The Ministry of Finance is revamping taxation in Ethiopia following the launching of the second leg of the HGED. One thing is for sure this thing about transforming the country into an African Beacon of Prosperity is almost like scaling a steep cliff. You see among others the first phase was plagued by multiple setback factors including COVID-19 and the Russo-Ukraine war. The ten year economic development plan is thus half way into its sixth year currency and after four years the Tax Revenue to GDP ratio is expected to hit 18.2 mark, a Herculean task by all accounts considering the World Bank Groups’ dismal current rating hovering around 3.4-4.0 ratio. For the record the HGED sets the current ratio at 9.2 and this triple fold variance is quite unsettling if you really come to think of it.
After crunching the numbers economists tell you that these ratios translate in to a humongous effort of raising tax revenue from birr 395 billion to 3.9 trillion with estimated annual growth rate of 26.1%. We all need to brace up for hard times to come. The tax is base set to expand and not constrict. The good thing is the government of FDRE doesn’t hold back anything; every data, even every slight detour from the principal Road Map is out there for anyone who cares to look it up. You know like breaking with tradition and publishing a summarized ‘raison d etre’ along with the revised income tax law (Proc 1395/17). Honest to God the access-friendliness of the public records and figures was helpful when we here at NGLHRSM PLC were working on the recently endorsed Strategic Plan and more specifically when we were filing our income tax return for the budget year ended 7 July 2025.
I wouldn’t say roadblocks but it is no secret that as outsourcing business is gathering momentum and forging forward it is met by challenges at each and every turn. The one we recently encountered was relative to the blanket Alternative Minimum 2.5% profit tax levied on all businesses who have reported loss or a profit margin less than 25% of their respective gross annual revenue. The ‘raison d etre’ I mentioned earlier makes the factors that necessitated the levy abundantly clear. Literatures reviewed also reveal that governments customarily use this method in an effort to discourage tax avoidance (note that tax avoidance is quite different from criminal tax evasion). I have absolutely no problem with that, what made us knock at the doors of the Ministry of Finance and officials of the Ministry of Revenue is the key term employed and care taken on the part of the government not to penalize business that earn commission by aggregating total transactions or turnovers as revenue collected.
Officials of the Ministry of Revenue as well as that of the Ministry of Finance went out of their ways to oblige us and entertain our pleas the best they could (incidentally it was a pleasant novelty never witnessed around government functionaries-I mean the warm reception we got and the sincere sense of duty and top notch professionalism exhibited by team- I mean back at office it was a major point of discussion).
In the course of our dialogue what we were able to gather was in the eyes of the tax authorities outsourcing business is wedged between ‘commission’ earning business and entities reporting the whole transaction as sales (own earnings). While they acknowledge that an Outsourcing Company only and actually earns the admin cost and profit margin determined by the contract the fact that it issues total transaction receipt to the Client makes its position precarious. Thus, while it is obvious that it doesn’t buy and resell ‘Services ‘ but enters a contract for the benefit and on behalf of another beneficiary the actual fact eludes most. I know an opposing argument could be offered to counter this but it only shows that much remains to be written and discussed about the business of outsourcing as it has yet to break in to the ‘mainstream’. The good thing is the sector is interesting some segments of academia as encouraging number of graduate senior thesis are beginning to cover the subject. This trend is certain to propel the business into a sub-specialty contract that requires legal framework as a senior office at the tax ministry has observed.
We keep our fingers crossed that the Regulation in the consultation stage at the Ministry of Finance will avoid the misconception by defining Commission earnings as applicable to Outsourcing Companies.
God Bless.
