public chapter 4&5

• Income


  Every sort of economic benefit including gains in cash or in kind, from whatever source derived and in whatever form paid, credited or received
• Sources of Income


  • Income from employment
  • Income from business activities
  • Income derived by an entertainer, musician or sportsperson from his/her personal activities
  • Income from entrepreneurial activities carried on by a non-resident through a permanent establishment in Ethiopia
  • 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 much property is situated in Ethiopia
  • Dividends distributed by a resident company
  • Profit shares paid by a resident registered partnership
  • 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/she maintains in Ethiopia
  • 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
• Schedules of Income


  • Schedule 'A' Income from employment
  • Schedule 'B' Income from rental buildings
  • Schedule 'C' Income from business
  • Schedule 'D' Income from other sources
  • Schedule 'E' Exemptions
• Determination of Employment Income (Schedule 'A')

  1. Determination of Gross employment income: all type of income like basic salary, allowance, overtime and bonus

  2. Taxable Income: Every person deriving income for employment is liable to pay tax on that income at the rate specified in schedule 'A'. The first Birr 600 (six hundred Birr) of employment income is excluded from taxable income. If the tax on income from employment, instead of being deducted from the salary on wage of the employee, is paid by the employee in whole or in part, the amount so paid shall be added to the taxable income and shall be considered as part thereof.

  3. Employers have an obligation to withhold the tax from each payment to an employee and to pay to the tax authority the amount withheld during each calendar month.
• Exemptions


  • Income from casual employment. Income from employment received by casual employees who are not regularly employed provided that they do not work for more than one month for the same employer in any twelve months period.
  • Contribution of retirement benefits by employers. 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.
  • Income from Diplomatic and consular representatives, and other persons employed in any Embassy, Legation, Consulate or Mission of a foreign state performing state affairs, which 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.
  • Payments as compensation. Payments made to a person as compensation or gratitude in relation to: Personal injuries suffered by that person; The death of another person.
• Allowable Deductions


  • Reimbursed medical expenses
  • Transportation allowance (if provided in the contract): Federal 25% of basic salary or not more than Br 800; Addis Ababa 15% of basic salary or not more than Br 500
  • Hardship Allowance
  • Desert Allowance
  • Reimbursed traveling expense (incurred on duty)
• Employment Income Tax Rate

  • Up to 600: Exemption
  • 600 –1,650: 10%
  • 1,650 –3,200: 15%
  • 3,200 –5,250: 20%
  • 5,250 –7,800: 25%
  • 7,800 –10,900: 30%
  • Above 10,900: 35%
• Methods of employment income tax computations

  1. Progression method: The amount of tax is calculated for each layer of tax bracket by multiplying the given rate under Schedule 'A' for each additional income.

  2. Deduction method: Deduction is computed by the following formula: Deduction = upper taxable income pervious tax bracket tax rate of given bracket- cumulative threshold
• Employment Income Tax Computation

  • Abel Tena: Gross Earnings Br.3,325, Taxable Income Br.3,325, Total Deductions Br.602.5, Net Pay Br.2,722.5
  • Sara Chala: Gross Earnings Br.4,200, Taxable Income Br.4,200, Total Deductions Br.1,103.5, Net Pay Br.3,096.5
  • Nega Girum: Gross Earnings Br.2,350, Taxable Income Br.2,250, Total Deductions Br.483, Net Pay Br.1,867
• Rental Income


  All form of income from rent of a building and rent of furniture and equipment if the building is fully furnished. Income from the lease of business including goods, equipment and building which are part of the normal operation of a business (called business lease) are taxable under another schedule that is in Schedule 'C'.
• Lessor


  The party who grants rent of the building
• Lessee


  The one who leases the property for use
• Sub-lessor


  The first lessee who allows the building to be sub-leased to another party
• Sub-lessee


  The third party who rents the building from the sub-lessor
• The owner of the building who allows a lessee to sub-lease is liable for payment of the tax for which the sub-lessor is liable, in the event the sub-lessor fails to pay.
• Taxable Income for Rental of Buildings (Schedule 'B')

  1. Gross income includes all payments, either in cash or benefited in kind, received by the lessor

  2. All payments made by the lessee on the behalf of the lessor

  3. The value of any renovation or improvement to the land or the building is also part of taxable income if such cost is borne by the lessee in addition to rent payable
• Deductions for Rental Income (for taxpayers who maintain books of account)

  • The cost of the lease of land on which the building is situated
  • Repairs and maintenance
  • Depreciation of the building, furniture and equipment
  • Interest and insurance premiums
  • Fees and charges, but not tax, levied by a State or city administration in respect of the land or building leased
• Deductions for Rental Income (for taxpayers who do not maintain books of account)


  • Any fees and charges, but not tax, levied by a State or city administration in respect of the land or building leased and paid by the taxpayer during the year
  • An amount equal to fifty present (50%) of the gross rental income derived by the taxpayer for the year as an allowance for the repair, maintenance, and depreciation of the building, furniture, and equipment
• Tax Rate on Rental Income

  • If the lessor or owners are bodies: 30% of taxable income
  • For persons: Up to 7,200: Exempted; 7,200 –19,800: 10%; 19,800 –38,400: 15%; 38,400 –63,000: 20%; 63,000 –93,600: 25%; 93,600 –130,800: 30%; Above 130,800: 35%
• Rental Income Tax Computation

  • Mr. X has a building rented out for 12 months at Br 30,000 per month. He paid 15% of the rent as land taxes and 3% as other taxes. He spent Br 10,000 on building maintenance. The building was constructed in 2008 at a cost of Br 3,000,000.
• Taxable Income from Rental (Income per year) in Birr


  • Up to 7,200
  • 7,200 – 19,800
  • 19,800 – 38,400
  • 38,400 – 63,000
  • 63,000 – 93,600
  • 93,600 – 130,800
  • Above 130,800
• Tax rate (%)


  • Exempted
  • 10
  • 15
  • 20
  • 25
  • 30
  • 35
• Deduction in Birr


  • 0
  • 720
  • 1,710
  • 3,630
  • 6,780
  • 11,460
  • 18,000
• Mr. X has a building that is available for rent in year 2008
• He has let out for twelve months
• Actual rent for a month is birr 30,000
• He paid 15% of the actual rent received as land taxes and 3% as other taxes
• He spent birr 10,000 for maintenance of the building
• Depreciation Schedule


  • Building (2008, 3,000,000, -, 3,000,000)
  • Equipment (2008, 150,000, -, 150,000)
  • Computer & Accessory (2008, 100,000, 60,000, 160,000)
• Mr. X does not maintain any books of accounts in this regard
• Mr. X assumes that he has maintained books of accounts
• Annual rental income (birr 30,000*12 months) is 360,000
• Allowable deductions


  • Land tax (15% of 360,000)
  • Other taxes (3% of 360,000)
  • Maintenance (50% of 360,000)
• Taxable income is 115,200
• Tax liability is 23,100
• Allowable deductions


  • Land tax (15% of 360,000)
  • Other taxes (3% of 360,000)
  • Maintenance
  • Dep Expense Building
  • Dep Expense Equipment
  • Dep Expense computer
• Taxable Income is 65,200
• Tax liability is 9,520
• Business means manufacture or purchase and sale of a commodity with a view to make profit
• Business includes any trade, commerce or manufacture or any other adventure or concern in the nature of entrepreneurial activity