Tax Law

To fourth year law students

Walelign Nega

2016 E.c
• An Introduction to Taxation and Tax Law
• Tax law is the body of rules that governs an individual’s
liability to pay tax to the government of a given country.
• It covers the rules that establish the incidence of tax and
the tax base (i.e who and what is subject to tax).
• Tax is regulated by law because it is a universally agreed
principle that every tax should have a firm basis in law.
• One of the basic characteristics of tax law is the fact that it
restricts the rights of private actors and, primarily, property
rights considerably.
• Tax is a multidisciplinary subject that touches up on several
disciplines. Pls mention some?
• Tax law is a public law with two parts ( dimensions).
• It has both substantive and procedural laws.
• The Substantive part of tax law determines
• (i) who should be taxed ( the person
• or entity who is liable to pay tax);
• (ii) what will be taxed(the base up on which taxes are to be imposed);
• (iii) when it will be taxed (the time where by the tax liability arise);
• (iv) how it will be collected (the manner, the period and method of
calculating the tax liability);
• (v) how to deal with tax avoidance and evasion (anti-avoidance and
anti-evasion provisions); and
• (vii) consideration of the international transactions in which tax
treaties are signed.
• procedural part of the tax law covers issues such as who is authorized
to collect tax, how the taxpayers calculate tax liability, the rights of
taxpayers, the limitations on tax authorities while collecting taxes,
the sanctions on taxpayers who failed to comply with duties, the
manner and procedure of imposing and collecting the taxes,
etc._x0000_
• 1.1. The Meaning of Public Finance
• Public finance is the branch of economics that
deals with the role of the government in the
economy.
• It is the systematic study of the revenue and
expenditure of the government.
• government expenditure, public borrowing, the
impact of taxation and deficit financing on the
economy comprises the subject matters studied by
public finance.
1.2 The Economic Role of the Government
•
• In different countries there have been different
• views on the role that governments should play in the
economy.
Governments do not have a uniform role in the economy
in all jurisdictions.
•
• The major views on the economic role of governments
are
• discussed below.
1,Individualistic/mechanistic/
view of the state

• The individualistic view is also known as the

mechanistic view.
• The state is created by a collective of individuals to
serve the interest of the individuals.
• Individuals are at the center stage
• the government can be demolished or changed if it
fails to serve the interest of individuals.
• groups including democratic majorities cannot
impose their rules on individuals or minority
groups.
II. Organic View of the
state
• This view was the dominant view in societies that
have strong national links and common history and
traditions.
• Pluto was the earliest thinker who introduced this
theory.
• Aristotle also held the same view.
• It takes society as organism.
• It was further developed by Cisero and later on by
Thomas Hobbs.
• the organic theory is criticized : -
 Cont..
• makes individuals completely subordinate to the state
as if they can’t have separate existence;
• It contradicts the rule of democracy and liberty;
• is against the social contract theory and makes the
state a totalitarian state.According to this view,
society is similar to an organism.
• an individual can play a role only as part of society.
• This view does not recognize an individual as a
separate entity from society..
• This view does not allow individuals to have separate
goals.
• only the state can decide what is best for members of
the society.
• Hence, this view considers national goals more
III. Paternalistic View of the
State
• According to this view, the state has the mandate to
make some important decisions
• the decisions may go beyond the wishes of the
majority of current voters.
• the policymakers sometimes know what is good for
the country and the society better than the citizen
just like what the father knows best for his children.
• No choice of individuals
• The practice: -
• Whatever the views,there is a growing consensus
that governments must play a key role in any
economic system_x0000_
 Reasons for Government Participation in the Economy

• I. The need to provide Public Goods: -

• These goods which cannot be provided by the private market are
called public goods.
• Public goods are not capable to be provided by the private
sector efficiently due to two reasons. These are : -
the non-excludability
and non-rivalness nature of the goods.
• II. The Need to Provide Merit Goods: -
• Merit goods are those goods and services that the
government feels that people will under-consume.
Consumption does not depend on the ability to pay .
• They are goods that are deemed to be socially desirable,
• The unique characteristics of merit goods are
generating positive externalities. Examples are free
health services, free education, low-cost housing, etc.
 III. The Need for Redistribution:
• - Sometimes the income inequality among individuals
might be very high.
• This requires the government to intervene by taxing the
reach and transfer the revenue to the poor.
• Hence, the government can intervene in the economy to
make redistribution when the income gap between the
poor and the rich is high.
IV. The Need to Correct Market Failure:
• market regulates it self through demand and supply.
• When there is aproblem on either of the varibles market
failure may arise.
• The situations that may cause market failure include;
monopolies, missing markets, information asymmetry,
positive externality and negative externality.
• To rectify the failure, gov't intervention needs.
• Hence, to carry out the functions of the government, the
government needs public revenue.
• Revennue can be classified as tax and non tax revenue
• Non tax revenue includes commercial revenue (revenue drived
from public enterprises), administrative revenue (like fees,fines,
forfeitures, eschits), gifts( voluntary contribution from individuals
or NGOs and grants (gov'tfinancial aid), capital receipts (from
market borrowing eg loan)
• Understanding Taxation and Tax revenue
• In this world nothing is certain except death and taxes. 'Benjamin
Franclin.
• There is no agreed definitions as to the meaning of tax.
• Tax is compulsory levy by state on persons, properities or
transactions without quid pro quoi obligation so as to generate
revenues to defray expenses of government/ expenditure.
• Taxation includes the processes of levying, collecting, and paying
• But it is only possible to discern some common
elements with respect to it. These are:
• They are obligatory (Enforced) contributions
• They are usually payable in the form of money
• They should be as progressive as possible, in nature
• It is levied on persons, property, rights, acts,
transactions
• It is levied by the State which has jurisdiction or control
the subject to be taxed
• Taxes are paid without any reciprocal service from the
government or quid pro quo
• Theories Justifying Taxation
• The benefit or the cost of service theory;-
• This implies that all individuals should contribute to the
• Thomas Hobbes, reckoned that “the equality” of taxes
depends “not on the equality of riches but on the equality
of the debt that everyman owes to the common wealth
for his defense.
• Criticisms are raised against this theory. These includes :-
• The difficulty of measuring the benefits received by
individuals;
• the burden will be high on the poor;
• the indivisible nature of the benefits provided by the
state and the effect on income distribution will be
negative.
• The social contract theory;
• The founding fathers of this theory were Tomas Hobbs
and John Lock.
• Locke’s social contract theory tried to legitimatize the
imposition of taxation through voluntary alienation of
individual rights in exchange for state protection of
individuals ‘property. According to this theory, all must
contribute to the greater good of the community.
• The sacrifice Theory
• The sacrifice theory is a derivative of the ability-to-pay
theory. According to this theory, all individuals should
contribute in accordance with the wealth they generated
in order for the state to redistribute that wealth. This
theory has the following three variants
• I. Equal (Absolute) Sacrifice Theory:-
• This theory says that the tax must take away such
amounts that the resulting pressure or the sacrifice of
enjoyments may be relatively proportional. In other
words, taxes should be so levied in a manner that needs
every taxpayer to give up the same absolute amount of
utility as every other taxpayer.
• The rich must pay taxes at a higher rate than the poor
man so that the sacrifices that the rich and the poor man
made become equal. Eg. 10% for poor 30% rich.
• Equal Proportional Sacrifice theory:-Each taxpayer
should give up the same proportion of the total utility of
his income. higher-income individuals should be
burdened with a greater sacrifice than lower-income
individuals in absolute terms but in proportion to their
income
• Minimum/Least Sacrifice Theory
• According to this theory, the sum of the areas of utility
sacrificed, both directly and indirectly, by all taxpayers
"shall be as small as possible in proportion to the revenue
secured.
• This theory purports to impose a lion’s share of the tax
burden on the rich as it advocates for an excessive kind of
progression, approximating to, if not actually attaining, a
state of socialistic equality. Principles
of Taxation
• By principles, we mean the characteristics or qualities that
must be taken into consideration when designing any tax
rules for the tax systems to be good enough.
• They are lso known as cannons of taxation.
• Adam Smith Has formulated the following 4 Principles
• The Principle of Equality/Equity
• The Principle of Certainty
• The Principle of Convenience
• The Principle of Economy
• Modern economists have added more principles of a
good tax system. A few of these principles are outlined
below.
• The Principle of Equity (Equality)
• The principle of equity holds that taxes must be
equitable. Equitability means that taxes must be fair, or
just.
• There are many reasons that needed any tax system to
be equitable.
• Reasons
• A moral value that judges appropriate action to be
an action that treats humans equally
• To encourage voluntary compliance
• Desire by society for the equitability of taxation
• There is no universally agreed method of measuring
equity/fairness due to diverse views on how to
measure it and to determine who should pay more
• Equity, or fairness, has two dimensions:
• Horizontal Equity:- People in similar economic
conditions should be treated similarly.
• Vertical equity:- People of different economic status
should be treated differently.
• Equals should be treated equally and unequals should
be treated unequally; Aristotle
• Regarding horizontal equity the difficulty to apply it in
practice happens due to:-
• 1. No two individuals are alike economically and
• 2. No appropriate base has been found to show the
ability of the individuals
• Which base is best? Income, Saving or Consumption?
• Income is usually used, but it is not an appropriate way
of measuring ability.
• Vertical Equality: Those with more ability or more
money should pay more than those with lower ability
• But the questions how? Why? Who? is not easy to
answer
• benefit principle and the ability to pay principles
are usually used to justify the how to achieve
vertical equity.
• Ability- to-pay Principle:- Individuals must pay in
proportion to what they earn based on their ability
to pay (Adam Smith). But measuring ability to pay is
not an easy task.
• Equal sacrifice”, “proportional sacrifice” or
“minimum sacrifice” principles have been some of
the proposed alternatives by theoretical literature.
• The Benefit Principle:- According to the benefit
theory of taxation, individuals must pay for the
benefits they receive from the government in
proportion to the benefit they obtain.
• The more individuals benefited from public services the
more they should pay
• Criticisms on Benefit Principle
• Public goods cannot be accurately measured.
• Persons might not have any direct benefit
• Public services and goods are non-excludable and nonrival
• It leads the state to disregard one of its most important
duties i.e. to support the poor through income
redistribution
• The Principle of Certainty
• The time of payment, the manner of payment, the
quantity to be paid, ought all to be clear and plain to the
taxpayer
• Taxes should be certain means that they should not be
imposed arbitrarily, and taxpayers should know precisely
the amount that they will be paying to the government
by the end of the tax period, and also when and how
they are going to pay the tax.
• The Principle of Efficiency
• Tax must distorts market processes as little as possible
since economic agents attempt to limit, avoid and evade
tax liability as much as possible.
• Efficient tax minimizes the change in behavior which is
explained in terms of reducing the distortions that would
have happened on individual decision-making due to the
imposition of taxes.
• broad-based consumption taxes such as the
“modern VAT”
• The Principle of Neutrality
• Tax neutrality means that tax should create no
advantage or disadvantage with regard to any
transaction or investment.
• Neutrality also entails that the tax system raises
revenue while minimizing discrimination in favor of,
or against, any particular economic choice.
• The Principle of Simplicity
• Tax must be fairly simple for a taxpayer to comply
with, for the tax collector to administer.
• It enables taxpayers to understand their obligations
• It also reduce taxpayer compliance
• It makes tax a system easy to comply with and hard
to evade
• The Principle of Convenience
• Taxes should be designed so that the taxpayers are
enabled to pay their taxes at a time and in a
manner that is most convenient to the taxpayer.
• This principle helps improve compliance
• Despite the prevalence of multiple principles, it is
not always possible to realize all principles
simultaneously.
• Mostly, governments are confronted with a choice
between efficiency and equity since there is a
trade-off between the two. When governments
try to make a tax system efficient, they ended up
in making it complex and vice-versa.
• The Various Classifications of Taxation
• A) Central (Federal) and Local Tax
• B) Direct and Indirect Taxes: Direct taxes are taxes
in which the persons who pay the taxes also bear
the ultimate burden. Impact and incidence are on
the same person. Indirect taxes are taxes in which
the ultimate burden of the tax shifts to other
persons or final consumers. In the case of indirect
taxes, the impact and incidence fall on different
persons.
• Advantages and Disadvantages of Direct and
Indirect Taxes.
• Advantages of Direct Taxes
• Direct taxes are Equitable
• Direct taxes are certain
• Direct taxes create Civic Consciousness
• Direct taxes help minimize inequality
• Disadvantages of Direct Taxes:
• Direct Taxes are Unpopular
• Direct Taxes are prone to excessive tax evasion
problems
• Direct Taxes are more Complex than indirect taxes
• Direct taxes have a narrow base
• Direct taxes can be arbitrary
• Advantages of Indirect Taxes
• Indirect taxes are convenient
• Indirect taxes are elastic
• Indirect taxes are difficult to evade
• Indirect taxes are broad-based
• Indirect taxes are less felt than direct taxes
• Direct taxes are revenue productive
• Disadvantages of Indirect Taxes
• Indirect taxes are regressive
• Indirect taxes are difficult to administer:
• Indirect taxes are uncertain
• Indirect taxes do not promote civic consciousness
• Indirect taxes lead to inflation
• C) Single tax and multiple taxes (on the base of volume)
• A single-stage tax is a tax that is imposed and levied only
at one stage in the process from production to retail level.
Eg. the manufacturer’s sales tax, the wholesaler’s sales
tax, the retailer’s sales tax, and the specific excise tax.
• Multistage taxes include the value-added tax and the
turnover tax.
• D) Progressive, proportional, digressive, and
regressive
• (On the basis of method or rate of tax or based on the degree of
progression,)
• Proportional Taxation:- A proportional tax system is the one in
which the rate of taxation remains constant as the tax base
changes. eg 30 %
• As his income increased, his tax liability increases though the tax
rate is constant.
• Progressive Taxation:- The rate of taxation increases when the
tax base (the income, consumption, or saving) increases.
• Regressive Taxation:- A kind of tax in which the rate of taxation
decreases as tax base increases. Eg.12..9......7
• Digressive Taxation:- A tax in which the rate of tax increases with
the increase in income up to a certain level and then becomes
constant.
• The rate may be slightly progressed up to a certain limit .
• This type of taxation is widely accepted in most tax systems
• E) Advolrem and Specific Tax (Based on essence )
• Specific Tax:- A tax of a fixed amount, imposed by the
head or number or by some other standard of weight or
measurement.
• It requires no assessment other than the listing or
classification of the objects to be taxed.
• Ad valorem Tax:- A tax of a fixed proportion of the value
of the property with respect to which the tax is assessed.
• It requires the intervention of assessors to estimate the
value of such property and the amount due from each
taxpayer can be determined.
• Purposes and functions of Taxation
• Taxes are used as the most important source for
governments revenue. Without taxation, governments
all over the world would be unable to finance their
governmental functions and to provide public goods and
services to the community. However, taxation does not
have fixed goals.
• Richard and Peggy Musgrave suggested that taxes play
three roles for the government. These are allocation
functions, distribution functions and stabilization
functions. The main functions and purposes of taxation
includes : -
• i) The provision of public goods
• ii)Regulation of Consumption and Production eg. excise
tax
• iii)Encouraging Domestic Industries (by imposing high
taxes/tariffs on imported commodities or by subsidizing
• iv) Stimulating Investment
• The first is through reduction of tax rates,
exemption from taxes, and tax holidays.
• The second way is by making financial grants and
loans collected from tax.
• v) Reducing Income Inequalities (Redistributive
Functions) except
Chapter
• Is there a system called a tax system in Ethiopia today?
• What are the major limitations pertaining to tax policy,
law, and administrative institutions?
• What are the legal and non-legal factors responsible for
the low tax performance in Ethiopia?
• How tax power is distributed among federal, regional,
and local governments in Ethiopia?
• What are the directives and limitations in the exercise
of tax powers in Ethiopia?
• A Brief Overview of the Ethiopian Tax System
• The term “tax system” has been widely used in
legislation, administrative documents, the literature, and
the media although none of them have defined or
conceptualized what it means.
• The term “tax system” is used to denote the nexus
between and among tax policies, laws, and
administrations.
• If you apply strict standards for calling some thing a
system, you may have serious doubts as to the Ethiopian
tax system exists. Given the multiplicity of tax laws
which are not connected at all or loosely connected at
best, it may be tempting to dismiss the idea of a tax
system in Ethiopia.
• some tend to describe the Ethiopian tax system as a
loose agglomeration of proclamations, regulations,
• Despite all the disorganization, incoherence, and other gaps, there
are guiding policies, operating laws,legal institutions, administrative
procedures ,etc which led to argue despite fragmentary nature,
there exist what resembles system.
• Tax systems improved through tax reforms.
• Tax reform is the process of changing the existing tax system (the
status quo) or introducing new systems.
• The “modern” Ethiopian tax system has undergone more or less
continual reform over the last seven decades.
• The Ethiopian tax history passed three phases.
• the pre-1941 period,land tenure system . Taxes were paid in kind or
in the form of forced labour.
• the 1941-2002 period, and
• The first attempt to introduce a modernized tax structure. The base
for present day tax laws.
• the post-2002 period.
• a comprehensive reform , introduced new taxes such as the VAT- TOT
and which completely changed the existing income tax, excise tax
• Generally: -
• A good tax system enables to raise of adequate
revenue mainly from internal sources to finance public
expenditures.
• Low tax effort in Ethiopia.
• The legal and institutional factors include poor tax
culture, huge tax incentives/ exemptions, high tax
evasion, tax avoidance, administrative limitations,
corruption, illicit financial flows, hostility between
taxpayers and tax officials, etc are contributing factors
for it to be low and less efficient.
• The Source and Organization of Tax Laws in Ethiopia
1, The first source
of law is the constitution.
• the constitution decentralizes taxing power across tires of
government,
• sets limitations on taxing power,
• and provides for taxpayers’ rights.
• The FDRE Constitution assigns revenue powers into four headings:
• revenue belonging to the federal government (federal power of
taxation),
• revenues belonging to regional governments (state power of
taxation),
• revenues jointly owned by both (concurrent power of taxation),
• and new revenue sources (undesignated powers of taxation.The
constitution also sets limits to the power of taxation in Ethiopia
• Compared to other Constitutions, the FDRE Constitution doesn’t
adequately stipulate the rights of taxpayers,
• 2, Tax proclamations
• Comes below the constitution in hierarchy.
• Enacted by HPR at the federal level and by state council at regional
level.
• Treaties signed by Ethiopia and ratified by HPR have equal status
with proclamations.
• When there is aconflict between treaty and proclamation, the
treaty shall prevail except when the treaty provides an exemption,
exclusion or rate reduction. Art 48 of ITP
3, Tax Regulations are the next level.
• 4, Tax directives.
• 5, Adminstrative/advance rulings
• Federal Tax Administration Proclamation No. 983/2016 has formally
recognized it. Accordingly, Arts. 68-75 provides two types of
advanced rulings (public and private) that can be binding to the tax
authority unless withdrawn.
• 6, administrative publications, tax guides, tax forms, and public
notices : -
• modern tax administration to assist in tax administration with voluminous
administrative commentaries, manuals, guides, and circular letters.
• It is mainly issued by tax authorities for an easy understanding of tax laws.
• Prcln No. 983/2016 provides publications or other advices,
communications, forms, and notices by the authority as a source of law.
• Their main aim is to facilitate law enforcement.
• 7, cassation decisions are the other sources of tax laws.
Organizations of tax laws
• while France has only consolidated tax rules (also known as the general
tax code), many other civil law countries remain without tax codes or
consolidated rules, and the United States has a tax code although it is a
common law country.
• Challenges :-
• organizing tax laws into codes is not a simple project.
• This emanates from the very nature of taxation and tax law
• Taxation is a fast and frequently changing or most dynamic area of
law._x0000_
• Advantages codification of tax laws
• Including accessibility, intelligibility, certainty, elimination of
duplicative provisions, uniformity in interpretation, facilitation of
compliance, and ease of subsequent amendments.
• Consolidation is the other option to codification
• Consolidation is nothing but a careful organization and archival of
separate tax laws with cross-references that virtually achieve the same
result as the tax codes
• some countries including the civil law legal system followers prefer
consolidation while other countries have only general fiscal or revenue
law, leaving the details for piecemeal legislation.
• Ethiopia is found in the camp of civil law and has many codified laws
but not codified tax laws.
• Ethiopia has come to organizing tax laws into a systematic body of laws
is through the Consolidated Laws project, which was unfortunately
terminated or forgotten in 1975, 1990, and 2002.
• The rampant fragmented tax reforms and the successive amendment
to tax laws can be mentioned as one of the reasons that prevent
• Currently, the tax laws of Ethiopia are found scattered not just
indifferent tax laws but also in other laws of the country. The
investment law, which contains tax incentives, is a good
example.
• The field of Ethiopian tax legislation is chaotic,
disorganized,uncoordinated, and worse, making it difficult for an
average taxpayer or tax expert to make sense of her obligations
under the various tax laws in force.
• Because tax laws are uncoordinated, most tax legislations
repeat certain provisions as if they were not already provided
for in other tax legislations.
• The dearth of publication and distribution of law have made the
concerns more worrisome.
• Fiscal Federalism
• The sharing or distribution of revenues between central and
state governments is principally intended to enable all levels of
governments efficiently carry out their respective duties and
• Principles in tax assignment between the levels of government.
• These include ownership of the source of revenue, the national or
regional, or local character of the sources of revenue, the
convenience of levying and collection of the tax or duty, population
size, distribution of wealth, the standard of development, and other
factors that are the basis for an integrated and balanced economy.
• Most writers on fiscal federalism have reached a consensus on the
following major recommendations are forwarded in the division of
taxing power in federalcountries. These are:
• Progressive and redistributive taxes should be central;
• Taxes suitable for economic stabilization should be central;•
• Tax bases distributed highly unequally between jurisdictions should
be central;
• Taxes on mobile factors of production are best administered at
thecenter;
• Residence based taxes such as sales of consumption goods to
consumers are suited for states;
• Benefit taxes and user charges might be appropriately used
at all levels; and
• Taxes that are based totally on immobile factors should be
assigned to states.
• The FDRE Constitution provides exclusive revenue sources
under the title “federal power of taxation”, “state power of
taxation”, “concurrent power of taxation”, and
“undesignated power of taxation” in the Articles 96, 97,
98, and 99 respectively.
• The constitution allocates revenue powers based on the
tax sources not on the tax bases. Except for custom duties
and land use fees, a specific tax is not assigned to either of
the governments exclusively.
• Limitations on Powers of Taxation
• taxing powers may affect the right to property, equality,
privacy, freedom of expression, speech, religion, taxing
powers of other governments etc. It’s therefore common
to set guidelines and limitations on the exercise of tax
powers.
• In Ethiopia, Art. 100 of the FDRE Constitution has tried to
provide directives and limitations on taxation powers of
the Federal and Regional governments.
• common constitutional guidances such as the principles
of procedural fairness or due process, principles of ability
to pay, benefit received principle, etc. cannot be easily
read from Article 100 unless we read them through other
provisions.
• some most important principles to the exercise of
taxation powers are the following.
• a. Principle of legality
• This principle emanates from the public nature of tax law.
• First, it requires taxation (imposition or exemption) must
have a legal basis.
• If there is no law there will not be an obligation to pay tax.
• No taxation without representetion.
• Second, the principle underlines that the legislature has
supremacy over tax matters.
• There shall only be limited delegation (only where necessary)
• No delegation on tax base, rate, exemption, and incentive
that increase or reduce tax liability.
• There are many deligations in Ethiopia which makes the tax
law fragmentary.
• Thirdly, the principle dictates that no public money shall be
collected except when authorized by law. _x0000_
• b. 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.
• Recognized under Article 100 (1) of the FDRE Constitution. Both Federal
and State Governments shall ensure that any tax is related to the source of
revenue taxed.
• Governments must in practice be faithful to the sources designated.
• In some countries, a related principle “the prohibition of extraterritoriality
of taxes” is adopted.
• In the Ethiopian context, those taxes, which by their nature are extra-
territorial, are assigned to the federal government.
• c. Intergovernmental Immunity and Duty not to Cause Adverse
Impact.
• These are two related principles. It is quite common for federal
structures.
• constitutions impose the limitation of intergovernmental immunity.
• intergovernmental immunity ( art 100(3)) of the constitution.
• Duty not to cause adverse impact art 100(2) of the constitution.
• Governments should refrain from exercising their tax powers in
ways that would adversely impact the tax powers of the other.
• In practice, there are a number of instances contrary to this
principle. For example, the envestment incentive laws that have
an impact on the capacity of the Regional States to raise
revenues from sources.
•
• d. Principle of Non-Discrimination
• This limitation imposed a prohibition on the federal government
from dealing with tax between the states or other levels of
government in a discriminatory manner.
• The states should not enact tax laws that discriminate among
taxpayers on ethnic grounds.
• The limitation prohibits the imposition of different tax rates and
tax privileges between the states.
• What do you think the different tax holidays among states in
• e. Procedural Fairness and the Benefit Principle
• In other legal systems, there are principles such as
principles of equality and the principle of fair play or public
trust in tax adminstration.
• There are no such principles under Article 100. Yet it can
be read from art 25 and art 37.
• The “benefit principle” Art. 100 (2), the rate and amount
of taxes shall be commensurate with services the taxes
help deliver.
• However, it is difficult for taxpayers to challenge a tax on
the ground that they receive no benefits,
• and it is equally difficult for the government to establish
correspondence between what it collects from taxes and
the public services it provides to taxpayers.
Chapter Three
• The Law of Income Tax in Ethiopia: Part I
• The Concept of Income
• Income tax is a type of direct tax.
• It is levied on the income of persons.
• No comprehensive and permanently applicable definition of income.
• The Schanz-Haig-Simons’ definition of income is regarded as the most
influential definition of income in the tax world.
• It conceives income as ‘the sum of the person’s consumption plus
accumulation during the taxable period’. Income is broadly defined to
include the amount of how much a person could spend on
consumption in a given period without reducing their net assets
(wealth).
• The Schanz-Haig-Simons definition of income incorporates not only
those conventional economic benefits, such as wage, business profit,
interest, dividend, rental income, gifts, and inheritance but also
imputed income and a net increase in the value of a person’s wealth
(capital assets). _x0000_
• Imputed income is a type of non-cash or in-kind income that is
derived from goods owned and used by the taxpayer.
• The essential characteristic of imputed income is that the taxpayer
received the income from his or her property. In a barter
transaction, though the benefit is in-kind, it does not fall within the
meaning of imputed income as it is derived from the other party to
the transaction.
• Not all countries treat imputed income as taxable income. The
United States and Ethiopia are prime examples.
• They are usually excluded from the reach of income tax systems.
• The legal definitions of income, as enshrined in the tax systems,
make some departures from the ideal and comprehensive concept
of Haig Simon's definition of income.
• The net accretions to wealth (capital assets) are not regarded as
taxable incomes until the disposal (sale, gift…) of the assets are
taken place.
• In the absence of the event, net accretions are difficult to measure
like imputed income._x0000_
• The concept ‘income’ in the Income Tax Proclamation
(No. 979/2016) art 2(14)
• Income
• C, 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 of the in-kind benefits.
• D,‘‘from whatever source derived’ : -
• sources of income are not restrictive. Based on the plain
words of the definition, one may argue that the type of the
source of the income does not affect the taxability of the
income. Save exemptions (art 8(1)(e) and art 65 of the ITP.
• Argue for and against whether income from illegal sources
is taxable or not?
• Under the USA tax system, the definition of income
incorporates the phrase ‘from whatever source’, and this
phrase is interpreted so broadly to include illegal income.
• E, derived and in whatever form paid, credited, or received’
• the timing for the realization of income and the existence of
a duty to pay income tax.
• If the income is not derived, there will be no duty to pay
income tax.
• Income credited to the taxpayer's bank account is deemed
to be derived by the taxpayer even if he/she does not
withdraw or physically possess it.
• This is called the doctrine of constructive receipt. It is
incorporated into Ethiopia’s income tax laws. Art 2(5) and
2(19)
• Purpose : - to prevent tax evasion or unreasonable delay of
payment of tax by taxpayers.
• Canceled debt is considered a taxable income. Debt Waiver
Fringe Benefit (Article 9 of the Income Tax Regulation, No.
• Relevant terminologies in income tax law
• Gross income-totality of the income received by a person. GI
does not include exempted incomes.
• Taxable income-income that is subject to the payment of tax.
• Exempted income/exemptions- economic benefits/income
received by a person but not subject to the payment of tax.
• Reasons for exemption :-
• a, socially motivated grounds eg. pension payments, scholarships, injury
compensations, and income earned by institutions like religious, charitable, or educational institutions .

• b, for economic reasons eg. Income tax holidays

• c, by international law. Eg. diplomatic communities exempted
from employment income tax.
• d, Plitical or adminstrative reasons
• deductions- costs incurred in order to generate the income.
• Tax Credit/Crediting –an amount to be subtracted from the net
tax liability.
• Why Tax on Income?
a. It is a clear indicator of ability to pay.
b. commended for income and wealth distribution.
c. By adopting progressive tax rates,
• Income Tax Jurisdiction Principles (art 7 of ITP)
• taxing powers should have some sort of
• connection with taxable subjects (persons) and objects.
• It is based on either the relationship to a person
(personal attachment) or a territory (territorial
attachment). This led to the formulation of the two
famous income jurisdiction. These are: -: the residence
and source principles.
 Taxation power
Taxation power

nexus

Residence Source

• 1, Residence principle: -the state where a person resides shall

have the right to tax the income of that person regardless of
the place where the income is derived.
• This is taxation from worldwide income.
• Justification :- that persons shall share the
• public expenditure (costs) of the state whey they live.
Taxpayers contribute to the public services, such as the
• Tests to detemine residence in Ethiopia
• a, natural person : (Federal Tax Administration Proclamation No.
983/2016, Article 5(2) and art 183 of the civil code)
• The Domicile Test: An individual becomes a resident taxpayer if
• he/she is domiciled in Ethiopia. The Proclamation does tell us what
• domicile means.
• “domicile” of an individual is the place where the individual has a
permanent home. This explanation is still not satisfactory. It does notoffer
an answer to basic questions like what constitutes a permanent home.
• It is recommended to refer to the Civil
• Code of Ethiopia to fill the definitional gap.
• • 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._x0000_
• b, bodies (artificial taxpayers), there are two alternative tests
• A taxpayer is presumed to be an Ethiopian resident if It is
incorporated or established in Ethiopia (incorporation test)
• when they are formed under the commercial laws of the
country.
• For cooperative societies as per the rules contained in the
cooperative society proclamation.
• • Its effective seat of management is in Ethiopia: whether or
not the top decision-makers of a body hold their meeting in
Ethiopia.
• example, shareholders and the board of directors are the top
decision making persons of companies.
• A body taxpayer may present in Ethiopia through a
permanent establishment.
• This does not mean that the taxpayer is a resident of Ethiopia.
Rather, it is regarded as a non-resident taxpayer._x0000_
• 2, source principle (art 6 ITP)
• Non-resident taxpayers are liable to pay tax to Ethiopia
only with respect to their Ethiopian source income.
• The following events make the income an Ethiopian
source.
• The conduct of the income-generating activities, such as
employment, business, sporting activities, and chance
winnings, in Ethiopia
• The disposal or lease of assets, such as buildings, located
in Ethiopia.
• Place of payment is irrelevant.
• For a non-resident body, permanent establishment is an
additional and important requirement for the attribution
of an income as Ethiopian source income. Art 4ITP
• The concept is generally defined as “a fixed place of
business through which the business of a person is wholly
or partly conducted”
• The word ‘fixed’ is used to require a certain degree of
permanence in the place of the business.
• Short-term operations do not constitute a permanent
establishment.
• A non-resident body is presumed to establish a
permanent establishment in Ethiopia if it has a building or
construction site that continues for more than 183 days.
• Double Taxation and Avoidance or Relief Mechanisms
• The different interpretations and combined use of the residence
and source principles lead to double taxation of an income.
• The use of treaties and Income Tax Proclamation of Ethiopia
provide double tax avoidance mechanisms. Art. 45, 48, ITP & 25
Regulation.
• Double taxation is unfair and discourages taxpayers. Thus,
countries have devised mechanisms in order to eliminate the
negative perception of double taxation.
• Across the globe, the mechanisms of avoiding double taxation are
two, unilateral measures and double taxation treaties.
• A, Unilateral : -
• (1) exempting foreign source income,
• (2) allowing a tax credit for foreign tax paid on foreign source
income,
• (3) applying deduction from the taxable base of foreign taxes
paid on foreign source income._x0000_
• What is the difference between tax credit and tax deduction?
• Which one is better for the tax payer?
• And which one is incorporated in the Ethiopian ITP?
• - A tax credit is a direct reduction in the amount of tax you owe.
It is typically a dollar-for-dollar reduction, meaning that each
dollar of tax credit reduces your tax liability by one dollar.
• Eg. Tax liability = tax liability of residence state - foreign tax paid
( tax from the source state). It is adolar to dolar reduction.
• - A tax deduction reduces your taxable income, which in turn
reduces the amount of tax you owe based on your tax rate.
Deductions are subtracted from your gross income to arrive at
your taxable income.
• The foreign tax paid is considered as deductible expense.
• Eg. Tax liability = taxable income - foreign tax paid (tax from the
source state)
• It reduces the tax base.
• B, Bilateral Treaties
• The double tax treaties (DTTs) are sometimes called
double tax agreements (DTAs) or Double Tax Conventions
(DTCs).
• According to the IMF data, more than 3000 double-tax
treaties have been signed at a global level up until 2018.
Ethiopia, on the other hand, has entered into 30 treaties.

• Income Tax Systems: Global, Schedular, and Mixed

• Art 8 ITP
• Two theoretical models exist for designing income tax
systems; the schedular and global income tax models
(systems).
• In practice, many states design their tax systems in a
combination of the features of both models.
• The global income tax model is one in which a single
income tax is imposed on all incomes, irrespective of their
nature and source._x0000_
• 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).
• An intermediate, composite or mixed model that combines,
to a greater or lesser extent, the features of the two
theoretical models.

• The first publicly known and modern income tax law was
issued in 1944.
• This law has a distinctive place in the history of the Ethiopian
income tax system.
• It introduced a schedular income tax system to the country,
which continues to date. _x0000_
• The following are key points to understand the key features
of the Ethiopian income tax system
• A, The Ethiopian income tax system is schedular. art 8
ITP.
• B, Post-1991 Ethiopia is a federal state.
• The two tiers of governments exercise either an exclusive or
concurrent taxing power depending upon the constitutional
provisions (Articles 96-99) under which the income in
question falls.
• C,The existing income tax laws of Ethiopia are found
primarily in proclamations, regulations, and directives.
• In terms of their content, it is difficult to make a distinction
between the federal and regional income tax laws.
• D, Taxpayers that derive incomes from two or more sources
that fall under the same schedule are taxed on the
aggregate of their incomes.
• This is called the income aggregation rule and it applies to
Schedules A, B and C of the Income Tax Proclamation.
• E,Except for schedule A whereby the taxpayers (employees)
are always natural persons, Schedules B, C and D’s
taxpayers could be either natural (individual) or artificial
(body) persons.
• This classification of taxpayers is relevant to determining
the applicable tax rates for schedules B and C.
• The two schedules apply progressive and proportional tax
rates on individuals and bodies respectively.
• The classification of taxpayers into Category A, Category B,
and Category C is the other important categorization of
taxpayers._x0000_
• Sumary of privious classes
• Schedular tax structure
• Ethiopian tax structure ( art 8 ITP)
• Employment income tax ( schedule A)
• Rental income tax (schedule B)
• taxable unit
• Tax rate
• Assesment self or presumptive
• Declaration and computation
• Taxation is from net income