The outbreak of COVID-19 pandemic has brought overall economic, political and social crisis in most parts of the world including Ethiopia. Although there are criticisms on their effectiveness, the government of Ethiopia has been taking measures to ease the economic impact of COVID-19 on the business entities operating in the country. Earlier on the month of April, a protocol was issued by the Ministry of Labor and Social Affairs cited as the COVID-19 Workplace Response Protocol, which regulates the relationship between employees and employees during the COVID-19 pandemic. This protocol was a subject of criticisms due to its silence on the obligation and role of the government in sharing the burdens of employers.
Apart from the protocol, the Council of Ministers has passed a decision earlier this month to cancel tax arrears of the previous tax years to ease the impact of the pandemic on taxpayers. Based on this decision, Ministry of Finance has issued a directive on May 04, 2020 to implement the decision of the Council of Ministers. The directive issued by the Ministry of Finance can be cited as a Tax relief directive No. 64/2012 to ease the economic damage of COVID-19 Pandemic on taxpayers (the Directive). The Directive has brought some significant relief schemes to taxpayers struggling to pay taxes for previous tax years.
In the meantime, the Directive has not been appreciated with some taxpayers who were looking immediate and forward-looking tax reliefs. Having said this, the Directive basis the decision of the Council of Ministries and it has been provided that the Directive is in consistent with the Tax Administration Proclamation No. 983/2016. This proclamation, under article 51, provides tax relief scheme in cases of hardships based on a regulation to be issued by the Council of Ministers. The Directive has not cited any provision of the Council of Ministers regulation signaling the absence of it. It cited the decision of the Council of Ministries to waive the unpaid taxes of taxpayers. As such, the subsequent sections of this brief note assess major aspects of the Directive and analyzes list of tax reliefs provided to the taxpayers.
1. Scope of Application of the Directive
The Directive will broadly applicable on most tax issues including issues arising from the provisions of Income Tax Proclamation, Mining Income tax proclamation, Value Added Tax Proclamation, Turn Over Tax Proclamation, Excise Tax Proclamation and Tax Administration Proclamation. However, the Directive has limited its scope of application with time. Accordingly, the Directive will only applicable for tax payments due up to 2011 Ethiopian Calendar (2018) tax year. As such, the Directive will not be applicable on the 2019 tax year. In addition to this, the Directive has also limited its scope of application to some specific sectors. Consequently, entities engaged on the services sector, manufacturing, export trade, finance and construction sector will only be the beneficiary to this tax relief and removal of penalty and interest schemes.
2. Taxpayers Category in the Directive
The Directive has classified taxpayers based on their tax year or accounting year and their respective tax obligations. Accordingly, two category of taxpayers have been created by the Directive; the first group is category A consists of taxpayers whose accounting year is arranged as per the Ethiopian Calendar and for their respective tax obligation up to 2007 and those taxpayers whose accounting year is arranged as per the Gregorian Calendar and for their tax obligations up to 2014. The second group is category B, which includes taxpayers whose tax year is arranged in accordance with the Ethiopian Calendar and for their tax obligation accrued after 2008 up to 2011 and for taxpayers with a Gregorian Calendar tax year and with their respective tax obligations between 2015-2018. In simple terms, the Directive has classified taxpayers by putting 2014 (2007) tax year as benchmark and tax obligations accrued before 2014 will be categorized under A and tax obligation accrued starting from 2015 to 2018 will be treated at category B.
3. Tax Privileges Provided for Category A and Category B Taxpayers
3.1 Privileges of Category A Taxpayers
As indicated in the Directive, category A taxpayers are fully exempted from the payment of the unpaid tax for the tax years before 2014 and their respective penalty and interests. As it is provided above, category A taxpayers are those taxpayers whose tax liabilities are defined to include tax years up to the 2014 tax year. However, it is to be noted that this tax exemption will not be applicable for those taxpayers who have already paid their tax liability. Therefore, all taxpayers whose tax obligations are accrued for the tax years before 2014 are relieved from the payment of tax provided that those taxpayers who have paid tax will not get tax refund but will not be obliged to pay additional amount of taxation as it may provided in the tax assessment notice of the tax authorities.
Those taxpayers under category A who are litigating with the tax authority at tax review committee or tax appeal commission or at courts regarding payment of tax is required by the Directive to notify the Ministry of Revenues within 30 days of the Directive regarding their interest to proceed with the litigation. If they failed to notify, the litigation will be canceled, and they will become the beneficiary of the tax relief provided that the payments they have paid will not be refunded. Upon notification by the taxpayer, the tax authorities are required to provide written assurance for the cancellation of the unpaid tax obligation. Other detail requirements are provided in the Directive. All in all, the Directive provides immediate tax relief for tax obligations arising before the 2014 tax year excluding the possibility of refunding the tax payments that have already been paid before the issuance of the Directive.
3.2 Privileges of Category B Taxpayers
Comparing to Category A taxpayers, Category B taxpayers has less privileges. As it has been noted above, Category B taxpayers are those taxpayers whose tax obligations are ranging from the 2015 tax year to the 2018 tax year. Accordingly, the Directive has stipulated two type of privileges to category B taxpayers. These are cancellation of penalty and cancellation of interests for the unpaid taxes for tax years of 2015 to 2018. This means that the payment of the full amount of the unpaid tax have not been exempted and taxpayers under category B are relieved only with respect to the payment of interests and penalties in relation to the unpaid tax.
Accordingly, the Directive has provided that any taxpayer who received a tax assessment notice before the date of the Directive from the tax authority and has been informed of unpaid tax and a related duty of paying penalty and interest, shall notify the tax authority its interest to use the relief scheme provided in the Directive. Based on this, two payment modalities are provided in the Directive. The first is signing a payment arrangement with the Authority by paying the 25% of the unpaid tax upfront and agreeing to pay the remaining 75% with one year of the arrangement. As such, if the taxpayer pays the unpaid tax as per the arrangement then it will be relieved from payment of interests and penalties associated with the unpaid taxes.
The second alternative arrangement is to pay the full amount of the unpaid tax at the time of notification. In such cases, the taxpayer will get 10% of the unpaid tax as a deduction from the authority and the payment obligation of the penalty and interests will be automatically canceled. In line with category A taxpayers, category B taxpayers have also an obligation to notify the tax authority the cancelation of all pending cases at the tax review committee, tax appeal commission and courts in order become the beneficiary of the scheme. For this purpose, the taxpayers are required to submit a written evidence for the cancellation of pending cases from the appropriate bodies.
The above procedures are also applicable for those taxpayers who have already paid tax but have not yet received tax assessment notice from the authority. Such entities can be the beneficiary of the scheme, if they notify the tax authority within 30 days of the tax notice their willingness to benefit from the Directive. The Directive is also applicable for those taxpayers who have not declared and pay any amount of tax during the tax years provided above. Such taxpayers will get an exemption from the payment of interests and penalties despite the fact that there are no taxes accrued and to be paid. If there is an unpaid tax the taxpayers will get exemption from the payment of interests and penalties provided that they have paid the unpaid tax. For this purpose, the above procedures applicable for taxpayers who have paid part of their tax obligation will be applicable.
As such, it has to be noted that failing to notify to the authority within the time-frame provided in the Directive to become beneficiary of the relief scheme will lead taxpayers to be the subject of the usual application of tax laws.
4. Common Privileges
As it has been assessed above, the Directive has provided tax privileges for both Category A and Category B taxpayers with some significant amount of difference between the two. In line with this, the Directive has also provided privileges, which can be categorized as a common privilege for both categories. As such, the Directive has provided a scheme for the return of confiscated properties by the authority. Confiscation of properties of the taxpayer’s properties are the normal power of the tax authority to enforce tax laws. Based on this, the Directive is saying that upon fulfilling some conditions, the confiscated properties of the taxpayer will be returned. Consequently, the conditions to be fulfilled by the Category A and Category B taxpayers are different. For Category A taxpayers, they are obliged to prove that they are active in the market to get their confiscated properties back. The details of the evidences to be provided by the taxpayers for its activeness in the economy will be determined by the Ministry of Finance. In addition to this, the taxpayer should not have any unpaid tax liability for the 2019 tax year to get the confiscated property.
For Category B taxpayers, the Directive requires payment of the unpaid tax in accordance with the payment arrangement that this note assessed above. In the arrangement of paying the 25% of the unpaid tax and payment of the remaining 75% unpaid tax, the taxpayer may use the confiscated properties upon the consent of the tax authority. However, in such cases the taxpayer is obliged to bring bank guarantee. As such, the directive has provided schemes for the return of both moveable and immovable properties to the taxpayers for both category A and B taxpayers.
As it has been noted, the wide range of economic effects of the COVID-19 pandemic will mainly be minimized through the government’s effort of assisting the working category of the society. Taxpayers are the backbone of the Ethiopia’s economy and they are the primary victims of the negative impact of the Pandemic. Although the decisions taken by the Council of Ministries and the immediate reaction of the Ministry of Finance to issue a directive is much appreciated, this will not be sufficient to address the concerns of the taxpayers. Continues study and support will be required to alleviate the economic impact of the Pandemic. In the meantime, taxpayers are advised to make use of such schemes and to push appropriate tax offices as there may be a tendencies from the tax authorities of being reluctant in providing the benefits provided in the Directive.