In a bid to ensure transparency, the government has introduced a new system that compels public institutions to submit quarterly reports of tax holidays and incentives they grant investors.
The Ethiopian Investment Commission and the Ministry of Mines, Petroleum & Natural Gases are two bodies that grant tax holidays and incentives to investors, and are expected to submit their reports to the Ministry of Finance. The Finance Ministry has already alerted the two institutions about the change and provided them with guideline forms that dictate how to prepare the reports.
“The main aim of the new procedure is to protect the system, which has been abused and is prone to corruption,” said an official at the Ministry, who requested to remain anonymous.
A recent report conducted by the Federal Ethics & Anti-Corruption Commission revealed that the country’s duty-free incentives and tax exemptions had given way to corruption and maladministration.
More duty-free goods are imported than allowed by the regulations; privileges were abused while importing non-duty free items; products imported with these privileges are sold to third parties; and the transfer of privileges takes place between businesses without using the proper channels, according to the findings of the Commission.
For the assessment, the Anti-Corruption Commission sampled 433 businesses that used duty-free privileges in Addis Abeba and Dire Dewa. The March 2018 finding revealed that duty-free incentives of nearly one third of the business transactions sampled were open to corruption.
“We have been sending the reports to the Ethiopian Revenues & Customs Authority [ERCA],” said Teka Gebreyesus, acting commissioner of the Ethiopian Investment Commission, which was identified as one of the liable institutions for in the practice of these abuses in the report.
With the aim of encouraging investments and inflow of foreign capital, tax exemptions and holiday periods are granted based on the remoteness of the investment from Addis Abeba. Investments in areas with slow economic activities get over 15 years of tax holidays, including 100pc tax exemption from custom duties.
The study funded by the Democratic Institutions Programme of the United Nations Development Program and conducted over a yearlong period showed that the lack of cross-checking, over-invoicing and poor follow up as the primary reason for the abuse of the privileges.
“After cross-checking the report from the government institutions,” said the official from the Finance Ministry, “we will send it to parliament.”
Last year, the Finance Ministry along with the World Bank began a study on the administration of tax holidays and other exemptions in the country. The finding of the assessment led to the introduction of the new procedure.
“This will ensure transparency and can minimise the abuse,” said the Ministry official.
Yohannes Woldegebriel, a tax law expert who was once the prosecutor of the Ethiopian Revenues & Customs Authority, begs to differ on this.
“It could help the government only to trace how much revenues were forgone,” said Yohannes. “It can’t control the abuse of the privileges.”
Yohannes believes that problems in understanding and enforcing tax administration laws of the nation are the causes of the abuse. The capacity of the tax authority is also another cause, according to Yohannes.
“The tax authority has to look into itself and enhance efficiency and its capacity to tackle the deep-rooted problem,” Yohannes said.
Although the government has planned to raise the share of tax to GDP ratio annually by one percent, the ratio stands at 12.7pc, which is below the Sub-Saharan Africa average of 18pc. In the past fiscal year, 50 billion Br of the targeted tax revenues remained uncollected, according to ERCA.
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