Employment income tax,
Business income tax;
Rental income tax,
Capital gains tax,
Capital
Taxes on lottery and other chance winning,
Tax on royalty,
Tax on Interest,
Tax on Dividend, and
Tax on Casual rental of property.
According to Federal Income Tax Proclamation No.
979/2016,
Category “A” taxpayer being
Bodies; PLC, [Link], LLC
A person with annual gross income of Br.
1,000,000 or more;
Category “B” taxpayer
A person with annual turn over Between Br. 500,000
or more but less than 1,000,000;
Category “C” taxpayer being a person, other than a
body, having an annual gross income of less than
Br. 500,000.
The period of tax assessment is one fiscal
year.
For an individual (category C), the one-year
period starts on Hamle 1 and ends on Sene 30
and
The accounting year of the body might start at
any month but should not exceeds 12 months.
This requires bodies to obtain permission from
the authority
The period within which the taxable income
should be declared and paid shall be the same
as that for business income tax.
That is,
Category “A” taxpayers within months,
Category “B” within months and
Category “C” taxpayer shall pay tax on the 7th
day of July to the 6th day of August each
fiscal year.
Income Taxes ( Direct taxes)
Federal Income Tax Proclamation No. 979/2016.
I. Employment income is categorized as schedule
“A”
II. Income from rental as schedule “B”
III. Income from business as schedule “C”,
IV. All other direct taxes together as schedule “D”
income and exempt income as schedule “E”.
Every person deriving income from
employment is liable to pay tax on that
income at the rate specified in Schedule “A”
set out in Article 11 of the proclamation No
979/2016.
It refers to income, which is .
Proclamation No 979/2016 Regulation No410/2017 &
Directive 1/2019
Casual employees - working & not
attended vocational trainings
Domestic servants: home servant, gardener
Pension, provident fund and all other retirement
benefit ( of the monthly salary of
employee)
Transportation allowance
– for moving from place to pace for work
• Transportation allowance for travelling from
home to work & from work to home –
• If transportation is paid to a foreigner, - free of
tax up to the amount paid on
• If an employee is at far from residence, & paid
transportation for visiting of his family, & is
employer’s debt in contract, -
Hardship, Desert area/ frost area, chemical,
allowance
Reimbursed medical expense
Traveling expenses and per diem payments (for
traveling >25KM away) on a tour of duty up to
which ever is higher
In case, if the employee travelling on a tour of
duty presents for bedroom, freed of tax
accordingly. But per diem for foods & drinks freed
up to
Traveling expenses and per diem payments (for
traveling >25KM away) to
on a tour of duty up to
In case, if the employee travelling on a tour of
duty presents for bedroom, freed of
income tax accordingly. But per diem for foods &
drinks freed up to
Employment Income tax…
Allowances paid to the members and
secretaries of the board of public
enterprises
Foreign personnel employed in Embassy,
Legation, Consulate or mission who are
bearers of diplomatic passport
Compensation paid for personal injury or
the death of another person
Salaries paid to domestic servants
Employment income…
• Payment of Withholding Tax
• within after the end of the month in which the
withholding income was paid.
• For failure to withhold: the withholding agent shall be
personally liable to pay the amount of tax to the authority.
• The schedule-A
Income Rate Deduction
0-600 0 0
601-1650 0.10 60
1651-3200 0.15 142.5
3201-5250 0.2 302.5
5251-7800 0.25 565
7801-10900 0.3 955
> 10,900 0.35 1500
• Example: Ato Bekele is an employee of Tiret Company and his monthly basic
salary is Br 5,800. In addition he is getting Br 500 monthly house allowance.
• Required: Determine his taxable income and income tax liability.
Solution:
Taxable income = Br 5,800 + Br 500 = Br. 6,300
Tax liability = (Taxable income X Tax rate for the Bracket) – Deduction
= (6,300 X 25%) – 565.00 = Br 1,010.00
Recording
i) Recording personal income tax data
To record payment of salary to employee:
Salary Expense ……………………..……… xxx
Employment Income Tax Payable …….. xxx
Cash …………………………………………………xxx
ii) To record the payment of withholding tax to Federal Inland Revenue
Authority:
Employment Income Tax Payable …………. xxx
Cash ……………………………………. xxx
Determination of Income
Rental Income includes rent of building and rent of
furniture and equipment if the building is fully furnished.
Gross income = cash + any cost incurred by the lessee for
improvement to the land or building in accordance with
the contract of lease.
do not :
A) Any fees and charges, but not tax, - in respect of the land
or building leased and paid by the taxpayer during the
year
B) An amount equal to of the gross rental income
Rental…
A. The cost of the lease of land on which the building is situated
B. Repairs and maintenance expenses actually incurred
C. Depreciation on building (and furniture and equipment if fully
furnished) per income tax proclamation
D. Interest on loan if any
E. Insurance premium paid on insurance of building
F. Fees and charges, but not tax, levied by a state or city administration
in respect of the land or building leased
The schedule –B
Income level Rate Deductions
0 -7,200 0% 0
7,201-19,800 10% 720
19,801-38,400 15% 1,710
38,401-63,000 20% 3,630
63,001-93,600 25% 6,780
93,601-130,800 30% 11,460
Over 130,800 35% 18,000
Example
• Assume that ABC Company rented a furnished office building to XYZ Company
for Br. 50,000 per month on Hamle 1, 2009 for 5 years. The following data
pertain to the expenses incurred and other allowable deductions. The
company keeps books and records properly.
• Tax on building …………………Br 4,400
Tax on land………………………….. 4,160
Maintenance on building…….. 24,000
Depreciation on building (for 12 months) ……….50,000
Interest on loan (for 12 months) …………………….15,000
Insurance premium (for 12 months) …………………6,000
Required:
• Compute rental income tax for the year ended Sene 30, 2010.
Solution:
Annual Rental Income 50,000 X 12 = Br 600,000
Less: Allowable Deductions:
Maintenance 24,000
Depreciation 50,000
Interest 15,000
Insurance 6,000 (95,000)
Taxable Income Br 505,000
Rental Income Tax for The year ended Sene 30, 2010 =
(Br 505,000 X 35%) – Br 18,000 = Br 158,750
Includes:
o Income from business other than rental and
income generated by bodies
o It requires preparation of income statement.
oCategory A tax payers prepare both statement
of profit and loss & balance sheet
oCategory B tax payers are required to submit to
tax authority Income statement.
oTotal Revenue – total expense & cost = net
income before tax (EBT)
o
COGS
General and administrative expenses
Depreciation expense
Premium payable on insurance
promotion Expense
Commission
Any payment made by a branch, subsidiary or associated company in Ethiopia
to the foreign head office for services rendered (actually), provided that such a
services cannot be rendered by any other person at a lower cost
Salaries, wages
,
: for five years & not more than two year losses is
carried forward
Donations and gifts - only if it does not exceed 10% of the taxable income
Allowables….
debt
lending institutions recognized by NBE or a foreign bank permitted
to lend. If its paid to related person who is a resident of Ethiopia is
not allowed except when the interest is included in the schedule ‘D’
of the related person.
• DONATIONS AND GIFTS: given to Ethiopian Charities, & charities in
Ethiopia & in response to a call by government for development or
an emergency
there are two options:
In both options, partial depreciation is required
No pooling is allowed, asset shall be depreciated partially for partial year
Assets Straight Explanations
line Rate
Building: Building , road, driveway, car park,
fence, or wall.
Intangible Assets & green house Intangible assets with > 10 years life
Computers information systems, software
products and data storage equipment
Intangible assets Intangible assets with < 10 years life
preliminary expenditure, Pre-operating expenses
Assets in mining and petroleum
development operations
All other business assets: All other assets not under any of the
above list
:
The same rates specified for straight line should be
applied.
The base is net book value of the assets at the
beginning of each year.
If a building is used partially as a business asset,
Depreciation is computed proportionately. If the
depreciation base is Br and less, the entire
amount is deducted as deprecation.
Maintenance and improvement expense are
deductable to the extent not exceed 20% of the
depreciation base at the end of the year.
Capital expenditure, addition, betterment, extra
ordinary repairs (>20% of value of the asset)
Additional investment: an increase in the share
capital of a company or the original capital of a
registered partnership
Pension or provident fund -excess of 15% of BS
Dividends and paid-out profits shares
An expenditure or loss - recovered
A fine or penalty imposed
Income tax paid under any tax law or recoverable
value added tax
Representation expenditures of an employee in
of the employment income
Entertainment: the provision to any person of food,
beverages, tobacco, accommodation, amusement,
recreation or hospitality of any kind) :
I. When the person’s business involves the provision of
entertainment or
II. To the extent that the expenditure is allowed as a
deduction under a directives issued by the minister
relating to food provided for free to employees by an
employer conducting a mining, manufacturing or
agricultural business
A donation and gift other than permitted by regulation
Personal consumption expenditure
A loss on the disposal of business asset by a taxpayer to a
related person
• The procedure for the assessment of
business income tax takes two forms:
( category A & B)
Category A tax payers are required to submit
statement of profit & loss and balance sheet
but category B submit income statement to
tax authority to help assess their income tax.
. (category
C)- this category tax payers can maintain
books of account voluntarily.
• Corporate businesses ([Link], plc & Corporations)
are required to pay flat rate of business
income tax.
• For unincorporated or individual businesses the
business income tax ranges from
• The schedule-C Income range rates Deduction
0 -7,200 0% 0
7,201-19,800 10% 720
19,801-38,400 15% 1,710
38,401-63,000 20% 3,630
63,001-93,600 25% 6,780
93,601-130,800 30% 11,460
Over 130,800 35% 18,000
Recording Business Income Tax
Example: Mohammed enterprise, unincorporated business has reported a taxable
income of birr 50,000 at the tax year ending Sene 30, 2010.
• Required;
1) Determine the amount of business income tax using progression and deduction
method.
2) Record the journal entries for income tax liability
Solution;
1) A- progression method;
Business income Tax rate Business income tax
7,200 exempted 0
12,600 10 % 1,260 (12,600*10%)
18,600 15% 2,790 (18,600*15%)
11,600 20% 2,320 (11,600*20%)
Total= 50,000 6,370
Or
= (50,000) X 20% - 3,630
= 10,000 – 3,630
= 6,370
2) The required journal entries
Income tax expense -------------- 6,370
Income tax payable -------------------- 6,370
The subsequent payment of income tax to the income tax authority is recorded as
Income tax payable -------------- 6,370
Cash -------------------------------------- 6,370
1.
For insurance premium or royalty, 5% of the gross
amount of the premium or royalty;
For dividend or interest, 10% of the gross
amount of the dividend or interest;
For management or technical fee, 15% of the
gross amount of the fee.
Taxed at the rate of 10% on the gross income
derived from the performance without deduction
of expenditures.
Tax on Income from Royalty- taxed at rate of 5%.
-copyright, literary, artistic or scientific work; films or tapes for radio and TV
broadcasts; patent or trademark, design, model, plan, or secret formula; any
industrial, commercial, scientific equipment or experience, etc.
2. Tax on Income paid for Technical Services – taxed at 10%
By residents for services rendered outside Ethiopia
3. Tax on Income from Games of Chance – taxed at 15%
This includes income from lottery and other chance winning on above Br 1,000.
The payer withholds tax and pays tax office within the time specified.
4. Tax on Income from Dividends – taxed at 10%
The payer deducts tax at source and remits to the tax office like other Schedule
“D” income tax.
5. Income from Casual Rentals – taxed at 15%
A person who derives income from the casual rental of asset in Ethiopia
(including any land, building, or movable asset) shall be liable for income tax on
the annual gross rental income at the rate of 15% of the gross amount of the
rental income.
6. Income from Interest on Deposit ( 5% on saving deposit & 10% in any
other cases)
The amount of tax is withheld at source by the payer and transferred to
the tax office.
7. Tax on Gain on disposal of certain Investment asset
i. for a class ‘A’ taxable asset 15% ( class ‘A’ taxable asset means
immovable asset)
ii. for a class ‘B’ taxable asset, 30% ( class ‘B’ taxable asset means shares
and bonds)
8. Foreign Tax Credit
If a resident derives foreign income, the income is included in business
income for tax purpose, any foreign income tax payable (paid) on such
income is deductible.
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. Loss with respect of such source is carried forward. The
reduction of tax prescribed by this Article shall be calculated separately
inspect of each foreign country from which income or profit is derived.
