Scholars and policy makers alike have now almost reached a consensus that charities warrant tax exemption and charitable deduction. Various policy rationales have been put forward for tax exemption and charitable deduction in different jurisdictions. This note provides a brief explanation on the pertinent laws on charitable deduction and tax exemption in Ethiopia. In order to address charitable deduction and tax exemption under Ethiopian law one has to look into the Ethiopian tax laws, particularly the Ethiopian VAT and Income Tax laws, which are the major tax legislation in the country. 

When we look at the VAT Proclamation, most non-profit organizations are expected to pay VAT when they buy goods and services from VAT registered providers of goods and services. Transactions that are exempted from VAT are listed in the subsequent article of the proclamation and when we see the list of exempted transactions there is no blanket exemption for non-profit organizations. However, the following transactions and activities are exempted from VAT;

• the rendering by religious organizations of religious or church related services;  
• the rendering of educational services provided by educational institutions, as well as child care services for children at pre-school institutions; 
• the import or supply of prescription drugs specified in directives issued by the Minister of Health, and the rendering of medical services;
• the supply of goods and rendering of services in the form of humanitarian aid, as well as import of goods transferred to state agencies of Ethiopia and public organizations for the purpose of rehabilitation after natural disasters, industrial accidents, and catastrophes;
• the supply of goods or services by a workshop employing disabled individuals if more than 60 percent of the employees are disabled;

According to the above provisions, other non-profit sector organizations could enjoy exemption from VAT only when they provide humanitarian aid or import goods that they will transfer to state agencies and public organizations. To enjoy the exemption, the organizations in question must have been registered as humanitarian organizations established for the purpose of providing humanitarian aid. On the other hand, when one looks at the Income Tax Proclamation No. 286/2002, which is the principal legislation concerning income tax in Ethiopia, every person having income as defined in the proclamation is required to pay income tax in accordance with the law. The Proclamation proceeds to provide a long illustrative list of activities which will entail income tax liability. The list of these activities includes; 

1. income from employment;
2. income from business activities;
3. income derived by an entertainer, musician, or sports person from his personal activities;
4. income from entrepreneurial activities carried on by a non-resident through a permanent establishment in Ethiopia;
5. income from movable property attributable to a permanent establishment in Ethiopia;
6. income from immovable property and appurtenances thereto, income from livestock and inventory in agriculture and forestry, and income from usufruct and other rights deriving from immovable property is uch property is situated in Ethiopia;
7. income from the alienation of property referred to in(e);
8. dividends distributed by a resident company;
9. profit shares paid by a resident registered partnership;
10. interest paid by the national, a regional or local Government or a resident of Ethiopia, or paid by a non-resident through a permanent establishment that he maintains in Ethiopia;
11. license fees (including lease payments, and royalties paid by a resident or paid by a non resident through a permanent establishment that he maintains in Ethiopia.

Taking into account the fact that some organizations in the non-profit sector engage in income generating activities some of which are found in the list above, we can infer that such organizations will be expected to pay income tax for the income they secure from such activities just like private individuals or business. However, obviously, a non-profit sector will not be expected to pay income tax for the revenue it secures from the donation of its benefactors or members since such revenue does not constitute an income in the sense of Article 6 of Proclamation No. 286/2002. 

The more interesting provision from the perspective of the non-profit sector in relation to income tax is whether or not the benefactors of a non-profit entity can get a tax deduction for the donation they make to such an entity. Article 21(1) (n) provides that donations or gifts are not deductible when the taxable income of a business is determined. Nonetheless, the proclamation provides for the possibility for allowing donations or gifts provided for public use to be deducted as per a Regulation to be issued by the Council of Ministers. In accordance with this provision, the Council of Ministers has in fact stipulated that under certain conditions, donations and gifts made by business would be considered deductible. These conditions are; 

1. If the recipient of the donation is registered as welfare organization and where it is certified by the registering authority that the organization has record of outstanding achievement and its utilization of resources and accounting system operates with transparency and accountability;
2. If the contribution is made in response to an emergency call issued by the Government to defend the sovereignty and integrity of the country, to prevent man made or natural catastrophe, epidemic or for any other similar cause; and
3. Donation made to non-commercial education or health facilities.