2. Definition of Income
Ethiopian Law: Article 2(14) “… every sort of economic benefit
including nonrecurring gains in cash or in kind, from whatever source derived
and in whatever form paid, credited or received”
• Economic benefit – must be capable of being quantifiable in
monetary terms. Psychic pleasures are not taxable (e.g., pleasures
from leisure, or reading books, or watching movies).
• Kinds of economic benefits: in cash (money), in kind (property), in
services, barter. Question: are self-produced goods and services
income? Suppose a lawyer defends herself? Or a homeowner grows
fruits and vegetables in her garden?
• Non-recurring – the frequency of the benefit is immaterial. Example:
lottery winnings are income.
• From whatever source: the source of income is immaterial. The
source may not even be identified. At least theoretically. 2
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3. The schedules – main differences
• Tax bases: theoretically, the schedules must not overlap, but in
practice, the overlaps and conflicts among the schedules are one of
the most common sources of disputes among taxpayers and tax
authorities. Much of the energy is spent on properly delimiting where
one schedule ends and the other schedule begins.
• Income Brackets and Tax rates: the tax rates are separate for all
schedules, although there are apparent uniformities among the three
schedules of Ethiopian income tax law.
• Tax preferences – the tax exclusions, exemptions or deductions are separate for
each schedule.
• Tax accounting rules – many accounting principles are also separately stated for each of the
schedules. The accounting periods as well as methods are different.
• Assessment – some schedules rely upon withholding while others make use of self-
assessment methods.
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4. Anti-tax avoidance rule
Tax splitting 78
Transfer pricing 79
Thin capitalization 46
Tax Evasion Vs. Tax Avoidance Difference
• Tax Base: applies to “income from employment” –see
Articles 8(1a);
• Although not clearly stated, two conditions need to be met
for Schedule A to kick in. i) employment relationship; and ii)
income must be derived from employment relationship.
This suggests that the existence of employment
relationship is a necessary, but not sufficient condition for
the application of Schedule A.
5. Exclusions from Employment Income
• The ITP exclude a number of incomes from
employment – see Article 65
• First, some of these incomes are excluded largely
because they represent reimbursements of certain
employee expenses. For example transportation
allowances are reimbursements by employers for
transportation expenses incurred for the purpose of
discharging their functions. The same can be said of
hardship and traveling allowances.
• Secondly, some exclusions partially reflect a public
policy of encouraging certain kinds of payments to
employees – e.g., medical allowances.
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6. Cont’d…
• In any case, exclusions represent a departure from a
comprehensive definition of income. They might also
be discriminatory, because some allowances are not
excluded. Example: housing allowance.
• Medical Allowances: the ITP stipulate that medical
allowances are excludable. The nature as well as
scope of medical allowances is not defined in the law.
This leaves many questions unanswered: what is a
medical allowance? Is a payment for yoga classes, or a
gym or alternative medicine a medical allowance?
How about if employers reimburse employees for
dietary supplements ordered by physicians?
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7. Cont’d…
• Hardship allowance: the meaning of hardship allowance has
also been restricted by a directive that defines it as an
allowance for a weather condition. The Amharic version of
the regulation ‘hardship allowance’ indicates weather
condition allowance.
• There are questions as to whether hardship allowance
should be restricted to weather conditions.
• St. Paul Hospital Case; Cement Factory Cases; Ethio-Telecom
Case, and others raise serious questions about whether
should be a decisive and sole factor ‘hardship allowances’.
• Travelling allowance – distinguish it from transportation
allowance.
• Board fees – this is partly a reimbursement for additional
expenses – somewhat similar to transportation allowance
because it forces board members to travel from one place of
work to another. 7
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8. Fringe benefits
• Fringe benefits are in-kind benefits that various employees
receive from their employment. They vary from one
workplace to another – company cars, fuel, housing, meals,
clothing, discount goods and services, free medical services,
free entertainment and fitness services, free training and
educational opportunities, etc.
• High valued fringe benefits are usually made available to
highly paid employees.
• Fringe benefits are not exempted by law, but lack of proper
valuation rules has effectively resulted in their exemption.
• Ethiopian income tax system is harsh against those
employees who receive their income in cash.
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