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Practices, Challenges and Prospects of Public Sector Taxation in Ethiopia

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Presentation by Sebsbie Fekade, Ansakech Lake and Ronald Waiswa at the second annual meeting of the Ethiopian Tax Research Network, which took place in Addis Ababa on 8th October 2018.

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Practices, Challenges and Prospects of Public Sector Taxation in Ethiopia

  1. 1. Practices, Challenges and Prospects of Public Sector Taxation in Ethiopia October 8, 2018 Capital Hotel & Spa, Addis Ababa- Ethiopia Sebsbie Fakade, Asnakech Lake & Ronald Waiswa. ETRN
  2. 2. Table of Contents 1 5 3 4 2 Introduction Why focus on the public sector? Objectives of the study Methods Findings Lessons from Uganda and Nigeria? 6 7 The Enablers for sucessful PSO
  3. 3. Introduction • The public sector includes all government institutions (Public Budgetary Institutions, Public Business Enterprises) • According to many countries’ Tax laws, Government and all its agencies (MDAs) are taxpayers and usually “large taxpayers” • However, African revenue authorities perceive enforcing tax laws on government bodies as they do for other taxpayers as a very difficult or even an impossible undertaking. • Even in tax literature, the concept of treating government as a taxpayer is a new idea. • Tax compliance initiatives largely target private sector taxpayers. In the end, a lot of tax revenue gets lost within government entities.
  4. 4. Why focus on the public sector?  Low tax collections o Tax to GDP ratio has stagnated at less than 13% as compared to the average 19.1% for African countries and over 25% in emerging economies o Government expenditure to GDP (over 19%) is far higher than the tax to GDP o ERCA has over the years failed to meet its collection targets.  Government is a big spender o The service sector (largely run by government) is second largest contributor to GDP (41%) next to agriculture at 45%. o State-owned enterprises enjoy monopolies and other advantages in the most important sectors such as finance, communications and trade logistics and hence dominates the growth process of the country, (IMF 2013).  The non-compliance of government entities will directly lead to non- compliance of other taxpayers specifically government service providers.  In Uganda, where the revenue authority specifically singled out this group of taxpayers, there are significant returns.  It’s counterproductive for government to break its own tax instructions.
  5. 5. Objectives of the study i. Ascertaining the tax compliance levels of the PBIs and PBEs in Ethiopia. ii. Examining the effectiveness of these institutions as tax withholding agents. iii. Analysing the ERCA administrative and legal strength and challenges in handling tax affairs relating to government institutions
  6. 6. Methodology Interviews • Tax administration officials LTO, MTO East Oromiya , Addis Ababa City Revenue • Officials from PBIs and PBES ERA, MOE, MOH, EPPPA , ERA,ERC, ESLSE • Officials from other revene agencies (URA & FIRS) • SIGTAS- Filing history of PBI, VAT withholdings by PBI, • MOFEC - GDP, Government expenditure data, National budget • Domestic tax laws • Academic articles; • Internal ERCA reports • Other countries focusing on public sector • URA Experiences • FIRS Secondary data matching Textualanalysis Other countries
  7. 7. Findings 1. Low tax compliance  Tax compliance of government institutions particularly in Africa is very low. Characterised with low levels of filing, late tax payments, non payments, gross under declarations- Many withhold and fail to remit to revenue agencies  In the Ethiopian case, the compliance chain is half met.  PBIs and PBEs are fairly compliant with filing tax returns with over 70% of them filing it on time as indicated below. 12.4% 13.8% 28.1% 33.1% 27.8% 25.4% 25.3% 87.6% 86.2% 71.9% 66.9% 72.2% 74.6% 74.7% 2010 2011 2012 2013 2014 2015 2016 Fig 1: Filing Status of Public Budgetary Institutions and Public Business Enterprises late filers as % on time filers
  8. 8. Findings Ethiopia PBIs specifically as it is with other countries are however • Under declaring- Every time an audit is carried out on some of government agencies, inconsistencies in their declarations are discovered and more revenue generated • Do not remit the withheld tax- some withhold taxes but fail to pay • Some do not even withhold- VAT withholding not implemented up to Woreda level • Some have a tendency to include three or even six months in one return instead of filing each transaction in the next month after the transaction has occurred. • PBIs specifically have mistrustful tax remittances- Characterised with sharp increments and decreases over time e.g for sales tax (TOT), in 2012, only 475.95 million Birr were remitted and this sharply grew by 119.2% in the next year to 1,043.29 million and then sharply dropped to 862.08 million. • Same inconsistence patterns are realised in VAT
  9. 9. Findings…. 2. Government entities as withholding tax agents • They contribute averagely 46% of all VAT collected annually through the withholding system • However, these entities don’t have the capacity to verify the authenticity of the renewed business license, tax clearance certificates and VAT registration certificate submitted to them by their service providers before contracts are awarded- Due to lack of system integration • They also have less care for their tax obligation • Some have many branches, and these use the headquarter TIN which makes it difficult to trace transactions for the different branches
  10. 10. Findings…. 3) There are a number of inefficiencies at ERCA in the administration of withholding taxes I. A Malfunctioning e-filing and e-payment system. the system has frequent break downs or very slow especially during the due dates for return filing when all taxpayers are fighting to meet the deadlines. II. Low levels of automation of tax services and lack of interface with other government systems. Currently, there is no system at the ERCA that is interfaced with government entities making it difficult to obtain tax related information from third parties. III. Limited sensitizations on how to use the e-filing system and amendments in the tax regulations. IV. Unsatisfactory service rendered. Staff from PBIs and PBEs stated that ERCA staff create an impression to be feared and that sometimes they either take long or even fail to provide answers to their questions.
  11. 11. GOOD NEWS •The provisions of Federal Income Tax Proclamation No 983/ 2016; Council of Ministers Regulations 2016 ; provide a strong frame work for taxing public institutions. •Penalties for non compliance for both the institution and the persons responsible •However, its one thing to have a strong the law and another to implement it- Legal Framework ADMINISTRATIVE WEAKNESS •Tax enforcement on PBIs and PBEs is perceived as a very difficult or even an impossible undertaking •ERCA largely concentrates on private taxpayers •Very few PBIs are audited for compliance. •VAT withholding is not implemented up to Woreda level
  12. 12. Does the ERCA need a specialised Public Sector Office? • YES. • Supported by both tax officials and staff from PBIs & PBEs • But its operations need to be decentralised given their wide spread • Should not be placed in LTO or MTO Why not in LTO or MTO or even STO?  Their nature and operations is very different from the private sector businesses.  Handling their tax affairs require different skill sets such as knowledge of public sector management/accounting and an ability to negotiate with public officials.  A focus on both extremes - private businesses engaged in complex tax planning on the one hand and the much less complex but severely non-compliant public sector on the other hand - is stretching to staff especially those in LTO
  13. 13. Why not in LTO or MTO or even STO?........ I. They need high quality tax service that addresses their problems and meets their expectations. ERCA needs to handle them the way businesses enterprises handle their clients-providing a service that makes them feel that they are needed and highly treasured. II. They contribute significantly and have the potential to even contribute more revenue. For VAT that is withheld, averagely 46% is withheld by government agencies. The public entities in LTO contribute close to 49% of the LTO tax collections. III. A point for more information gathering on other taxpayers. At present, there are no mechanisms to receive real time information from these entities on other taxpayers. Therefore, it’s currently very difficult to track transactions between government and the private sector yet the government is perhaps the biggest consumer in the country. Failing to track the flow of this money is a huge risk. A separate office will ensure that all government service providers are profiled well.
  14. 14. Lessons from Uganda’s PSO  Operationalized in 2014  Since its establishment in 2015, the PSO has registered significant success.  In the financial year 2015/2016, revenue collected by the PSO grew by 194% over the previous year. In 2016/17, it increased by 106%.  The PSO is now the second largest contributor to domestic tax collection in Uganda, after the LTO.  Its revenue share as a percentage of total domestic revenue collections grew from only 5% in financial year 2014/15 to 17% in 2016/17
  15. 15. The Enablers for a successful Government tax office • ERCA needs to embrace and have the will and boldness to improve the compliance of government entities • ERCA needs to win the support of the different government entities • High ranking government officials could also tell these agencies the harsh penalties such as  terminating the contracts of the leaders  not allocating or cutting budgets to any non-compliant agency. • communication, interpersonal skills and flexibility • To those where soft skills are not yielding, enforcement mechanisms should be applied. • Not all non-compliance is deliberate. • staff cannot use the ERCA systems or they don’t even know how to do it right • Sensitization of the key officials in these agencies on areas that are difficult for them to comply should be done • The sensitizations should be escorted with continuous follow ups through short message service (SMS), emails, phone calls and physical visits. Internal and external support from high ranking officials Separating government entities from other taxpayers wont be enough on its own, its needs a number of enablers Soft skills rather than enforcement Taxpayer education and sensitisations

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