CHEDULE ‘C’ –INCOME FROM BUSINESS

POSITIONOFBUSINESSESINCOMETAX
Business Profit Tax
 This is the tax imposed on the taxable business income / net profit realized from
entrepreneurial activity.
 Taxable business income would be determined per tax period on the basis of the profit
and loss account or income statement, which shall be drawn in compliance with the
generally accepted accounting standards. Corporate businesses are required to pay 30%
flat rate of business income tax.
 For unincorporated or individual businesses the business income tax ranges from 10% -
35%.
Taxable business income/ Tax rate Deduction
net profit per year (in %) (in Birr)
Over Birr to Birr
0 7200 Exempt Threshold ___
7201 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
1. Ato wogiries – is a merchant in asayta town he worked in his retaining shop in 03 keble, and
his annual profit for 2013 is birr, 200,000 – calculate amount of tax expected to collect from him
based on tax rate of schedule ‘B’ /business profit tax

 /hints / - tax rate more than birr 130,800 at 35 % and deduction is birr 18000
A. 50,000 B. 52,000 C. 45000
2.if ABC company is a soap manufacturing business in Adama Town and if the company paid
out Br. 2000,000 VAT inclusive to purchase input, and sale the product Br.4,500,000 with total
employee salary of Br.25,000 and selling and administrative expense of Br 50,000 calculate the
profit of ABC company . calculate Direct
Categories of Taxpayer
1/ For the purposes of this Proclamation there shall be the following categories of
taxpayers:

A)category “A” tax payer being

1/a body; or

2/ any other person having an annual gross income of Birr1,000,000 or more;

a) category ‘B’ tax payer being a person, other than a body, having an annual
gross income of Birr 500,000ormore but less than 1,000,000;

c) category ‘C’ taxpayer being a person other than a body, having an annual gross
income of less than Birr500,000

Deductible expenses

The following expenses shall be deductible from gross income in calculating taxable income.

 The direct cost of producing that income, such as the direct cost of manufacturing,
importation, selling and such other similar costs.
 General and administrative expenses connected with the business activity
 Premiums payable on insurance directly connected with the business activity
  Expenses incurred in connection with the promotion of the business inside and outside
the country, subject to the limits set by the directive issued by the minister of revenue.
 Sums paid as salary, wages or other emoluments to the children of the proprietor or
member of the partnership shall only be allowed as deduction if such employees have
the qualifications required by the post.
Non-allowable expenses

All those expenses which are not wholly or exclusively incurred for the business activity are not
allowable deductions from gross income. Therefore, in computing taxable income the following
expenses should be added back, only if the taxpayer has deducted them in determining the
business income

i. Voluntary pension or provident fund contributions over and above 15% of the
monthly salary of the employee.
ii. Damages covered by insurance policy
iii. Representation expenses over and above 10% of the salary of the employee
iv. Personal consumption expenses
v. Entertainment expenses
vi. Donation and gift other than those permitted by regulation.
Example:- Computation of business profit tax
Business net profit per year / Taxable income = 70,500.00 Birr
Business profit tax = 70,500 * 25% tax rate
= 17680 Birr
= 17680 – 6780 (deduction fee)
Tax payment = 10845.00 Birr
In the determination of business income subject to tax in Ethiopia, deductions would be allowed
for expenses incurred for the purpose of earning, securing, and maintaining that business income
to the extent that the expenses can be proven by the tax payer.

IV Schedule ‘D’ income from other sources including:-

 Income paid form services rendered outside of Ethiopia

 Income from games of chance
 Dividends
  Income from casual rental of property
 Interest income
 specified non- business capital gains
 Tax on Interest Income on Deposits
 Every person deriving income from interest on deposits shall pay tax at the rate of
5%. The payers are required to withhold the tax and account to the Tax Authority
 Example :Mr kelemu earn an interest of 1500.00ETB for the deposit of money at
commercial bank in 2009E.C
Question 1: compute interest income tax for the year?
2. who is liable to pay tax to the tax authority?

INCOME FROM DIVIDENDS

 The taxable income received in the form of dividend from a share company or
withdrawals of profits from a private limited company. Dividend income is
subject to tax at the rate of 10%. The withholding agent (payer) shall withhold or
collect the tax and account to the tax authority. This tax is a final tax in lieu of
income tax.
 Example 1: XYZ Company declared dividend to shareholders birr 0.5 million at
the end of the year 2010.
 Re: determine the evidenced income tax for the year?
Royalty income ‟means

 a payment of any kind received as a consideration for the use of, or the right to
use, any copyright of literary, artistic or scientific work including cinematography
films, and films or tapes for radio or television broadcasting.
 Royalties income shall be liable to tax at a flat rate of 5%. The withholding agent
who effects payment shall withhold the foregoing tax and account to the Tax
Authority.

Tax on Income from Games of Chance

  Every person deriving income from winning of games of chance (e.g., lotteries,
tombola, and other similar activities) shall be subject to tax at the rate of 15%,
except for winning of less than 1000 Birr.
 The payer shall withhold or collect the tax and account to the Tax Authority.

Tax on Gains of Transfer of Certain Investment Property. This is the tax payable on
gains obtained from the transfer (sale or gift) of building held for business, factory,
office, and shares of companies. Such income is taxable at the following rates:

 Building held for business, factory, and office at the rate of 15%;
 Shares of companies at the rate of 30%. Gains obtained from the transfer of
building held for residence shall be exempted from tax provided that such building is
fully used for dwelling for two years prior to the date of transfer.
Tax on Income from Rental of Property

 The taxable income under this category is income derived from casual rental of property
(including any land, building, or moveable asset) not re Rendering of Technical Services
Outside Ethiopia
 All payments made in consideration of any kind of technical services rendered outside
Ethiopia to resident persons in any form shall be liable to tax at a flat rate of 10% which
shall be withheld and paid to the Tax Authority by the payer.
 The term “technical service” means any kind of expert advice or technological service
rendered.
 All income which cannot be subject to either schedule A, B or C shall be subject to tax
according to Schedule D of the Income Tax Proclamation.
Particular of income Resident Non-resident

Insurance premium or royalty 5% 5%

Dividends 10% 10%

Management or technical ees 2% 15%

Entertainment - 10%

Income from casual rentals 15% 15%

of property

Supply of 2% 2%
goods(exceedingETB10,000)

Supply of 2% 2%
services(exceedingETB3,000)

Payment to a person without to 30% 30%

Tax Identification
Number(TIN)

Imported goods for 3% 3%

local consumption

Income from games of 15% 15%

chance(exceedingETB1000)

Mining and Petroleum operations

Business income at25% shall be applicable to licensee and contractors.

Payments made by licensee to non-resident sub contractors shall be subject to WHTat10%.

Treatment of losses

Business enterprises (registered investments) that suffer losses during a tax holiday period can carry
forward such losses for a period equivalent to half of the income tax holiday period.

 However, this period of carrying forward of lossesiscappedto5years.

 A loss incurred in a tax period may be set off against taxable income in the next
five tax periods, provided that ownership of a body does not change by more than
25% in that tax period.
 If there has been two tax years in which a tax payer has incurred and each of those
 losses has been carried forward the, tax payer shall not be permitted to carry
forward any further losses.
 For companies in the mining sector, they can carry forward losses for a period
of10years.

Miscellaneous Taxes
Stamp and transfer duty
Stamp duty
 Is payable on abroad class of legal instruments, including:

Memorandandum and Articles of Association of any business organization:

o upon first execution aflatETB350;and

o Upon any subsequent execution aflatETB100.
Memorandandum and Articles of Association of a cooperative

o upon first execution a flatETB35;and

o upon any subsequent execution a flat ETB10
— Contracts and agreements and memoranda aflatETB5;
— Security deeds 1%onthevalueofthedeed;
— Contract of employment 1%ofamonth’ssalary;
— Register of title to property 2%ofthevalue;
— Leaseandsub-leasethereof–0.5%ofthevalue;and
Bonds including warehouse bonds – 1% of the value.

Double tax treaties and reduced rates

Ethiopia has signed double tax agreements(DTAs)with several countries such as United
Kingdom, China, India, Netherlands, South Africa, Czech Republic, Egypt, Turkey,
Tunisia, Iran, Algeria and Seychelles.

Agricultural Income Tax

  According to Proclamation No. 152 of 1978 individual farmers and
agricultural producer cooperatives earning up to Birr 600 per annum are
required to pay 10 Birr.
 The tax rates on every additional income vary from 10% to 89% for income
above 600 Birr.
 In line with the economic policy and structural set up of the Federal
Democratic Republic of Ethiopia, the former tax on income from agricultural
activities and the land use rent was revised in 1995.
 Since income tax from this source is allocated to Regional States in
consonance with the provisions of the new constitution of 1994,
 Each Regional State is entitled to issue a Proclamation providing for such a tax
and rent.
 A state farm shall pay 40% of the taxable income it realizes from its
agricultural activities.
 Income from agricultural activities is said to be determined by estimating the
price, in the area, of the crop before harvest.
 If the crop is sold, the price declared shall be the basis for the assessment of
income.
 Land Use Tax According to Proclamation No. 77/1976 and No. 152 /1978
individual farmers, who are not members of producer‟ s cooperatives, are
required to pay a land use fee of Birr 10 per hectare per annum.

Forms of tax declaration in Ethiopia

Declaration and Payment of Tax The following is the procedures for the declaration of
taxable income by taxpayers.

A) Taxpayers categorized as “A” are

 Required to declare their taxable income within four months from the end
of the tax period.
B) Those taxpayers who are categorized as “B” are
 Required to declare their taxable income within two months from the end
of the tax period.
C) Category “C” taxpayers
 Shall declare taxable income within one month i.e. between July 07 and
August each year.
 Tax declaration forms in Ethiopia include but not limited:

 Employment tax forms

 Business income tax forms
 Withholding income tax forms, and other forms, Ethiopian Revenue
Customs Authority (ERCA) issues all Tax declaration forms to the
taxpayers.
What is Taxpayer registration?
 Taxpayer registration is any tax system identifying and registering
actual and potential taxpayers is a primary function.
 the tax office has reliable and easily identifiable taxpayers
registration system,
 Tax assessment and collection will be difficult. Thus, the use of tax
payer’s identification number to identify taxpayers is a first step in
the management of tax collection.
 The TIN system provides the foundation for the tax administration to
independently identify taxpayers, control evasion, and create a
dependable database for efficient and effective tax collection.
 The TIN system is expected that the use of a unique taxpayer
registration number will enable the tax collectors to strengthen their
capabilities in identifying every person whose income is subject to
tax, and those who deliberately understate declarations or fail to
disclose income
 the proclamation obliged any taxpayer to have a tax identification
number (TIN) according the proclamation any person or organization
looking for a license to carry on a business occupation is required to
supply the TIN to the licensing authority in this case all public bodies
and institutions issuing a business or occupational license is not
allowed to issue or renew such license unless the taxpayer has
supplied the TIN.