Executives’ Criminal Liability in Tax Offences

Issues to Note While Amending the Income Tax Law

With some minor amendments, the Income Tax Law (proclamation no 286/2002) has been operational for the last 14 years, complemented by the proclamation regulating Ethiopia’s Value Added Tax. Both proclamations were the result of measures the government took to expand the tax base and modernise the system. The purpose was to mobilise resources to fund development projects and government expenditures from domestic sources. The results have been noticeable, as the federal tax authority was able to increase tax collection drastically, with the annual amount reaching more than ETB100 billion in the just-ended budget year.However, the growth of the economy, the increasing complexity of business transactions, gaps in the application of the tax laws, and the need to harmonise these regulations with other laws has necessitated the amendment of income tax statutes. Therefore, the amended draft income tax law has become a topical legal issue and a concern of serious discussion for businesses, lawyers, policy advocates and academicians in related fields of expertise.
With the government’s growing appetite for collecting more revenue and fine-tuning its legal framework to that end comes a growing liability for executives in the private sector. These emerge from irregularities in their financial management and, by extension, tax issues.

Income Tax Offences
The income tax proclamation enumerates the types of tax offences and serves as the basis for the criminal liability of alleged offenders. Accordingly, the misuse of a tax identification number, tax evasion, making false or misleading statements, obstruction of tax administration and unauthorised tax collection are the major criminal offenses punishable under the proclamation, in tandem with the application of the Federal Criminal Code of 2004.
The other category of offences concerns acts committed by the employees of the tax authority, especially in the use of cash register machines. Aiding and abetting is also punishable with the same penalty as the crime that is being assisted. In the case of offences by these entities, the manager of the organisation at the time of the commission of the offence is treated as having committed the same offence and is liable to a fine and imprisonment under the law. Based on these criminal provisions, many criminal charges have been filed against entities, managers, employees and other suspects and the trials of many cases are still pending.

Liability of Company Managers
For the purpose of this article, company managers are those who are named as such in the memorandum and article of association of private limited companies and share companies. The criminal liability of such managers is governed both by the Federal Criminal Code and by the income tax proclamation.
There are two liability categories for managers. The first one is liability for the violation of the income tax law by their acts. The second one is they are liable for the violation of the income tax law by other employees of the company or for any act of violation of the tax law without the involvement of any identified employee of the company.
For instance, if a forged document is found among the financial documents given to the revenue office for auditing and no one among the employees is identified for producing it, then it may be considered the fault of the company’s manager irrespective of who did it.
The manager’s liability for the acts of other employees and for any violation of the tax law by the company needs reform. This is especially important for leaders who are responsible for the management of big companies. These entities have a large number of employees and the nature of their business operation is complex, making them liable for violations of their own and others.
The transactions of many companies are complex and large. Many transactions are too technical to be effectively managed only by experienced accountants and auditors. The support of lawyers for the accountants should also be there in order to assist with the legal aspects of the accounting.
Tax accounting is becoming increasingly complex in terms of both legal and accounting technicalities. Because of this, it is common to have different views and conclusions among professionals of similar backgrounds on the understanding and application of similar tax problems.
The manager, both as a matter of practice and principle, cannot dictate all the details of each accounting and auditing task. Therefore, to make him or her liable for the fault of the employees without tangible evidence of wrongdoing with his or her direct or indirect involvement in the commission of the offence is neither fair nor justifiable.
The same justification applies in the liability of the manager for the acts of unidentified employees of the company. Unless there is proof as to the direct or indirect involvement of the manager in the alleged commission of the tax offence, there should not be legal ground for his or her liability.

Defense of the Manager
Once the manager is prosecuted for the crime of tax offence, the argument that another employee or individual committed the fault will not be considered as a legal defense. The income tax law clearly states that the manager has to demonstrate to the court that the offence was committed without his or her knowledge or consent. It must also be shown that he or she exercised care, diligence, and skill that a reasonable person would have exercised in comparable circumstances to prevent the commission of the offence.
The question of what kind of evidence needs to be produced to demonstrate that the manager did have neither the knowledge nor consent to the offence are unclear and too subjective for arbitrary evaluation. Instead, the prosecutor has to prove the knowledge and the consent of the manager in the commission of the offence. Hence, proving the circumstance that the offence is committed without his or her knowledge and consent is always difficult and burdensome. Because of this, managers are often found failing to defend themselves in court.
There are managers found guilty and sentenced for failing to prove that they have taken the appropriate managerial measures as stated by law. The problem in the application and interpretation of the managerial prudence clause is the question of what is the real standard of proof or the criteria for its evaluation. In the absence of a legal standard and a concrete evaluation guideline, what are reasonable criteria to show that the manager was actually acting prudent or not? Therefore, the amendment should be able to address this legal ambiguity if it still envisages continuing with this liability provision.
Each business entity has a different institutional nature particular to its own organisational structure. The level of knowledge, experience, wisdom, and the differences in the managerial independence and philosophy of each leader differ substantially from one company to another. The degree of care, diligence and skill to be exercised depends on these personal qualities and the nature of the business, the institutional culture and various organisational issues of that specific entity. The question of how to evaluate the degree of care and diligence of the manager in overseeing a specific entity is critical and needs to be addressed by the reform.

Thinking of Concrete Grounds of Liability Against Managers
The issues of what brings criminal liability to managers needs to be specified. Nevertheless, there are obvious issues for companies to note in order to minimise such risks. For example, companies having millions of transactions are subjected to external audit assessment. The external auditors give opinions and comments on any irregularities in the financial operation and transaction issues that are considered as indications of a tax crime, among other things. Sometimes external auditors strongly recommend specific actions need to be taken by the management to correct irregularities. They have the legal and ethical obligation to do so. In these instances, the manager should take corrective measures. Continuing with the problem regardless of the clear advice and warning of the external auditors should not be tolerated.
The recommendation and opinion of tax auditors from the government and in-house experts, who directly communicate with the management of the company, should also play the same role. In such cases, the manager’s actions cannot be justified by a lack technical knowledge or information on the alleged fault. He or she has to show all the managerial diligence and commitment to correct the identified faults and irregularities and apply the recommended corrective measures. If this is done, the tax offence liability of the manager will be reasonable. Therefore, the amendment of the income tax law needs to revisit these issues in order to make the legal grey areas more clear.

4th Year • November 16 – December 15 2015 • No. 33