• Chapter IV: The Ethiopian Tax Legal Regime

• History of Taxation and Tax Reform in Ethiopia

Read your module
– The sources of Ethiopian tax laws
• “Tax law” means:
• the TAP;
• the Income Tax Proclamation;
• the Value Added Tax Proclamation;
• the Excise Tax Proclamation;
• the Stamp Duty Proclamation;
• the Turnover Tax Proclamation;
• any other legislation under which a tax, duty, or levy is
imposed if the Authority has responsibility for the
administration of the tax, duty, or levy;
• any regulation or directives made under a law referred to in
the above paragraphs;
 – Ethiopian Tax Laws: Organization and Characteristics
• A logical organization of laws, particularly of tax
laws, is critical for the proper comprehension/
understanding of the tax system.
• Different legal systems organize their tax laws
differently, ranging from those countries that
organize their tax laws in codes to those that
issue tax laws in scattered pieces of legislation.
• While France has a tax code, many other civil law
countries remain without tax codes.
• The United States has a tax code although it is a
common law country.
• Organization of tax laws in a code has many
advantages.
• By organizing all general areas of definitions and
administrative provisions in a single section, codes
help eliminate duplication in individual pieces of
legislation.
• Codification facilitates compliance by taxpayers
because taxpayers know they have all the tax laws
before them to consult and subsequent amendments
can be automatically consolidated into it by way of
textual amendment.
• The tax laws of Ethiopia had been found scattered
not just in different tax laws but in other laws of
Ethiopia.
• Many other laws of Ethiopia contain tax rules and
provisions.
• It had been chaotic, disorganized, uncoordinated
and worse, making it difficult for an average
taxpayer to make sense of her obligations under
the various tax laws in force.
• Because tax laws were uncoordinated, most tax
legislations repeat certain provisions as if they
were not already provided for in other tax
legislations.
• These days, however, the country has consolidate
and issue tax rules of general application (e.g.,
administrative provisions) in a “revenue” or “fiscal”
law and flank these by an array of individual tax
legislations.
• Ethiopia has enacted TAP which has of the same
effect to those followed the same approach.
– Tax Administration in Ethiopia
• Read your module
 • Fiscal federalism
• Federalism is a form of state structure by which
power of a state is formally (constitutionally)
divided among different level of government.
• The subject of fiscal federalism is an extension and
basic element of the concept of federalism.
• It deals basically with the division of revenue
raising power and expenditure responsibilities to
multiple layers of governments formed by
federalism.
• “Fiscal Federalism" concerns the division of public
sector functions and finances among different tiers
of government.
 Art 94 of the constitution deal with division of
revenue b/n central and regional states
the Constitution requires each level of government
to cover its own expenditures.
Technically, in the structure of a budget, most
governments classify expenditure into two.
• (i) Recurrent expenditure, and
• (ii) Capital expenditure.
• All sorts of administrative costs such as salary, and
defence expenditure and debt services are called
recurrent expenditure.
• They are also referred to as non-developmental
expenditure.
• They are intended for continuing the existing flow
of goods and services and maintaining the capital of
the country intact.
• On the other hand, capital expenditures contribute
to increased productive capacity of the nation and
therefore, are known as development expenditure.
So for all the above purposes the Constitution has
classified tax revenues into three main categories.
1. Concurrent Powers of taxation(art.98)
2. Exclusive Powers of taxation (article 97 Exclusive
State Tax Power and article 96 Exclusive Federal
Tax Power)
3. Undesignated Powers of taxation(art.99)
Concurrent Tax Power;
here both the federal and regional governments are
given joint power to levy and collect tax from those
sources provided in article 98 of the Constitution.
 However, one should underscore that, given the size
of the country and the number of Regional
Governments comprising the federation the practical
applicability of this rule begs a big question.
 A question like what does joint means, are all
lawmakers of the Regional and Federal Government
going to conduct a meeting whenever they want to
make a law governing concurrent taxation? If that is
so, is it practicable?
 Federal Government and State Governments shall
jointly levy and collect taxes in relation to;
a) Enterprises that they jointly establish.
b) Companies i.e. Corporations including shareholders.
c) Large Scale mining undertakings.
d) And all petroleum and gas operations.
• The revenues collected from the above sources shall
be divided between the Regional and the Federal
Government based on the standards set by the House of
Federation.
• As per Art. 98(3) and 97(3) taxation from middle
scale and small scale mining activities are reserved to
the regional governments.
Exclusive Tax Powers-are those tax powers on
which the Regional and the Federal governments
are given the sole and exclusive responsibility of
levying and collecting the tax.
The Federal Government is given an exclusive
power to collect taxes from the following sources:
Taxes from import , export and customs duties.
96(1)
Income tax from employees of Federal
Government, enterprises owned by the Federal
Government and international
organizations.96(2&3)
Income taxes from Winnings of National lotteries
and other Games of Chance. 96(4)
It shall levy and collect tax on Monopolies.96(8)
It shall levy and collect Federal Stamp
duties.96(9)
• The area of sale and excise tax so far as they
pertain to the sale and production or services of
public enterprises owned by the federal
government are exclusive power of the federal
government (Art.96 (3)).
• In addition, the introduction of VAT broadens the
federal taxation to the sale and production or
services of individual traders.
 On the other hand, State Governments are given the
power to levy and collect taxes from the ff sources:
 Income taxes on employees of State and private
enterprises located in their jurisdictions 97(1)
 Income taxes from private farmers and farmers in
cooperative associations 97(2)
 Taxes on individual traders carrying out their
activities in their jurisdictions97(4)
 Taxes on enterprises owned by the State
Governments 97(7)
 Taxes on incomes from small scale mining
operations 97(8) &97(3)
• In addition, Federal and State Governments are given
the power to collect fees, charges and rents in their
localities.
Undesignated powers of Taxation;
The general rule regarding undesignated power is
provided in article 52(1) of the Constitution.
 Accordingly, all powers that have not been expressly
assigned either to the Federal Government alone or
concurrently to the Federal and Regional
Governments are left to the Regional governments.
 Nevertheless, a glance at article 99 of the
Constitution will show as the inapplicability of this
general rule to taxation.
 The Constitution as per its art. 99 have provided a
different rule on how to collect those taxes that is not
expressly assigned by the Constitution.
• This rule clearly provides that designating
undesignated taxation power is to be made by the
joint session of the House of Federation and the
House of Peoples’ Representative.
• The regions cannot immediately assume the power
of taxation that is not specifically provided by the
Constitution either the centre, the regions, or
concurrently to both.
• It has to be determined by a joint session and a
two-thirds majority vote in the HOF and HOPR is
required.
 Directives on Taxation
 The Constitution has provided rules to be followed by
the Federal and Regional Governments while
exercising their exclusive taxation powers. These
guiding principles are generally termed as directives
on taxation.
 The directives can generally be grouped into the
following categories:
Tax-Source Nexus Requirement
Proper Consideration Requirement
The Doctrine of Inter Governmental tax
immunities
Principle of legality
Principle of non-discrimination
1. Tax Source Nexus Requirement/ principles of
fidelity to sources of taxes
• Federal and State Governments shall collect taxes
from areas assigned to them by the Constitution
only.
• This directive aims at preventing overlapping of
taxes and clashes between governments that may
arise due to tax competition.
2. Proper Consideration Requirement- tax has been
determined following a proper consideration
requirement. It means the levying of tax is not
simply made without procedures.
3. The Doctrine of Inter Governmental tax
immunities
• The Constitution prohibits each level of
Government from taxing the property of other level
of government located in their taxing jurisdictions.
4. Principle of legality-tax imposition or exemption
must have a legal basis
5. Principle of non-discrimination- states should not
enact tax laws that discriminate among tax payers
on ethnic grounds.