Subject to certain conditions, business expenses are generally deductible to the extent they are incurred for the purpose of earning, securing, and maintaining business income.
Depreciation and amortisation
The depreciation rates range between 5% to 30% depending on the type of the asset. A taxpayer can use either a straight-line or diminishing value basis on most of the business assets, and the taxpayer is required to apply the same method of depreciation used in its financial accounts. However, some assets, such as business intangibles and buildings/structure improvements, are required to be depreciated on a straight-line method only.
The tax depreciation rates are as follows:
|Capital assets||Depreciation rate (%)|
|Buildings and structural improvements||5||N/A|
|Computers, software, and data storage equipment||20||15|
|Depreciable assets used in mining and petroleum operations||25||30|
|Any other depreciable asset||15||20|
Pre-operational expenses that provide benefit or advantage for more than one year fall under the meaning of business intangibles and qualify for tax depreciation at the rate of 25% on a straight-line basis.
The domestic tax law prohibits deduction of interest expense where the rate of interest exceeds the rate used between the National Bank of Ethiopia (the Central Bank) and the commercial banks by two percentage points. This restriction does not apply if the funds are borrowed from financial institutions recognised by the National Bank of Ethiopia or foreign banks permitted to lend to enterprises in Ethiopia.
Ethiopia also has thin capitalisation rules (see the Group taxation section).
Identifiable bad debts are allowed if the company has taken all reasonably necessary steps including legal action to recover the debts without success.
Donations are deductible where the donations are made to Ethiopian charities and Ethiopia societies or where the donations are made in response to a call for development or an emergency issue by the government to defend the sovereignty and integrity of the country or provide relief in case of man made or natural disasters.
Fines and penalties
A fine or penalty imposed, or punitive damages awarded, for violation of any law or regulation or contract is not deductible.
Net operating losses
Generally, tax loss incurred in a given year of income can be carried forward to the following tax year. If the loss is not fully utilised in the second year, the amount is carried forward to the subsequent years, up to a maximum of five years from the year the loss was incurred.
However, if there has been any two years that a person has incurred a loss and each of those losses have been carried forward, the person is not permitted to carry forward any further losses.
The tax law allows tax losses accumulated during tax holiday periods to be carried forward for half of the tax holiday period post expiry of the tax holiday.