Melaku Fenta giving clarification for business community
ow does taxation work in Ethiopia? Who is obliged to pay income tax? The law answers the following fundamental issues concerning income. First, it defines what income means. Then, it states how the dividend tax is treated by the law. Finally, it determines how much per cent is required to be paid as dividend tax.
The Ethiopian income tax law defines income as 'every sort of economic benefit including nonrecurring gains in cash or in kind, from whatever source derived and in whatever form paid credited or received'. According to article four of the proclamation every person having an income as defined above is required to pay income to the government.
Based on the above definition, for a particular thing in order to be considered as an income the source is irrelevant, rather the law gives special emphasis only to one element that is the economic benefit of that income source Therefore, in as long as it gets an economic benefit for the recipient, it will be considered as an income. Hence, it will be subject to tax.
In connection with this, recently a conference was organized by the Addis Ababa Chamber of Commerce and Sectoral Associations. At the conference senior officials from the Ethiopian Revenues and Customs Authority (ERCA) met with members of the business community at Desalegn Hotel, to discuss the payment of dividend tax. The discussion focused on income tax proclamation Article 34 which states about dividend tax.
According to Article 34 of the proclamation, every person deriving income from dividends from a share company or withdrawals of profits from a private limited company shall be subject to tax at the rate of ten percent. The withholding agent shall withhold or collect the tax and account to the Tax Authority. This tax is a final tax in lieu of income tax.
Notwithstanding, demand from tax authorities for private limited and share companies has caused a stir among businesses in the capital, whose leaders claim tax officials have a construed understanding of what the nation’s commercial code says about the distribution and payment of dividend. On the other hand, the Ethiopian Revenue and Customs Authority (ERCA) is going after share companies and Private Limited Companies that have not yet paid their dividend taxes.
Dividend tax is a ten per cent tax levied on the income that a person derives from dividends from a share company, or withdrawals from a private limited company, as stated in the income tax law of 2002._ The law also considers 80 per cent to 95 percent of the net profit after tax to be a dividend, whether the companies have dispatched that much or not.
The tax authority and the individual companies seem, however, to interpret the law differently. The companies claim that they are not obliged to pay the tax unless their shareholders have actually shared the profits. “It is like expecting an employee to pay income tax while he/she has not yet received salary,” an auditor at an import company argued.
Warka Trading Private Limited Company House Finance Aid, Beharu Kefeyalew also said that the government acquires ten per cent dividend tax from Private Limited Companies out of accumulated retain earnings. This is not supported by the commercial code. So, this is not an accounting issue.
Mekonnen Ayele, ERCA Legal Consultant, said that the conference was meant to create common understanding between the business community and the tax authority concerning dividend tax payment. Diverse ways of understanding dividend tax creates trouble in its implementation. In this respect, the discussion had pivotal role in creating clear picture in dividend tax and its contribution towards development. On the other hand, he argues that companies should collect the tax on account of the Authority, whether profit is shared or not, arguing that income includes all sorts of gains that a person acquires, whether it is paid, credited or received, according to the proclamation.
According to Mekonnen, companies may reserve five to ten per cent of their net profit as retained earnings. The remaining amount then has to be split between shareholders, and each of those is obligated to pay a divided tax on the payout. If the shareholders choose to reinvest the capital into the company, they will still have to pay the divided tax and reinvest the amount remaining, unless the company is one of those excepted by the Ministry of Finance and Economic Development (MoFED), such as those in the manufacturing industry. “The question that should be answered here is whether or not the company has made a profit,” he said.
If the company actually made a profit, the shareholders have the right to share profits as per the share amount that they bought, thus the amount of income that a shareholder will receive is known. Hence, ten per cent should be paid right away, even though it has not yet been distributed.
He also claimed that it has conducted an investigative survey of numerous companies and found that most did not pay the tax, whilst simultaneously declaring huge profits to the Authority. Some companies surveyed have avoided reporting dividends, by keeping everything in the retained earnings account. According to ERCA, others have used untaxed revenue to compensate for their losses. The MoFED has also endorsed the ERCA’s survey and its plan to collect the tax arrears in this fiscal year.
He further stated that knowingly or unknowingly the companies announce 30 per cent of their profit, but the final profit which is going to be shared among stakeholder is not asserted, which creates injustice. Employees pay tax in time because it is already deducted from their salary, where as some companies do not. This happens mainly because the establishment of the company is mostly between close kin and intimate friends and they make dividend tax payment delay.
A representative of a private limited company, engaged in medical imports, said that his company was told to pay 85 million birr as tax arrears during when he requested a tax clearance from the Authority, in order to replace one of its shareholders. The company did not share the dividend for the past four years, but rather has kept the amount in a retained earnings account. Other companies did not keep dividend in a retained earnings rather they utilized the money running their business, as it was noted in the discussion.
ERCA General Director , Melaku Fanta on the occasions noted that the Authority had plan to collect 101.6 billion birr, in the 2011/12 fiscal year, and it managed to collect 22.2 billion birr in the first quarter, to which business profit tax contributed 4.5 billion birr.