Practices, Challenges and Prospects of Public Sector Taxation in Ethiopia
Practices, Challenges and Prospects of Public
Sector Taxation in Ethiopia
October 8, 2018
Capital Hotel & Spa, Addis Ababa-
Sebsbie Fakade, Asnakech Lake & Ronald
Table of Contents
Why focus on the public sector?
Objectives of the study
Lessons from Uganda and
The Enablers for sucessful PSO
• 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
• 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
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.
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
iii. Analysing the ERCA administrative and legal strength and challenges in
handling tax affairs relating to government institutions
• Tax administration
LTO, MTO East Oromiya ,
Addis Ababa City
• Officials from PBIs
ERA, MOE, MOH, EPPPA
, ERA,ERC, ESLSE
• Officials from other
revene agencies (URA
• SIGTAS- Filing history
of PBI, VAT
withholdings by PBI,
• MOFEC - GDP,
• Domestic tax laws
• Academic articles;
• Internal ERCA
• Other countries
focusing on public
Textualanalysis Other countries
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.
27.8% 25.4% 25.3%
72.2% 74.6% 74.7%
2010 2011 2012 2013 2014 2015 2016
Fig 1: Filing Status of Public Budgetary Institutions and Public Business
late filers as % on time filers
Ethiopia PBIs specifically as it is with other countries are
• Under declaring- Every time an audit is carried out on some of government
agencies, inconsistencies in their declarations are discovered and more revenue
• 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
• 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
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
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
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.
•The provisions of Federal Income Tax
Proclamation No 983/ 2016; Council of
Ministers Regulations 2016 ; provide a
strong frame work for taxing public
•Penalties for non compliance for both
the institution and the persons
•However, its one thing to have a strong
the law and another to implement it-
•Tax enforcement on PBIs
and PBEs is perceived as a
very difficult or even an
•ERCA largely concentrates on
•Very few PBIs are audited for
•VAT withholding is not
implemented up to Woreda level
Does the ERCA need a specialised Public Sector Office?
• 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
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
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
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
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.
Lessons from Uganda’s PSO
Operationalized in 2014
Since its establishment in 2015, the PSO has registered
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
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
not allocating or cutting budgets to
any non-compliant agency.
interpersonal skills and
• To those where soft skills
are not yielding,
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
Separating government entities from other taxpayers wont be enough on its own, its
needs a number of enablers
Soft skills rather