Ethiopian Business Review

Executive Super Power: a Challenge for Rule of Law

This Year started with the Ethiopian Revenue and Customs Authority (ERCA) sending "dividend tax assessment notice" to several private limited companies and share companies. This notice was issued on the basis of its own controversial circular that purported to give "legal interpretation" of existing dividend tax by lawyers of ERCA and Ministry of Finance and Economic Planning (MOFED) on the scope of application of dividend tax on undistributed net profits registered under the heading of retained earnings on each company’s account.

Net profits on companies account may be distributed either as dividend to shareholders or used to cover costs for anticipated or reasonable needs such as working capitals, business expansion, machine replacement, settlement of court verdict or arbitration award and in our case, the unpredictable request of tax authority for additional tax payment following desk audit etc...

The commercial code of Ethiopia and local company statutes stipulates the manner and voting procedures how dividends are to be distributed to shareholders. Where a decision for the distribution of dividend has been made, a 10 pct dividend tax shall be withheld by the paying company to ERCA which "has priority over all other obligations" and transfer "the withheld tax …within fifteen (15) days." The legal requirements for distribution, withholding and payment of dividend tax are clear enough as to prevent any interpretation or misinterpretation of words or phrases. Accordingly, there is no controversy on the obligation of pertaining to dividend tax as far as existing Ethiopia’s income tax law is concerned.

The recent controversy between ERCA and tax payers came after the former issued a circular, retroactively levying tax from local companies and imposed penalty and interest on the retained earnings recorded since 2004. Following uproars among company owners, the Ethiopian and Addis Ababa Chamber of Commerce and Sectoral Associations organized a meeting with ERCA officials. During the meeting ERCA explained the content of the new circular and finally promised to, waive the penalty and interest and offered extended payment arrangement, provided the taxpayers agree with the tax assessment notice among others.

ERCA claims that it demanded the payment of “dividend tax” that it had failed to assess and collect for the past 9 years based on its new understanding and interpretation of the existing income tax proclamation and did not introduced anything new on the 34 years old law.

In reality, ERCA issued assessment notice and demanded payment of a 10pct rate tax from retained earnings on the account of local companies and share companies under the guise of “dividend tax.” ERCA’s new circular issued to its branch offices and departments, was issued on October 09, 2013. The operative part of the circular is two pages that are accompanied with attachments of “action plan, Explanatory statements and legal opinion for the assessment and collection of outstanding unpaid dividend tax.”

A painstaking examination of ERCA’s latest move to collect tax through the instrumentality of its new circular reveals how easily public bodies, in present day Ethiopia, can exercise and misuse their immense executive powers proffered by law for unwarranted purposes and exactions of money from tax payers regardless of adverse constitutional and legal ramifications.

Article 113 of the 1955 Revised Constitution of Ethiopia provides that “No tax, duty, impost or Excise shall be imposed, increased, reduced or abolished except by law. No exemption of any tax, duty, impost or excise imposed by law shall be granted except as authorized law.” ERCA claims that it demanded the payment of “dividend tax” that it had failed to assess and collect for the past 9 years based on its new understanding and interpretation of the existing income tax proclamation No comparable provision is available in the current Constitution of Ethiopia even though it is within the competence of the Federal parliament to levy tax and issue tax laws. Indeed both at federal and state level, the parliament is the supreme legislative body that has the power to levy or impose tax and since tax laws must be issued with the consent of the parliament “No tax can be imposed by executive department of a government or by the courts.”

ERCA’s circular superseded existing constitutional order on power distributions reserved to parliament and the judiciary by introducing a new “law” to levy tax on “retained earnings” and usurp the power vested in courts by giving its own interpretation of the law. Thus it issued a retroactive circular

that has the effect of not only widening the scope of application of “dividend tax” to undistributed net profits recorded in companies account as retained earnings for as long back as nine years but also claimed penalties and interests for failure of the tax payers to make timely declaration and settlement of such tax on the basis of the ERCA’s latest understanding and interpretation of dividend tax.

It has been repeatedly claimed that the new circular has neither violated laws nor imposed a new tax but simply gives interpretation and understanding of existing “dividend tax.” Despite this argument however, the circular has so vividly violated and introduced new procedures on provisions of the income tax proclamation and the commercial code of Ethiopia pertaining dividend distribution and dividend tax collection. The circular, rejected the power of general assembly companies to decide on net profits for distribution as dividend or use it for other lawfully authorized purposes. Accordingly, the circular presupposes ERCA’s officers to supplant members of the General Assembly of each company and decide on their be- half, the distribution of dividend to each share holder in ERCA’s bid to collect the 10 pct dividend tax payable from the share of each beneficiary.

The illegality and violation of ERCA’s circular is not limited on the foregoing and it has domino effects on collection of dividend tax too. Dividend tax is collected and paid under tax withholding scheme. Accordingly each company is a withholding agent mandated to deduct 10 pct dividend tax before payment is effected to the beneficiary. The withholding agent is required to deduct, transfer and notify the tax Authority within 15 days of the end of each calendar month.

The tax payer has also several reporting responsibilities including filling forms and issuing appropriate documents.

The new circular disparaged many provisions of the income tax proclamation governing the duties of a withholding agent and directed ERCA’s officer to illegally take over the responsibilities of individual companies with a completely different procedures that replaced it with legally unsanctioned procedure of dividend tax collection. In fact the circular has rescinded ERCA’s circular superseded existing constitutional order on power distributions reserved to parliament and the judiciary the detailed rules regarding withholding and transfer of dividend tax from companies and introduced new collection procedures. Accordingly the circular instructs tax officers to assess and collect the dividend tax of the previous year where the account of companies show transfer of undistributed profit being transferred to another year.

This circular might have been prompted by the pressing needs to col- lect highly demanded money to cover the overstretched activities and projects of the government. While there are least controversial and legally acceptable sys- tems and procedures to levy and collect tax, the wisdom of issuing an illegal and clumsy circular that override higher laws and the constitutional order is highly questionable for a regime that suppos- edly profess on parliamentary system and the rule of law and on the other hand, the action of one of its organ sim- ply transgress the principle of certainty and predictability on tax laws

Yohannes Wolde Gebriel

Yohannes Wolde Gebriel, holds an LLB in Law from AAU. He had served in several public prosecution offices in various capacities. He can be reached at

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