Among the various measures identified as helping to tackle tax avoidance, Ethiopia is proceeding with legislative improvements.
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Ethiopia has one of the lowest tax revenue-to-GDP ratios in Africa. [1], Multiple factors account for the inefficiency of the taxation system. People may say they don't trust the government with their money or are lost in the money-hiding games, while the country is struggling with budget insufficiency. Among the various measures identified as helping to tackle tax avoidance, Ethiopia is proceeding with legislative improvements.
As long as it’s legal…
Over 67% of companies registered at the federal level in Ethiopia declare no income by the end of the fiscal year. The number of those filing for bankruptcy is on the rise. According to the Ministry of Finance, many corporations in Ethiopia regularly avoid taxes through loopholes in the system. A proclamation has been drafted by the Minister to tackle this and many challenges in the system.
Inconsistencies arise when businesses claim to have gone bankrupt every year but continue to operate. A failed business would have to close down, or something isn’t adding up. To the minister, it’s such playing around with the rules that creates huge national income deficits. The new framework dictates pre-paid compulsory taxation rates before the financial year. Once the claimed bankruptcy is confirmed, the prepaid tax is compensated in the following fiscal year. This measure is regarded as an improvement to the system, making it more transparent and efficient.
Paying the government in advance
The other direction is on tax prepayment for category A taxpayers, those with annual income exceeding ETB 2,000,000. A quarter of the previous year's profit tax is paid every three months. By year-end, if the prepayment is less than or more than the financial year’s taxable profit, the excess is paid up or refunded. The Minister rationalises; as income flows throughout the year, so should tax. It explains how the periodic tax collections would ease budget shortages for the government. Supposedly, this alleviates end-of-year cash pressure on the payers.
In countries like Belgium, there is a somewhat similar quarterly tax payment, but it isn’t mandatory. [2] Even if not always compulsory, in countries like Spain, companies usually opt for periodic payments to taxation in an annual lump sum. They say bulk payments have a grave effect on their cash flow. [3] In South Africa, provisional tax payments are made twice a year before the end of the financial year. A third and final settlement is paid within 6 months after profit assessments are made.
And as a Bonus…
Ethiopia’s new tax reform will create new taxable citizens: digital content creators. The federal government’s proposed bill is expected to levy a 15% tax on all earnings and proceeds from content creation. This includes, but is not limited to, platform monetization, affiliate marketing, and merchandise sales. What makes this bill interesting is that the tax will be collected from both resident and non-resident creators as long as they generate income from audiences inside Ethiopia.
With this bill, Ethiopia’s digital creator economy, which was largely informal, is going to be more formal. The fast growth of the creator economy has made it noticeable to the authorities, who are just recognizing its monetary value. Ethiopia isn’t the only African country to do this, as countries like Uganda, Kenya, and Ghana also tax influencer income. [4]
Bottom Line
In the effort to broaden its tax base to subsidize its increasingly strained budget, Ethiopia’s citizens are now carrying an even heavier tax load. The sentiments are far from positive [5], but the government insists the move is necessary to sustain public services and reduce reliance on foreign aid. However, critics argue that the burden is being disproportionately borne by the working and lower-middle classes, who are already grappling with rising inflation, unemployment, and stagnant wages. Without meaningful tax reforms that ensure fairness and transparency, public trust in the system may continue to erode.
