The Council of Ministers has amended some provisions of the Federal Income Tax Regulation No. 410/2017 (“Regulation”) on September 23, 2021. The amendment was said to be necessitated by the reason that some provisions of the Regulation lack clarity and impacted economic transactions. The amendment (“Amendment”) has the aim of enabling the tax authority collect taxes by resolving the disagreement between the tax authority and taxpayers caused by lack of clarity on the Regulation. It has also the aim of increasing the flow of investment through amending those provisions that adversely impact investment. We have summarized the basic changes introduced by the Amendment as follows:
Depreciation allowance is permitted for lessees in a hire-purchase arrangement
Under the Capital Goods Business Proclamation No, 103/1998, three types of capital goods leasing are recognized i.e. finance lease agreement, operating lease and hire-purchase lease agreements. The Regulation provides a uniform treatment for all kinds of lease arrangements whereby the rent paid by the lessee would be a deductible expense. However, given the fact that in a hire-purchase arrangement, the lessee would be the owner of the leased property after settling all the rent, the Amendment permits these lessees to have depreciation allowance on the leased property instead of treating the rent as a deductible business expenditure.
No depreciation allowance is permitted for a building which is not completed even though partially used as a business asset
The provision of Article 40 of the Regulation was ambiguous in relation to allowing depreciation for buildings partially used as a business asset. The Amendment makes it clear that only buildings that are completed would be entitled to a depreciation allowance in proportion to the portion of the building used as a business asset, if the buildings are used partially as business assets and partially for other purposes.
Loss-carry forward benefit is applicable only if the taxpayer has a taxable income
The Amendment has provided that if the taxpayer has incurred a loss for more than one tax year, the loss of the earlier year must be deducted first. In this regard, the loss will be deducted only if the taxpayer has a taxable income. The loss cannot also be forwarded beyond a period of five years.This is apparently aimed to resolve the contention that a taxpayer who has incurred a loss for more than one year must be entitled to a loss carry-forward privilege for a period of more than five years.In addition, the Amendment has endowed the Ministry of Finance the discretion to allow a third loss suffered by a taxpayer engaged in the manufacturing sector to be carried forward when it believes that there is good cause for doing so.
The treatment of foreign exchange loss has been changed
The Regulation used to provide that if a taxpayer has incurred a foreign currency exchange loss, this loss would only be offset against a foreign currency exchange gain derived by the taxpayer. However, this provision was found to be problematic as most investors and business entities usually do not come across a foreign currency gain. The Amendment changed this and provided that if the foreign exchange loss was sustained in relation to the purchase of capital goods, the loss will be added to the cost of the capital good to be used as a basis for calculation of depreciation. On the other hand, when the loss is incurred for operating expenses, the loss will be considered as a deductible expenditure for the tax year.
Adjustment of Inflation is permitted for shares and bonds in the calculation of capital gains tax
Under Ethiopian income tax law, transfer of immovable properties and shares bonds is subject to Capital Gains Tax. In calculation of such tax, the Regulation allowed inflation adjustment to be made only in respect of the transfer of immovable assets. Now, under the Amendment, inflation adjustment is also permitted to be made to the cost of shares and bonds.
Continued application of the previous Income Tax Proclamation No. 286/2002 for losses carried forward under the same Proclamation
There were occasional arguments on part of some taxpayers that they should be entitled to a new set of loss-carry forward privilege after introduction of the currently applicable Income Tax Proclamation in substitution of the old one. But the Amendment now provides that taxpayers who have carried forward two losses under the previous Income Tax Proclamation will not be entitled to carry-forward any further losses under the new Income Tax Proclamation. If the taxpayer has any loss that should be carried forward under the repealed Proclamation, the loss carry forward will be treated under that law. This means, if the taxpayer has carried forward a loss for one tax year under the repealed proclamation, it will be entitled to carry the remaining loss forward in accordance with the repealed Proclamation. This is to emphasize that the taxpayer is entitled for a loss-carry forward privilege for not more than two losses sustained in its lifetime.
Retroactive application of the Amendment
The Amendment is made to be applicable to outstanding tax disputes and controversies that have not yet been resolved. Accordingly, all tax arrears that emanate from the aforementioned amendments would be settled in accordance with the Amendment.
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