In Ethiopia, Value Added Tax (VAT) applies to businesses operating in the country, goods imported into the country, and even specific services provided by non-residents without a physical presence in Ethiopia. The new Value Added Tax Proclamation No. 1341/2024 aims to rectify difference between actual and potential tax collection. These changes reflect a comprehensive effort to modernize Ethiopia's VAT system, ensuring it captures emerging economic activities and aligns more closely with international standards. The new regulations that are included in the new VAT Proclamation are designed to broaden the tax base, enhance revenue collection, and provide a clearer and more equitable framework for VAT administration.
The key differences between the new and the previous VAT proclamations are:
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Inclusion of Digital and E-commerce Services: The new VAT Proclamation mandate that foreign e-commerce companies, such as Amazon, Google Play, and Apple, must register for VAT in Ethiopia. These companies are required to open bank accounts in Ethiopia from which VAT will be deducted. If the e-commerce firms behind these services are not registered in Ethiopia, the responsibility of paying the taxes will fall on the business or entity that operates on their behalf. This means that if a local entity or business is facilitating the transactions on behalf of these foreign e-commerce platforms, they will be obliged to pay the VAT on their behalf. This aims to capture tax revenue from the burgeoning digital economy and ensure these international companies contribute to the national tax base.
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Threshold for VAT Registration: raises the threshold to Birr 2 million, broadening the base of VAT-eligible businesses.
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Adjustments in Financial Sector Tax Exemptions: The tax exemptions have been redefined to be more specific to certain activities. This new bill also outlines various goods and services that will continue to enjoy VAT exemptions, including agricultural products, prescription medicine, medical equipment, educational materials, and goods and services donated or supplied by non-profits and religious organizations. Services provided by financial institutions for a fee, such as commissions and service fees, will now be subject to VAT.
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Application of VAT to Additional Sectors: this includes private transportation services with vehicles seating less than eight people, and certain digital financial services offered by fin-tech companies. However, transactions conducted through platforms like Telebirr and M-PESA will remain VAT-exempt. It proposes that telecom service providers collect VAT directly from end users instead of telecom agents, and it obliges users to pay VAT for roaming services and charges when using an Ethiopian registered SIM card abroad.
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VAT on Utilities: proposing to apply a 15% value added tax to utilities such as electricity and water consumption according to the new guidelines. This aims to streamline tax policy and potentially reduce costs for low-income households.
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Delegation of Tax Collection: The Ministry of Revenue is mandated to delegate tax collection to regional offices where it lacks branches. This measure is intended to improve the efficiency and fairness of tax collection across different regions of the country and aiming to improve tax administration.
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In Conclusion
The new VAT Proclamation No. 1341/2024, represent a major design to modernize the efficiency and equity of the VAT system, broaden the tax base, and ensure that emerging sectors contribute to national revenue from the growing digital economy, this strengthens Ethiopia’s future growth and alignment with international standards.Disclaimer
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Compiled by Mahlet Dejene_Legal Associate at Million Legal Services