Employment Income Tax in Ethiopia Introduction
Individuals may receive various types of income such as wages or salary from employment, rent from letting hous or buildings, interest from lending/saving money, and profit from their trading activities or business. The individuals are required to pay income tax. They are ordered to do so by income tax proclamations, regulation and directives. The law specifies how and when the individuals have to pay the required tax. This article deals especially with the aspect of the law which applies to individuals who earn income from employment. According to the law, individuals who obtain income from their employment are required to pay tax. In line with internationally recognized best practice, employee’s income tax liabilities are calculated and paid directly by their employer. As a result the government relies on employers to compute and withhold the tax to be paid by employees. To discharge this responsibility properly, employers may need to know in advance what counts as income or shall be able to distinguish what kind of income is to be taxed or not. This article provides guidance to help employers in this respect.
However, for comprehensive understanding, readers are strongly advid to refer to the proclamation No 286/2002, 608/2008, Regulation No. 78/2002, Directive No. 21/2009 and circular on verance tax.
2. What is Employment Income Tax?
Employment income tax is a tax on the earnings of an employee. The government collects this tax from any individual employees, other than contractors, engaged whether on a permanent or temporary basis to perform rvices under the direction and control of the employer. Employment income includes any payment or gain in cash or in kind received from employment by the employee subject to certain exemptions: e below. Employment income is one of the most well known forms of tax in Ethiopia. In 2008/9 fiscal year, employment income tax amounting to 1.017 billion
birr was collected from payments made by employers to employees. This reprents 4.31% of the total revenue collected by the Tax Authority in that fiscal year.
3. What are the Tax bands, Tax Rates and deductible fees ud to calculate Employment Income Tax? The employee's income tax system divides taxable income into different tax bands. The are a range of income bands with different tax rates. Below is
a schedule that specifies tax bands and their tax rates. According to the above tax rate schedule, employees who earn up to 150 birr a month are below the threshold for paying employment income tax. It is presumed that this exemption has removed hundreds of thousands of low income employees from the tax roll. However, employees who earn 151 birr per month and above are liable t
o pay employment income tax. In order to impo a heavier tax burden on tho employees who earn more, the government us a progressive employment income tax system. Tax on income from employment has 6 bands or groups of rates. The are 10%, 15%, 20%, 25%, 30% and 35%. The minimum tax rate applied to income from employment is 10 percent while the maximum is 35 percent. The bands of rates in the above schedule are ud to compute the tax due.
Employment income (per month)
Income tax payable (%) Deductible fee Over birr
To birr
150 Exempt threshold 151
650 10 15 651
1400 15 47.50 1401
2350 20 117.50 2351
3550 25 235.00 3551
5000 30 412.50 Over 5000
35 662.00
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4. Who shall calculate and withhold the tax due?
Unless the payment is tax-exempt, the employer is responsible for calculating and withholding the tax from every payment to an employee and to forward it to the Tax Authority. By the Tax Authority, we mean the Ethiopian Revenues and Customs Authority (ERCA) Head Office or any of its branch offices established in any part of Ethiopia and the tax authorities of the Regional State. The tax to be paid to the Tax Authority by the employers can be transmitted through financial institutions delegated by the Authority or through electronically filing and payment system.
5. How employers can determine the tax to be withheld?
To determine the tax to be withheld, the employer may u a simple calculation method. In Ethiopia, employers can determine the tax to be withheld by following 3 key steps.
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1.First add all the payments in cash and in kind made to their
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employees in a month.介绍家乡
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 400x10/100-15= 25.
6. How tax on compensation and other funding is
determined?
When companies cut jobs or reduce their workforce, they may offer-
1) Compensation
2) Severance
3) Annual leave
4) Bonus and other funding to laid-off
广州大学是一本吗workers. The employers shall take notice that the funding for laid-off workers is taxable. The ba of calculation for the tax to be withheld is the amount of compensation divided by the final salary paid at the time of lay-off. This enables the employer to figure the specific period of time covered by the compensation. Then the employer calculates the tax to be paid on a monthly basis and multiplies it by the specific period of time covered by the compensation to figure the total tax to be levied on the total compensation.
Example 1, suppo 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 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 448 multiplied by 12.
Example 2, suppo the compensation offered to the employee is 30, 900 birr and the final regular salary paid when compensation is granted is 2500 birr then the specific period of time covered by co
mpensation is going to be
12 month with a remainder of 900 birr. The employer is therefore required
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关于希望的诗句to withhold 93 birr on the remainder in addition to the tax amounting to 5376 birr.
Employers usually offer two month’s verance pay to laid-off workers. The ba of computation for the tax on verance 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 example 1 above. The result
will be added to the monthly salary of the employee and then the tax due will be computed.
7, what are the exemptions allowed under income tax
proclamations, regulations and directives?
7.1, exemptions under the proclamation:
According to the income tax law, not all incomes of the employee are
taxable. The government may tax only a portion of some types of the
employee's income. Therefore employers have to subtract incomes of employees that are not taxable.
Accordingly, article 13 of the proclamation No. 286/2002 declares the
following categories of payments in cash or benefits in kind to be excluded
from computation of employment income tax.
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a)Income from employment received by casual employees who are not
regularly employed provided that they do not work for more than one (1)
month for the same employer in any twelve (12) months period.
b) Pension contribution, provident fund and all forms of retirement benefits
contributed by employers in an amount that does not exceed 15% (fifteen
percent) of the monthly salary of the employee.
c)Subject to reciprocity, income from employment, received for rvices
rendered in the exerci of their duties by:-
i.Diplomatic and consular reprentatives, and
ii.Other persons employed in any embassy, legation, consulate, or mission of a foreign state performing state affairs, who are national
of that state and bearers of diplomatic passports or who are in
accordance with international usage or custom normally and
usually, exempted from the payment of income tax.
d)Income specifically exempted from income tax by
i. any law in Ethiopia unless specifically amended or deleted by
proclamation
