The FDRE Constitution vs Taxation Arts 96-100

 The provisions do not deal with taxes as the list also includes non tax revenue like fee, charge,
rents
 It allocate revenue based on tax source not on tax base
 Except for custom duties and land use fee a specific tax is not assigned to either of
governments exclusively.
1. Federal Power of Taxation
 The FDRE Constitution under Article 96 enumerates the exclusive revenue
1. State Power of Taxation
 Unlike the federal government, the states have no exclusive tax bases assigned to them by the FDRE
Constitution.
 The lists under Article 97 entitled “state power of taxation”
 Article 52(1) of the FDRE Constitution Vs Article 99 made a provision that the residual power of
taxation Any Discrepancy?
2. Concurrent powers
 While the term levy refers to a legislative function the word “collect” is to refer the administrative
function of receiving money from the taxpayers.
 Art. 62 of the Federal Constitution which empowers the House of Federation to determine the division
of revenues.
 Shared 50% for all types of taxes.
 Incomes derived from large-scale mining and all petroleum and gas operations.
 This seems a reaffirmation of Art. 40(3) of the Constitution which provides that the right of ownership
of all natural resources exclusively vested in the state and peoples of Ethiopia
3. Undesignated Power of Taxation
 The constitution has envisaged the possibility of the coming existence of new tax bases and provides
for undesignated power of taxation.
 The different types of taxes such as gift tax, inheritance tax or death duties, real property tax,
environmental tax, hotel occupancy tax (tourist tax), highway tax, etc. which are found in some
other countries are still residual or undesignated taxes in Ethiopia.
 VAT??Does Really Undesignated?
 The same issue can be raised about and VAT, despite the fact that the joint session decides it is
undesignated.
 The Federal Government controversially took over the administration of VAT and decided to share
the proceeds with the Regional States as per the formula from HoF.
 FDRE Constitution, Arts. 96(1), 96(3), 97(4), 97(7), 98(1)
 Constitutional principles of Taxation/ Limitations on power of taxation

1. Principle of legality
 First, it requires taxation (imposition or exemption) must have a legal basis.
 Although article 100 is silent about this principle.
 Article 55(1)
2. Principle of Fidelity to Sources of Taxes
 The principle serves two purposes i.e. protection of taxpayers from the risk of double taxation
and avoiding conflict of jurisdiction.
 It is recognized under Article 100 (1) of the FDRE Constitution
3. Principle of non-discrimination
4. Procedural fairness and benefit principle

Law of Dirmect Taxation in Ethiopia & Procedural Rules of Income

Taxation

The Law of Income Tax in Ethiopia

 Income tax is a type of direct tax.

 Income is the basis of IT
 The Income Tax Proclamation (No. 979/2016) income.(Art.2(4))
Income means every form of economic benefit, including non-recurring gains, in cash or kind from
whatever source derived and in whatever form paid, credited, or received;
 Economic benefit that is capable of being expressed or measured in terms of money. Non-economic
benefit, are excluded.
 Periodicity is the other important component of the definition.
 Either a regular basis, such as employment , Rarely, to the extreme once in a lifetime (winning
chance games)
 See Articles 10(1), 13(1), 18(1) of ITP
 A monthly tax accounting period for employment income while an annual tax period for
incomes derived from the rental of buildings and business activity.
 No tax accounting period is provided for no regular incomes. It is difficult to provide a tax period
for such income.
 As regards its form, the income may be derived either in cash or in-kind.
 The awarding of houses, vehicles, and mobile phones to winners of lottery games and employee
fringe benefits are typical examples of in-kind incomes.
 The income tax laws contain valuation rules to compute the monetary value
 The phrase ‘‘from whatever source derived’
 It doesn’t means all income.
 Taxability of illegal income???
 The taxability of illegal income is a source of debate in taxation.
 There are supporters as well as opponents of the taxation of illegal incomes.
USA-Tax impose on illegal income
 An income is taxable only if it is not exempt income. Art.65 ff.
For example, an income derived from a personal gift or inheritance is an exempt
income in Ethiopia.

In Ethiopia-open for debate

First Argument
Article 63 of the Income Tax Proclamation (No. 979/2016) other income.
First, while defining income, the Proclamation does not require the source to be a lawful
source.
Second, illegal incomes are not found in the list of exempt incomes.
Second Argument
The objective and rules of the criminal law of Ethiopia.
The taxation of illegal income amounts to encouraging illegal activities.
It is against the public policy of the country.
See Article 92 of the criminal code
When criminals derive an economic benefit from their criminal activities, the court shall
impose a fine and order the confiscation of the profit made by the criminal
 The words ‘…derived and in whatever form paid, credited, or received’ are relevant to
know the timing for the realization of income and the existence of a duty to pay income tax.
 The deriving of an income may occur in various forms- as demonstrated by the words paid,
credited, or received.
 It includes not only the actual receiving of an income (such as cash) by a person but also
the existence of constructive receipts or the right to receive an income.
 Constructive receipts as a taxable income is to prevent tax evasion or unreasonable delay
of payment of tax by taxpayers.
 How the tax concept treats loans? Tax concept of loans
 Money received as a loan is generally not considered income because it is subject to an
equal and offsetting obligation to pay back the loan.
 When a creditor or lender relieves the borrower from paying all or a portion of the debt,
it is called cancellation of debt.
 A person, whose debt is canceled, shall pay income tax on it.
 It regulates the taxability of cancellation of debt in the context of employment income.
 Debt Waiver Fringe Benefit (Article 9 of the Income Tax Regulation, No. 410/2017)
 The waiver by an employer of the obligation of an employee to pay or repay an amount
owing to the employer is a debt waiver fringe benefit.
 The value of a debt waiver fringe benefit shall be the amount waived.
 RELEVANT TERMS

Gross Income
 Gross income refers to the total amount and type of income of a person.
 See Articles 2(12), 15(4), 21(2)
 Though the principle is to impose a tax on net income, an income tax may be imposed on
the gross income in some specific cases.
 The tax base of many taxable incomes of Schedule D is the gross income of the taxpayers
 Employment income??
Taxable Income
 Gross income of the taxpayer less (minus) the total deductions.
 Ability to pay of taxpayers.
 Gross income does not reflect the true financial capacity of taxpayers.
 See Schedule B/C (Articles 15(1), 20(1) )

Deductions

 Subtractions from gross income

 Tax laws determine which amount is deductible and which one is not.
 Deductions may be characterized as expenses, and losses
 Losses are amounts that result when expenses exceed gross/taxable income.

Exempt Income

 If income is exempted from tax, it will not be taxed.

 Unlike a deductible expense, an exempt income is not subtracted from gross income.

 The exempt incomes are neither added to gross income nor separately subject to income
tax
 Art.65 ITP

Income Tax Jurisdiction Principles

1. The residence principle:- the state where a person resides shall have the right to tax
the income of that person
 The principle asserts that persons, including natural and artificial persons, shall
pay tax in the state in which they establish their residence, regardless of the
place where the income is derived.
 For natural persons, Nationality, physical presence, domicile, or related
concepts are frequently applied to determine their residence status.
 For artificial persons (such as share or limited liability companies), places of
registration (incorporation), or the seat of the management of the body

Why Residence PP?

 The justification that persons shall share the public expenditure (costs) of the
state whey they live. Taxpayers contribute to the public services, such as the
maintenance of law and order, they receive from the state

2. Source Principle
 Contrary to the residence principle, it is the place where the income is derived that
matters for the source principle.
 The state where an income is derived shall have the right to tax the income,
irrespective of the place where the persons reside.
 Hence, non-residents of a state shall have the obligation to pay tax if they derive
income in that state.
 In practice, most states apply a combination of residence and source principles
 Since states do not have uniform jurisdictional rules, the same person or income
could be subject to the taxing powers or imposition of taxes by two or more states.
 This creates the possibility of double taxation.

Double taxation
 For example, the same income may be taxed by one state based on the residence
principle while another state based on the source principle.
 Alternatively, due to the various ways of definition of ‘residence’, the same person
may be considered a resident person by two or more States
ETHIOPIA
 Ethiopia employs a combination of residence and source principles to delimit the
jurisdictional reach of its income tax power.
 Article 7
 Resident taxpayers with respect to their worldwide income
 Non-residents with respect to their Ethiopian source income:
 Art.5 Residence
 Individual
 Body
 Government Wings (Art.5(1))
 Domicile Test

 The Domicile Test: An individual becomes a resident taxpayer if he/she is

domiciled in Ethiopia.
 It constitutes a permanent home.
 The 1960 Civil Code, Article 183
The Citizenship test: This test has a narrow scope of application as it is concerned with
those Ethiopian citizens that are consular, diplomatic, or similar officials posted abroad
The Physical Presence Test: Any individual that is present in Ethiopia, continuously or
intermittently, for more than 183 days in one year, is regarded as a resident taxpayer of
Ethiopia.
Concerning bodies (artificial taxpayers)
 Two alternative tests for their residence status.
1. It is incorporated or established in Ethiopia (incorporation test):
2. Its effective seat of management is in Ethiopia:
 On the other hand, the conduct of the day-to-day activities of a body, including
lower-level management decisions, in Ethiopia does not make Ethiopia a state of
residence.

 Resident taxpayers are taxed on their worldwide income. That means, their income
derived in and outside Ethiopia is under the taxing power or jurisdiction of Ethiopia.
Worldwide income refers to an income derived anywhere in the world, including the
state of residence.
 Non-resident taxpayers are those taxpayers that do not satisfy the residence tests
 SOURCE OF INCOME

 Non-resident taxpayers are liable to pay tax to Ethiopia only with respect to their
Ethiopian source income.
Article 6
 For a non-resident body, there is an additional and important requirement for the
attribution of an income as Ethiopian source income.
 The non-resident body shall derive the income through its permanent establishment in
Ethiopia
 Article 4(1) PE “a fixed place of business through which the business of a person is
wholly or partly conducted”.
 Advancement of digital technology • Source vs Residence
 PE??

Income Tax Systems: Global, Schedular, and Mixed

1. The global income tax model

 Is one in which a single income tax is imposed on all incomes, irrespective of their nature
and source.
 By aggregating all incomes
 The model promotes tax equity by taxing persons on the aggregate of their income.
 Good for tax administration
 Tax payer need not prepare and file a separate tax return for each income
 It requires a strong tax administration with the capacity to identify and aggregate multiple
incomes from different sources.

2. The schedular income tax model

 Imposes separate income taxes on different types of income.

 Incomes are separated by their sources, such as employment, business, etc, and subjected
to different schedules (tax rules).
 It employs distinct rules of deduction and exemption or exclusion for each income.
 It is easily administered in countries with less developed tax administration
 The model provides the structure for the special tax treatment.
 This reduces the number of taxpayers that are required to file tax returns. (Withholding)
The schedular income tax model has its downsides.
 An income may fall in two or more schedules.
 This creates overlapping of schedules
 The difference in the tax rules among the schedules induces taxpayers to engage in tax
planning
3. The mixed model
 In between the schedular and global income tax models, there is an intermediate, composite
or mixed model that combines, to a greater or lesser extent, the features of the two
theoretical models.
Predominately global and few schedule
Predominately schedlue and residual income
 What about Ethiopia?
 See Art.8 of ITP
 The Ethiopian income tax system exhibits the characteristics of schedular income tax
system.
 Contains four tax charging schedules:
 Schedules A, B, C, and D. Each Schedule has its tax base, tax rate, assessment, and
collection methods.
 Taxpayers that derive incomes from two or more sources that fall under the same
schedule are taxed on the aggregate of their incomes.
 Income aggregation rule and it applies to Schedules A, B and C of the Income Tax
Proclamation.
 The income aggregation rule does not apply to Schedule D as there are separate
taxable incomes and tax charging rules in the Schedule.
 The classification of taxpayers into Category A and Category B is the other
important categorization of taxpayers. This classification is very relevant for
Schedules B and C.
 By employing annual turnover and legal form (i.e, body vs sole proprietorship) as
criteria
 Article 3
 Category “A” taxpayers are bodies, irrespective of the amount of their annual
turnover, and individuals (such as sole proprietors) with having an annual gross
income of Birr 2,000,000 or more.
 Category ‘B’ taxpayer individuals having an annual gross income of less
than Birr 2,000,000
 Category A taxpayers shall have the duty to keep books accounts and they are
subject to the self-assessment rule.
 Category B taxpayers do not have the legal obligation to keep books of accounts.