According to the Ethiopian Income Tax Proclamation No. 286/2002, "Business" or 'Trade" shall mean any industrial, commercial professional or vocational activity or any other activity recognized as trade by the Commercial Code of Ethiopia and carried out by any person for profit.

Types of taxes and their conditions

The different types of taxes, their meaning, rates and conditions, as provided by the Federal Inland Revenue Authority (FIRA), are presented below.

1.    Value Added Tax (VAT)is a sales tax based on the increase in value or price of product at each stage in its manufacture and distribution. The cost of the tax is added to the final price and is eventually "paid by the consumer.

The rate and impose of VAT:

·         The rate of VAT is 15% of the value for every taxable transaction by a registered person, all imported goods other than an exempt import and an import of services;

·         The export of taxable goods or services to the extent provided in regulations for zero tax rate are:

o    The export of goods or services to the extent provided in  the regulation;

o    The rendering of transportation or other services directly connected with international transport of goods or passengers, as well as the supply of lubricants and other consumable technical supplies taken on board for consumption during international flights;

o    The supply of gold to the National Bank of Ethiopia; and

o    A supply by a registered person to another registered person in a single transaction of substantially all of the assets of a taxable activity or an independent functioning part of a taxable activity as a going concern, provided anotice in writing, signed by the transferor and transferee, is furnished to the authority within 21 days after the supply takes place and such notice includes the details of the supply.

2.    Excise Taxis imposed and payable on selected goods, such asluxury goods and basic goods which are demand inelastic. In addition, it is believed that imposing the tax on goods that are hazardous to health and which are cause to social problems will reduce the consumption thereof. Excise tax shall be paid on goods mentioned under the schedule of 'Excise Tax Proclamation No. 307/2002' (a) when imported and (b) when produced locally at the rate prescribed in the schedule. Computation of excise taxes applied (a) in the case of goods produced locally, production cost and (b) in the case of imported goods, cost, insurance and freight C.I.F. /. Payment of excise tax for locally produced goods is by the producer and for imported goods by the importer. Time of payment of excise tax for imported goods is the time of clearing the goods from the customs area, and for locally produced goods it is not later than 30 days from the date of production.

3.    Turnover Taxis an equalization tax imposed on persons not registered for value-added tax to fulfill their obligations and also to enhance fairness in commercial relations and to complete the coverage of the tax system. Administrative feasibility considerations limit the registration of person; under the value-added tax to those with annual transactions to the total value exceeding '500,000 Birr. Rate of turnover tax is 2% on goods sold locally and 10% on others. For further details refer to 'Excise Tax Proclamation No. 307/2002'.

4.    Income Tax. Income taxable under the Ethiopian 'Income Tax Proclamation No, 286/2002' shall include, but not be limited to:

·         Income from employment;

·         Income from business activities;

·         Income derived by an entertainer, musician, or sports person from his personal activities;

·         Income from entrepreneurial activities carried out by a non-resident through a permanent establishment in Ethiopia;

·         Income from movable property attributable to a permanent establishment in Ethiopia;

·         Income from immovable property and appurtenances thereto, income from livestock and inventory in agriculture and forestry, and income from usufruct and other rights deriving from immovable property, that is situated in Ethiopia;

·         Income from the alienation of property referred to in (e);

·         Dividends distributed by a resident company;

·         Profit shares paid by a resident registered partnership;

·         Interest paid by the national, a regional or local Government or a resident of Ethiopia, or paid by a non-resident through' a permanent establishment that he maintains in Ethiopia;

·         License fees including lease payments, and royalties paid by a resident or paid by a non-resident through a permanent establishment that he maintains in Ethiopia.

5.    Business profit tax

a.    Taxable business income of bodies is taxable at the rate of 30%

b.    Taxable business income of other taxpayers shall be taxed in accordance with the following expenses:

Deductible expenses

a)    In the determination of business income subject to tax in Ethiopia, deductions shall be allowed for expenses incurred for the purpose of earning, securing, and maintaining that business income to the expenses that the expenses can be proven by the taxpayer and subject to the limitations specified by the 'Income Tax Proclamation No. 286/2002'.

b)    In the determination of taxable business income, the owner of the business assets may deduct depreciation of business assets. The following two categories of business assets shall be depreciated according to a pooling system at the following rates:

                              i.    Computers, information systems, software products and data storage equipment: Twenty-five percent (25%);

                             ii.    All other business assets: Twenty percent (20:/0).

Non-deductible expenses

The following expenses shall not be deductible:

·         The cost of the acquisition, improvement, renewal and reconstruction of business assets that are depreciated pursuant to Article 23 of this Proclamation;

·         An increase of the share of capital of a company or the basic capital of a registered partnership;

·         Voluntary pension or provident fund contributions over and above 15% of the monthly salary of the employee.

·         Declared dividends and paid-out profit shares;

·         Interest in excess of the rate used between the National Bank of -Ethiopia and the commercial banks increased by two (2) percentage points;

·         Damages covered by insurance policy;

·         Punitive damages and penalties;

·         The creation or increase of reserves, provisions and other special-purpose funds unless otherwise allowed by this Proclamation;

·         Income Tax paid on Schedule C income and recoverable value-added Tax; Representation expenses over and above 10% of the salary of the employee; Personal consumption expenses;

·         Expenditures exceeding the limits set forth by this Proclamation or Regulations issued hereunder;

·         Entertainment expenses;

·         Donations or gifts