Chapter 2

Income tax
Proclamation 979/2016
 I. Definitions
Income
Income is defined as “every form of economic
benefit including non recurring gains in cash
or in kind, from whatever source derived and
in whatever form paid credited or received”
art 2(14).
 Gross income Vs. Taxable Income
• ‘Gross income’ is taken to mean the total or
aggregate income received by an individual.
Whatever their sources may be, any types of income
that an individual collects constitute his/her gross
income.
• Taxable Income” shall mean the amount of income
subject to tax after deduction of all expenses and
other deductible items allowed under tax laws
II. Sources of Income subject to taxation. Art 6
• Employment;
• Business activity;
• Entertainment, music and personal activities of a sports
person;
• Insurance premium
• Winning from game of chance
• Entrepreneurial activities of a non-resident through a
permanent establishment in the country;
• Movable property attributable to a permanent establishment
in Ethiopia;
• Immovable property and apparatuses thereof,
• Livestock and inventory in agriculture and forestry;
• Alienation of property;
• Dividends of a resident company;
• Profit shares paid by a resident registered partnership;
interest; and license fees.
 Income Tax Jurisdiction:
Global Jurisdiction on Residents and Source
Jurisdiction on non-residents
• A look at the Income Tax Proclamation of 2016 reveals that, in
Ethiopia, income tax has global jurisdiction on residents
whereas it has a source jurisdiction on non-residents.
• Accordingly, the income tax law is applicable to residents of
the Federal Democratic Republic of Ethiopia with respect to
their worldwide income. Therefore, wherever a resident earns
his/her income from, he/she is bound by the provisions of the
proclamation.
• On the other hand, the proclamation has applicability on non-
residents of the country to the extent that the source of their
income is in Ethiopia. Therefore, where the source of a
portion of a certain non-resident’s income is in Ethiopia,
he/she will be liable to pay tax according to Ethiopian income
tax laws on that portion the source of which is in Ethiopia.
The Foreign Tax Credit
• The concept of foreign tax credit deals with the
administration of taxes on income that is derived
from a foreign source. Article 45 of the Income
Tax Proclamation is devoted to foreign tax credit.
• Accordingly, if during the tax period a resident
derives foreign source income, the Income Tax
payable by that resident in respect of that income
shall be reduced by the amount of foreign tax
payable on such income. The amount of foreign
tax payable shall be substantiated by appropriate
evidence such as a tax assessment, a withholding
certificate or any other similar document
accepted by the Tax Authority
• However, the reduction of the Income Tax shall not
exceed the tax payable in Ethiopia that would
otherwise be payable on the foreign source income.
In the case of a taxpayer subject to Income Tax on
Schedule C income, any such reduction of tax shall
be limited to the tax that would otherwise be payable
in Ethiopia computed as if Article 28 (loss carry
forward) of the Income Tax Proclamation applied
separately to each foreign country in respect of profit
and losses derived from sources therein. The
reduction of tax shall be calculated separately in
respect of each foreign country from which income or
profit is derived.
 Income Tax Structures in General: Global and
Schedular
• There are two important systems of income
taxation that have been adopted by countries
around the world. These are the global and the
schedular systems of taxation.
• The basic feature of the global system of income
taxation is that the tax is imposed on the total
income of an individual regardless of the types of
activities that he/she pursues and regardless of the
sources from which he/she obtained his/her income.
Accordingly, under the global system of taxation,
an individual has to declare his/her aggregate
income for the purpose of taxation.
• On the other hand, the scheduler system of income
taxation, which is the system adopted in Ethiopia, takes
the different sources of income of an individual into
consideration for the purpose of taxation.
• Accordingly, income is identified by its sources and
each source has its own procedures and rates for the
determination of income tax; thereby requiring an
individual to declare his/her income from each source
separately.
• Under this system, each source of income is considered
to have its own identifying unique features for the
purposes of taxation. Therefore, before taxation,
sources of income have to be properly identified
according to the correct schedule set by the system.
• In its purest form, global income taxation requires
aggregation of all incomes of individual or any
other “taxable unit” without any exceptions, and
applies a single progressive income tax rate upon
the taxable income.
• Global income tax model, again in its purest form,
allows deductions for all expenses regardless of
the source of income. The difference between
total income from all diverse sources and total
expenses from all activities makes up the taxable
income, upon which the progressive income tax is
then imposed.
The advantages of a global income tax structure are many.
• One advantage is that the global income tax structure is
more amenable to achieving the goals of vertical (and
horizontal) equity than schedular income tax structures.
• A global income tax structure is able to pierce the thicket of
sources of income and apportion income tax liability on the
basis of the aggregate income derived by individuals and
overcomes the problems of fixing tax liability on the basis
of sources – which are not important considerations in
ensuring tax equity.
• Individuals who earn income from multiple sources and
individuals who earn income from a single source are more
likely to bear identical or at least comparable burdens of
income tax liability under a global income tax structure
than a schedular income tax structure.
• Besides, while many countries are apprehensive about the
administrative burdens of a global income tax system, the
proponents of a global income tax structure have argued that a
global income tax structure is administratively simpler for
taxpayers who obtain income from multiple sources, as these
individuals are required to file a single tax return (usually at
the end of the tax year) instead of having to comply with
multiple income taxes under typical schedular income tax
structures.
• It is also argued that global income tax systems are less
susceptible to tax planning, providing thereby less temptation
for lots of administrative expenses spent in trying to place
income under one heading rather than another.
• Scheduler income tax
• Schedular income tax systems stand in direct
theoretical opposition to the underlying notion of the
global income tax structures. Schedular income tax
systems partition income into specific sources of
income and impose separate income tax rules and
rates upon these individual sources of income.
• The extreme forms of schedular income tax structures
treat each source of income as if it were different, and
completely disregard the fact that the individual or
the taxable unit in general is one person deriving
income from multiple sources.
• Each separate source (which may be labeled and
identified under a “schedule,” or a “box,” or a
“category” or a “part” in different income tax
systems), has its internal rules of income tax
computation and separate income tax brackets and tax
rates. The separate rules determine the amounts to be
included as income in each category and amounts to
be excluded from that category as well as determining
whether certain expenses are deductible and to what
extent.
Characteristics of scheduler income tax structure
I) Amounts included in income (and at times excluded
from income) and deductions are determined
separately;
ii) Any amount, not included in any schedule, box,
category or part, generally remains un-taxable unless
there is a separate schedule with a catch-all phrase
that seeks to capture all other “undesignated” income;
iii) Deduction of expenses for certain sources or
categories of income is either prohibited or extremely
limited;
IV) A loss incurred in connection with one category of
income is often not allowed to be offset against any
other category of income;
V) The income brackets and tax rates are developed for
each category of income, and sometimes these
brackets and tax rates may not even be comparable
with one another ; and
VI) The assessment and collection measures are often
different for each source of income.
 In terms of major heads of income, the Ethiopian
income tax system is at the moment composed of four
major bodies of income tax laws:
• a. Agricultural Income Taxes
• b. Petroleum income Taxes
• c. Mining Income Taxes; and
• d. The Main Income Tax System
• Petroleum and mining income tax laws exhibit
substantial affinities with each other in content, in
administration, etc., a fact that justifies their treatment
together.
 Major Schedules of the Income Tax, Art 8
The working law on income taxation in Ethiopia, the
Income Tax Proclamation No. 979/2016, has
classified sources of income into five schedules.
Therefore, income taxation in the country is
undertaken based on these schedules, which have
been systematically classified as:
 Schedule A Income from Employment
 Schedule B Income from Rental of Buildings
 Schedule C Income from Business
 Schedule D other income and
 schedule E. exempt income
 Schedule A Income
• The first schedule of our income tax law, as
provided in the Income Tax Proclamation of 2016,
i.e. schedule A provides for the tax rate and
modality of assessment of income tax collected
from employment. Articles 10-12 of the
proclamation govern the modalities and rates of
taxation on such income.
a. The Definition of ‘Employment’ for Tax Purposes
b. Tax Rate and Tax Base
c. Exclusions from Gross Income
d. Exemptions
• As can be inferred from Articles 2(12) and 12 of the Income
Tax Proclamation, employment is any arrangement, whether
contractual or otherwise, whereby an individual to be called
the employee is engaged, whether on a permanent or on a
temporary basis, to perform services under the direction and
control of another person to be called the employer.
• Contractors are excluded from the ambit of employees by
way of Article 2(12), which in (b) defines a contractor as an
individual who is engaged to perform services under an
agreement by which the individual retains substantial
authority to direct and control the manner in which the
services are to be performed.
• Looking to the whole picture, employment income tax is tax
that is imposed upon any payments or gains in cash or in
kind received from employment by an individual,
including income from former employment or otherwise
from prospective employment.
 Employment Employment
income/month income tax rate
0- 600 0%
601- 1650 10%
1651- 3200 15%
3201- 5250 20%
5251- 7800 25%
7801-10900 30%
Above 10900 35%
Exclusions from Gross Income
As of principle, Schedule A applies to tax levied
on employment income in the sense that income
tax will be levied on any gains in cash or in kind
which have been received from employment.
However, certain exclusions have been provided
by Council of Ministers Income Tax Regulations
No. 78/2002. According to Article 3 of the
regulation, the following categories of gains have
been excluded from the ambit of taxable income
and thus will not be subjected to income
taxation.
a. amounts paid by employers to cover the actual cost of
medical treatment of employees;
b. allowances in lieu of means of transportation
granted to employees under contract of employment;
c. hardship allowance;
d. amounts paid to employees in reimbursement of
traveling expenses incurred on duty;
e. amounts of travelling expense paid to employees
recruited from elsewhere than the place of
employment on joining and completion of
employment or in case of foreigners traveling
expenses from or to their country, provided that such
payments are made pursuant to specific provisions of
the contract;
• allowances paid to members and secretaries
of boards of public enterprises and public
bodies as well as to members and secretaries
of study groups set up by the Federal or
Regional Government;
• income of persons employed for domestic
duties;
 Schedule B Income

• The second schedule under the Ethiopian

Income Tax laws, Schedule B, provides for the
taxation of income earned from rental of
buildings. Articles 13 -17 of the Income Tax
Proclamation are devoted to the modalities
and rates of taxation on income derived from
the rental of buildings.
The Scope of Schedule B Income
• The income to be taxed under Schedule B of
the Income Tax Proclamation is provided by
Article 13 of the Proclamation, which states
that “Income tax shall be imposed on the
person driving income from renting building
or buildings.”
• The income from the rental of buildings is to
be computed based on the procedures,
requirements and modalities set forth by
Article 14 & 15 of the Proclamation.
 Taxable Rental Rental
income/year income tax rate
0- 7200 0%
7201- 19800 10%
19801- 38400 15%
38401- 63000 20%
63001- 93600 25%
93601-130800 30%
Above 130800 35%
• Taxable rental income art 15
TRI=GI-D
Gross income includes
a) All amounts derived by the tax payer during the year under the lease
agreement
b) All payments made by the leasee during the year on behalf of the lessor
according to the lease agreement.
c) The amount of any bond, security, or similar amount that, during the
year, the tax payer is entitled to retain as a result of damage to the
building and that has not been used by the tax payer to repair the
damage to the building.
d) The value of any renovation or improvement made under lease
agreement to the building when the cost was borne by the leasee in
addition to the rent payable to the tax payer
Deduction of Expenses under Schedule B
• taxes paid with respect to the land and buildings being
leased; except income taxes; and
for taxpayers not maintaining books of account, half (1/2) of
"the gross income received as an allowance for repairs,
maintenance and depreciation of such buildings, furniture
and equipment;
for taxpayers maintaining books of account,
• the expenses incurred in earning, securing, and maintaining
rental income, to the extent that the expenses can be proven
by the taxpayer and subject to the limitations specified by this
Proclamation;
=> deductible expenses include (but are not limited to)
the cost of lease (rent) of land, repairs, maintenance,
and depreciation of buildings, furniture and
equipment as well as interest on bank loans, insurance
premiums. 15(7)
 Schedule C Income {art 18_27]
• The third schedule of the Income Tax law of
Ethiopia, Schedule C, provides for the taxation
of income earned from businesses, i.e. from
entrepreneurial activities. Articles 17 – 27 of
the Income Tax Proclamation are devoted to
the modalities of assessment of taxation
under Schedule C.
The Scope of Schedule C Income
• Business income tax or corporate tax as commonly referred
to relates to direct tax levied by various jurisdictions on
the profits made by companies or associations.

• As Schedule C applies to business income tax, it is only

proper to start this discussion by defining what a business
is. According to Article 2[2(a-c)] of the Income Tax
Proclamation, business refers to “any industrial,
commercial or vocational activity or any other activity
recognized as trade by the Commercial Code of Ethiopia
and carried on by any person for profit.”

• And when one looks to the Commercial Code for reference,

we can find that Article 5 provides for a definition to be
referred to.
The taxable income art 20
• TBI= business income –deductions allowed by the law
• Business income art 21
• Deductions art 22
• according to Article 20 of the Income Tax
Proclamation, taxable business income is to be
determined “per tax period on the basis of the
profit and loss account or income statement,
which shall be drawn in compliance with the
Generally Accepted Accounting Standards”,
subject to the provisions of the Income Tax
Proclamation and subsequent directives to be
issued by the Tax Authority.
 The tax rate of Schedule C Income
• The tax rate of Schedule C income is provided by article
19 of the Income Tax Proclamation.
• Accordingly, businesses (bodies) are required to pay
30% flat rate of business income tax; and other
taxpayers under Schedule C, i.e., unincorporated or
individual businesses are required to pay taxes ranging
from 10% to 35% according to the following table:
• Birr 0 to 7200 0%
• Birr 7201 to 19,800 10%
• Birr 19,801 to 38,400 15%
• Birr 38,401 to 63,000 20%
• Birr 63,001to 93, 600 25%
• Birr 63, 601 to 130, 800 30%
• Over Birr 130, 800 35%
 Deductions of Schedule C Expenses
• Article 20 of the Income Tax Proclamation
provides that deductions of Schedule C
expenses will be allowed for expenses incurred
for the purpose of earning, securing, and
maintaining that business income.
• However, these deductions will be allowed
only provided that the taxpayer can prove the
expenses and subject to the limitations specified by
law.
 Deductible Expenses art 22
• The direct cost of producing the income. Good examples of
such expenses are the expenses incurred in manufacturing,
importation, selling, transportations etc
• General and administrative expenses connected with the
business activity. These are expenses incurred for the
maintaining of the business activity.
• Premiums payable on insurance directly connected with
the business activity.
• Expenses incurred in connection with the promotion of the
business inside and outside the country subject to the
limits set by the directives issued by the Ministry of
Revenue.
• Commissions paid for services rendered to the business
provided.
• If the tax authority has reason to consider that the
total amount of salaries and other personal
emoluments payable to the manager or managers of a
private limited company is exaggerated, it may reduce
the said amount for taxation purposes to the limit
which, in view of operations of the company, appears
justifiable, either by disallowing the payments made,
or in any other way which may be just and appropriate.
• Sums paid as salary, wages or other emoluments to the
children of the proprietor or member of the
partnership shall only be allowed as deduction if such
employees have qualifications required by the post to
which they are positioned
Interest on loan[art 23] provided that the interest charged by the
business is paid
a) To lending institutions recognized by the National Bank of Ethiopia;
b) To foreign banks permitted to lend to enterprises in Ethiopia (note here
that interest paid to foreign banks can only be deductible upon fulfilling);
and
c) In excess of the rate used between the National Bank of Ethiopia and the
commercial banks increased by 2 percentage points.
Gifts and donations [art 24] gifts and donations will be allowed as
deductions provided that the following conditions are fulfilled:
a) To Ethiopian charities and Ethiopian societies;
b) The contribution is made in response to the emergency call carried by
government to defend the sovereignty and integrity of the country, to
prevent man made or natural catastrophe, epidemic or for any other
similar cause; and
c) The deductions to be made per the above conditions can only be made
where the amount of the donation or grant does not exceed 10% of the
taxable income of the taxpayer.
 • Non deductable expenses and losses [Art 27]
• Schedule D_ Other income Art 51-64
 Income of non residents
 Taxation of recharged technical fees and royalties
 Taxation of non resident entertainers
 Royalties
 Dividends
 Interest
 Income from game of chance
 Income from causal rentals
• Schedule E_ Exempt Income ART 65