Value-added tax (VAT)
VAT is a consumption tax that is charged on the supply of taxable goods or services made in Ethiopia and on the importation of taxable goods or services into Ethiopia.
The standard VAT rate is 15% and applies to goods and services that are neither exempt from VAT nor zero-rated.
The major difference between taxable supplies and exempt supplies is that where the supplies are taxable, the registered person is required to charge VAT but is also eligible to recover VAT incurred on such supplies as input tax, whereas VAT incurred on making exempt supplies is not recoverable as input tax.
VAT is chargeable on:
- a taxable supply of goods or services made by a registered person in Ethiopia, and
- the importation of taxable goods and taxable services.
The VAT proclamation provides that a resident entity importing a service is required to account for ‘reverse VAT’ on the services. In this case, the resident entity is required to withhold and pay reverse VAT from the payments made to the non-resident service provider.
A person who, in the course of business, has supplied or expects to supply taxable goods or services whose value is 1 million Ethiopian birr (ETB) or more in a period of 12 months should register for VAT.
A supplier of taxable goods and services is allowed to claim/deduct VAT paid (input tax) on importation or local purchase of goods and services. The claim is made through the monthly VAT returns by reducing the output VAT payable. Input tax is not allowed to be deducted unless a registered person is in possession of a valid tax invoice and uses the purchases for purposes of making taxable supplies.
Where a person supplies partly taxable and partly exempt supplies, input tax attributable to the taxable supplies is deductible in full while input tax relating to exempt supplies is not deductible.
Ethiopia follows the Harmonised Commodity and Description Coding System (HS Codes) for customs purposes.
Customs duty rates in Ethiopia range between 10% and 35% depending on the tariff classification of the goods. Customs duty is applicable on the dutiable value (CIF) at the point of importation into Ethiopia and is required to be paid by the importer of record/declarant.
Customs duty exemption on the importation of capital goods and construction materials necessary for the establishment of a new enterprise or for the expansion or upgrading of an existing enterprise may be granted subject to meeting certain conditions.
Excise tax is charged on excisable goods manufactured in Ethiopia by a licensed manufacturer, excisable goods imported into Ethiopia, and excisable services supplied in Ethiopia by a licensed person. Generally, the rates of excise duty range between 5% to 500%. The 500% applies to goods such as old motor vehicles.
All goods imported into Ethiopia (with a few exceptions) are subject to sur-tax at a rate of 10%. The tax base is the aggregate of the CIF value, customs duty, VAT, and excise duty.
There are no property taxes in Ethiopia.
Stamp duty is payable on instruments such as Memorandum and Article of Association of any business, cooperative, or any other organisation, bonds, warehouse bonds, employment contracts, registration of title to property, lease (including sub-lease), and transfer of similar rights (lease), etc.
The stamp duty rates of bonds, registration of title to a property, and lease are 1%, 2%, and 0.5%, respectively, of the value. Stamp duty on the other instruments is nominal.
Capital gains tax (CGT)
Taxable assets/properties are classified into two groups (namely ‘class A’ and ‘class B’) for CGT purposes.
Class A taxable assets relate to immovable assets, and the CGT rate is 15%. Class B taxable assets relate to shares and bonds, which attract CGT at the rate of 30%.
In relation to shares, CGT applies on gains derived from the direct transfer of shares issued by a resident company. It also applies on indirect share transfer where the gain relates to disposal of a membership interest in a body if more than 50% of the value of the interest is derived directly or indirectly through one or more interposed bodies from immovable assets located in Ethiopia.
Employment income derived by an employee is Ethiopian-source income to the extent that it is derived in respect of employment exercised in Ethiopia wherever paid or it is paid to the employee by or on behalf of the government wherever employment is exercised.
Employers are required to withhold tax on payments to employees in respect of employment services that they have rendered. The tax is withheld through the Pay-As-You-Earn (PAYE) system. The tax deducted should be remitted to the Ministry of Revenue (MoR) on or before the 3oth day of the month following the payroll month.
Social security contributions
All entities are required to register with the Private Organisation Employees Social Security Agency (‘pension fund’). The employer is required to contribute 11% of the employee’s basic salary to the scheme, while the employee’s contribution is 7%.
It is mandatory for all Ethiopian citizens to contribute and optional for foreign citizens with Ethiopian origin. Foreign citizens with no Ethiopian origin are not allowed to contribute to the fund.