How to Collect and Pay Employment Income Tax in Ethiopia

Last updated March 14, 2015

Are you preparing to comply with employment income tax obligations for your new agribusiness investment venture in Ethiopia? If not you better should during the process of opening your venture. Like any other responsible investor, you are advised to be ready early on but not before employing your first recruit and signing payments for the first month worked. Otherwise, you will be in trouble sooner or later if you become an irresponsible employer and choose to get your company started and running like that. This article contains a checklist of very useful step-b-step instructions intended to guide particularly new investors on how to discharge their responsibilities with regards to employees’ tax liabilities. Read to learn and perform accordingly.

1

Begin with understanding the employment income tax requirements in Ethiopia

Before you start hiring, you should be aware that your recruits will have tax obligations. The government will collect tax from the payments you make to your employees as it does from any worker of a private, public or any other type of organization. 

Such tax on the earnings of an employee of organizations like yours is called employment income tax. It includes any payment or gain in cash or in kind derived from employment by the employee subject to certain exemptions.

2

Know and own your tax collection responsibilities

You need to know that when you employ workers and engage them in developing and operating your new investment venture, you are committing yourself or your agribusiness company to employment income tax collection obligations. You should therefore be aware and own your responsibilities. These include:

Calculating your employees’ income tax liabilities

  1. Withholding the tax
  2. Paying the tax to the government
3

Filter the incomes in and out of the tax roll

Monthly income over birr 0 to 150 is below the threshold. If you plan to offer employments in this income level, you should remove them from the tax roll. however, payments you make starting from birr 151 are above the threshold and you need to keep such income in the tax roll.

4

Be familiar with the tax bands, tax rates and deductible fees

According to the Income Tax Proclamation No 286/2002, there are six tax bands in addition to the monthly income below the threshold. The government uses a progressive employment income tax system, imposing a heavier tax burden on those employees who earn more. These are 10%, 15%, 20%, 25%, 30% and 35%. 

You need to refer the below table to be familiar with the bands of tax and the respective tax rates and deductible fees.

 

No

Employment income per month

Income tax payable

(%)

Deductible fees

Over birr

To birr

1

0

150

Exempt threshold

 

2

151

650

10

15

3

651

1 400

15

47.50

4

1 401

2 350

20

117.50

5

2 351

3 550

25

235.00

6

3 551

5 000

30

412.50

7

Over 5 000

 

35

662.00

Source: Income tax proclamation No 286/2002

 
5

Distinguish exempt incomes

You should note that not all incomes are taxable. There are many exemptions you need to know and treat accordingly. For details, you may refer the Checklists section at the end of this article.

6

Determine and withhold tax from income for every

Once you engage new recruits either on permanent or temporary basis, you need to calculate and withhold the tax due at the end of every month you pay their incomes. To do so, follow the steps and procedures outlined below: 

  1. First add all the payments in cash and in kind made to their employees in a month.
  2. Refer/consult a tax schedule (schedule that shows how much tax is owed for different amounts of income earned by the employee to find the tax rate applicable on the income earned by the employee.
  3. Multiply the taxable income by the tax rate and then minus the deductible fee: as indicated in the tax schedule.

For example, an employer who pays to an employee 400 birr a month will then have 25 birr to be withheld, i.e. 400 x 10/100 – 15= 25.

7

Decide the means of tax payment transmission

You should forward the tax you withhold every month to the tax authority, i.e., the Ethiopian Revenue and Customs Authority. To do this, you need to choose the most convenient means of transmission for you. The possible ways include:

Paying directly the tax authority, ERCA

  1. Paying to one of the tax collecting agents designated by ERCA
  2. Using electronic filing and payment systems
8

Pay the tax withheld

You need to pay the tax you withhold using the means of transmission that suites you. Remember to provide a statement accompanying each payment in the form and furnished in the manner prescribed by the Tax Authority. The statement shall contain the following information: 

  1. The name, address and Tax Identification Number(TIN) of each employee;
  2. The amount of taxable income derived by each employee from the employment;
  3. The amount of tax withheld from that income and,
  4. The amount of any tax exempt income derived by the employee.
9

Consider tax liabilities if you pay compensation or other funding

There may come circumstances in which you need to pay other benefit packages for instance when you lay off workers or shut down your investment project for some reasons. In such cases you may offer either one or more of the following:

  1. Compensation
  2. Severance
  3. Annual leave
  4. Bonus
  5. Other funding

Employers like shall take notice that these funding for laid-off workers is taxable.

10

Determine and withhold tax on compensation and other funding offers

The base of calculation for the tax to be withheld is the amount of compensation divided by the final salary paid at the time of layoff. This enables you the employer to figure out the specific period of time covered by the compensation.

Calculate the tax to be paid on a monthly basis and multiplies it by the specific period of time covered by the compensation to figure out the total tax to be levied on the total compensation.

For example, suppose the compensation offered to the employee is 30,000 birr and the final regular salary paid when compensation is granted is 2500 birr then the specific period of time covered by compensation is going to be 12 months, i.e., 30000/ 2500 = 12. Hence, the tax to be levied on or withheld from the monthly salary is 448 birr whereas the tax for the period covered by the compensation is 5376 birr, i.e., 448 multiplied by 12.

The base of computation for the tax on severance shall be the final regular salary paid at the time of lay-off.

Bonus, annual leave and other funding to laid-off worker shall be summed up and be divided by the month stated in the above example. The result will be added to the monthly salary of the employee and then the tax due will be computed.

11

Refer the relevant legal documents if you would like to learn more

You are advised to refer the relevant legal documents to gain comprehensive understanding. To learn more and perform according to the legal requirements and procedures, you may refer the following: 

  1. Income Tax Proclamation No 286/2002,
  2. Income Tax (Amendment) Proclamation No. 608/2008,
  3. Income Tax Regulation No. 78/2002,
  4. Directive No. 21/2009 ,and
  5. Circular on severance tax
Notes
Take note that this article was prepared by Amare Molla, Information Hub Coordinator for ABSF, and as such does not necessarily reflect the views and opinions of the institutions involved in funding or managing the AGRIbiz.et website. The article is written with utmost care by referring available and reliable information sources on the topic. It is also thoroughly reviewed by Gertjan Becx, the ABSF project coordinator, and other experts of the project. Despite that, you are advised to check the accuracy of the information as the employment income tax withholding requirements and registration procedures may change over time with, for instance, changes in related laws, regulations and directives of the tax authority.
Tips
  • If you are a big agribusiness company, you are advised to hire a qualified and experienced finance officer. That can help you a great deal in professionally handling not only employment income tax but also all other financial matters according to the relevant Ethiopian laws and regulations.
  • Have adequate and clear work / employment contract agreement. While many of the rules such as tax band and rate go without going, there may be some income types and taxes that can be determined according to employment or agreed work contracts. You are advised to make such agreements in written documents.
Warnings
  • Do not ignore your employer obligations to settle employee’s income tax liabilities. Make sure you or the finance officer of your company withhold and pay such tax in accordance with the relevant laws.
  • Do not over-tax or under-tax. You need to correctly calculate the tax due to avoid possible computational errors.
  • Do not over-withhold the employees’ income tax. You need to pay such tax withheld within 30 days from the end of the month.
References
MOSLA. Employment income tax in Ethiopia. http://www.molsa.gov.et/English/EPro/Documents/Employment%20Income%20Tax%20in%20Ethiopia.pdf. Accessed on January 12, 2015. Income Tax Proclamation No 286/2002. http://www.mfa.gov.et/docs/Proc%20NO.%20286-2002%20Income%20Tax.pdf. Accessed on January 12, 2015. Income Tax (Amendment) Proclamation No. 608/2008. Income Tax Regulation No. 78/2002, ERCA. Directive No. 21/2009 for the execution of income tax privileges. http://wenku.baidu.com/view/9529a3020740be1e650e9a2c. Accessed on January 12, 2015.