor the Federal Government shall levy and collect taxes on each others property unless it is a profit-making enterprise
12.3)
The following are the notable steps taken by the government of Ethiopia to enhance efficiency in tax administration: Establishing of a separate unit FIRA
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Performance of tax audit Confidentiality of taxpayers information Code of conduct for tax authority employees Cooperation of other entity TIN (Taxpayer Identification Number) Introduction of Tax withholding system Record Keeping Requirement for Taxpayers Establishment of Review Committee and Tax Appeal Court Provision for Tax Relief Reward for outstanding performance Convenience of Tax Payment System Businesses can directly remit the amount of tax to banks with which the FIRA is doing. Taxpayers information series the tax authority is providing information to the tax payers through leaflets and other publications Automation of the Tax Collection System
12.4)
Tax Declaration Forms there are problems to declare in prescribed forms until July,
2006. still there is no declaration form (Tax Return) for Rental Income Tax, Turnover Tax, other Income Tax and Business Profit Tax Unskilled Employees when withholding system is introduced into the taxation system of the country even the tax officers are not aware of the system. Still the officers are not well trained and educated. This may relate to the ability to employ and retain highly qualified professionals because of low salary scale. Lesser Probability of Tax Audit by the Tax Authority Event though Tax Audit is introduced to the taxation system of the country, the Tax Audit is not performed in the required manner to find out tax evaders TIN is not given to all taxpayers. Employees of either government or private organizations are not given Tax Identification Number (TIN)
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