Ethiopian Business Review

The Harsh Reality Facing Firms Accused of Tax Evasion and their Employees

The subject of tax evasion, which refers to illegal practices used to escape from taxation, embraces many dimensions and problems. Global Financial Integrity estimates a sum of USD285 billion economic loss occurs in developing countries a year because of tax evasion. Although the exact figure is hard to find in Ethiopia due to insufficient data and different estimation techniques, tax evasion activities remain one of the major problem in Ethiopia. Even recently, the government announced that 135 companies were implicated in tax evasion activities, totaling around ETB14 billion. However, companies which are accused of involvement in tax evasion, as well as tax experts, stress that the gaps in the tax law is costing businesses unnecessary money, on top of leaving thousands of employees jobless as EBR’s Ashenafi Endale reports.

The morning of March 15, 2019, saw the case of the Indian Oxford Group, which runs five factories, including a textile factory and a plastic factory, come before the eighth bench of the Lideta First Instance Court. Established 22 years ago, Oxford was accused by the former Ethiopian Revenue and Customs Authority (ERCA) five years ago for evading to pay ETB130 million tax although the company claims that the tax assessment and audit was incorrect.
During the court session, the former tax officers who audited Oxford and were caught red handed taking a bribe of five million birr from a Chinese company latter also appeared in the court with a police escort. Although the charges against Oxford were filed after a tax assessment conducted in 2013, prosecutors failed to present documents to support their allegations of tax evasion. The case was adjourned until March 29.

Regardless of the final ruling, this case showcases the existing gaps in the laws that govern the tax regime and the unnecessary costs that are levied on companies accused of tax evasion, as well as employees whose jobs are taken away.

According to Ethiopia’s tax law, when a company is charged with tax evasion and ordered by the government to pay a certain amount of money, it must first submit a complaint to the Tax Appeal Office and Tax Grievance Committee, which are under the current Ministry of Revenues. If unsatisfied, the taxpayer can go to the Tax Appeal Commission, after paying 50Pct of the money involved in the case within 30 days.

Abbas Merchant, owner of Oxford, who brought the company to Ethiopia 22 years ago, however, says the law is unjustified. “Paying 50Pct upfront is difficult especially if the money asked by the government is huge,” he explains. “Since it was a lot of money we couldn’t get it ready in 30 days.”

The justification behind this requirement is to allow the government to be able to recover at least half of the evaded tax if the government wins the case. Yet, Taye Fente, attorney and law consultant, stress that if the company wins there is no guarantee to they will recoup their money. “Taking back the money takes up to six months, after the Ministry of Finance and Economic Cooperation (MoFEC) approves the request. In addition, nobody pays compensation for companies that wins the court battle or brings back their businesses, which have probably already been dissolved.”

The Commission, formerly known as the Tax Appeal Tribunal, used to be located inside the former Ministry of Justice compound, until it moved to the MoR a few months ago. The Proclamation says officers from the MoR should not directly serve in the Commission, a requirement that isn’t currently in practice. Other members in the Commission come from the Chamber of Commerce, MOFEC, and the Ministry of Trade and Industry, among others. Even though the Proclamation states the Commission is an independent institution, insiders say it is just another wing of the government, with no independence.  

Abbas also took his complaint to the then-director of the ERCA and also the Prime Minister’s Office, but to no avail. “The only chance we had was to defend ourselves in court. But the case has dragged on for over four years now,” he explains. “The March 15 hearing was out first chance to present our defense, but the prosecution couldn’t present their case.”

“There are many tax cases that have taken years,” says Abebe Asamere, a tax attorney. “Even some of the cases I am handling currently remains in court for more than four years.”

Tax cases usually has civil and criminal facets. “If someone just fails to pay tax on time, it has no criminal element,” Abebe explains. “However, a tax officer can say that the company intentionally failed to pay tax on time. Therefore it became a criminal case.”

The gaps in the tax law also jeopardise the lives of employees. For instance, even though he was not convicted of anything, Abbas have been forbidden from leaving Ethiopia since the beginning of the case while all of the five factories have been closed by the authorities. “The machineries have been damaged. Over 3,000 employees have lost their jobs. All in all, The Company has lost close to ETB550 million so far,” adds Abbas.

Abbas’ case is not unique. Many businesses accused of tax evasion have suffered from their cases being dragged out in court, which end in the dissolution of the company, even if the court finally decides the company is not at fault. As the information obtained from the Ministry of Trade and Industry shows, the number of total deactivated business licenses for various reasons including problems arising from the tax regime has now doubled from 263,350 in 2014.  
“There are thousands of small businesses whose cases are concealed in tax offices at the district level,” stress Taye. “These cases involve small amounts of money and could be resolved quickly, but it is taking a surprisingly long time. For instance, a case started in 2011 and involves ETB1.5 million was given a final decision last year.”

Generally speaking, tax evasion involves all illegal practices taken to escape from taxation. These include concealing taxable income, profits liable to tax or other taxable activities as well as overstating deductions, exemptions or credits deliberately. Literatures written on the subject reveal that especially in developing countries like Ethiopia tax evasion is a complex and multidimensional problem. The Global Financial Integrity (GFI) estimates that in developing countries the loss in the domestic economy due to tax evasion reaches USD285 billion per year while tax revenue lost due to corporate income tax evasion vary between USD35 billion and USD160 billion annually. Tax evasion by wealthy individuals, on the other hand, results in additional revenue losses ranging from USD15 billion to USD124 billion annually in developing countries.

Although there are various reasons why companies try to avoid or reduce the amount of tax they have to pay, Chiza Chiumya, in s study entitled ‘Counteracting tax evasion in Malawi’ indicates that the reasons can be grouped in two categories. The first factor is the existence of low levels of tax compliance, which emanate from low tax morale, poor quality of service in return for taxes, tax system, and perception of fairness as well as lack of transparency and accountability in public institutions.

Taye says the major reasons for tax evasion in Ethiopia is the inefficient tax system and negative perception towards the tax levied. “In case of inland tax, during assessment or routine audits, officers usually exaggerate sales turnover, which provokes the company to evade tax in order to compensate loses that will be brought by unfair tax assessment,” he explains.  

The customs tax system, which constitutes 40Pct of Ethiopia’s tax revenue, is no different. “Customs duties are determined based on the price data base available at MoR’s branches, which should be updated every three months, according to the law. But in reality, the database has remained the same for some items for up to three years,” argues Taye. “In this case, officers at the customs offices levy exaggerated custom taxes, which leaves importers trapped between paying and evading their tax.”

The second reason for evading and reducing the amount of tax one has to pay relates to weak enforcement of tax laws, which restrain tax authorities from performing their duties, according to Chiumya. In this regard, the weak capacities of tax authorities to detect and prosecute tax violators is a major factor in tax evasion. “We lack the capacity to investigate and prosecute offenders,” agrees Azezew Chane, deputy commissioner of the Ethiopian Customs Commission. “There is also little effort to investigate companies that are abusing incentives.”

“Duty free rebar imported for the hotel industry is sold on the open market. Thousands of vehicles imported for the tourism sector and machineries for the construction sector are sold in the market. There are importers in Mercato, who import without any license or any legal document. They are never touched,” added Taye.

Shortfalls in tax collection is one of the results of low tax legislation enforcement as seen in Ethiopia. The government has planned to cover 70Pct of the country’s ETB346.9 billion budget for the 2018/2019 fiscal year. The MoR planned to collect ETB28.8 billion in taxes in the first quarter of the current fiscal year, but only managed ETB25.59 billion, which is ETB3.21 billion less than the target.

Yet foreign investors as well as domestic businesses complain that the Ministry falls on legal companies for the slightest mistake, leaving behind the really illegal ones. “If a company declares its tax on time, they think it is hiding something. You can be jailed for not issuing receipts for ETB100 sales,” says Taye.
Only 60Pct of eligible companies operating in the country currently use cash register machines in Ethiopia, according to Adanech Abebe, minister of Revenues, who recently briefed journalists.   The MoR also announced the names of 135 companies in February 2019, which were found to be involved in tax evasion activities totaling around ETB14 billion. Close to 70Pct of the companies were importers and wholesalers, while the rest were retailers.

 “It is true we have to focus on importers, wholesalers and industries in order to address the problem at the source. Business cannot continue this way,” Adanech said.

Out of the 135 companies the Ministry arrested in January, most are accused of forging receipts. However, since they are ghost companies that only exist on paper, the MoR only arrested a few people, according to insiders.

Abebe says in recent years aggressive crackdowns have become a nightmare for companies. “Every time the government took measures to punish a few companies, a thousand others evade taxes or turn to the informal sector. Today, the law is used to scare off and intimidate businesses, not as tool for justice.”
As a result, Abebe stresses a fundamental policy shift is needed. “First the tax law must be changed. The tax administrative court, which is quasi-judiciary, needs experts and skilled officers, on top of becoming fully independent.”

Sisay Gezu, director of Tax Evasion Investigation Directorate at the MoR, says the Ministry is reforming itself. “We are undertaking studies in relation with the tax laws and the structure of the institution. But fundamental reform is not a simple task.”

However Abbas, who has experienced the lagging system from the inside, says he cannot wait until the whole tax system is reformed. “There are so many companies that are in tax limbo. The government must have the political will to create an empowered committee that can solve this immediately. We are in an economic state of emergency.”


8th Year • Apr.16 - May.15 2019 • No. 73




 

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