ERCA to collect tax arrears from undistributed dividend

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The Ethiopia Revenue and Customs Authority (ERCA) is engaged in collecting back taxes from private limited companies and share companies on undistributed dividend for shareholders. Although the taxes remain ten percent of the accumulated net profit, ERCA is claiming interest as well as penalty on the unpaid tax since 2003/04 fiscal year. 
The period before 2003/04 is not concerned with this latest tax levy due to the period of limitation as proclaimed at the time by the government. Though finance experts have opposed the new measure saying that it has no legal framework, ERCA says that the tax proclamation gives room to implement the new tax enforcement. 
Habitually, shareholders or company owners would pay ten percent tax to the authority when they apportion their net profit, and it was not usual to impose the tax unless the company distributes the dividend to its shareholders. Mostly companies would leave the undistributed profit under retained earnings on their financial statement or transfer it to their capital. The lately introduced duty is based on a circular signed in October this year by Eshetu Dessie, deputy director of change and modernization works sector under ERCA. The tax arrears collection hence concerns the past seven years’ registered net profit and undistributed in the form of dividend. However, the calculation sets aside five percent of the net profit registered that is legally authorized and even encouraged to pass onto the capital of the company. This amount should also not surpass ten percent of the registered capital of the company.
As per the country’s law shareholders have to pay ten percent tax to the Authority when they collect their dividend from PLCs or share companies, or on the other hand the company is expected to withhold ten percent from their dividend and pay it to ERCA.
Such a move say analysts would stifle private businesses as it would drain off their cash flow and working capital, especially for those capital intensive types of commerce. 
According to the new circular dispatched to ERCA’s high and medium tax payers’ branch offices, the country’s proclamation and directives issued in different periods allows the government to collect tax from unpaid dividend. 
It indicates that to endorse this tax, the authority has undertaken several discussions at different levels within ERCA.
Before the implementation of the unpaid dividend tax collection, the authority sent the draft proposal to the Ministry of Finance and Economic Development (MoFED) to get its views in relation to the legal framework of the country’s laws and regulations.
After reviewing it Wasihun Abate, legal department head of MoFED, replied to ERCA in July 2012 that based on the commercial code and tax proclamation, the authority can collect the stated tax arrears from the companies that did not pay out dividends for their share holders and kept their net profit as retained earnings.
Capital learnt that the three branch offices have already commenced calling in companies to collect their duty on the accumulated unpaid dividend with interest and penalty fees. According to the tax proclamation shareholders have to pay ten percent from their dividend, but companies are responsible to withhold and pay the tax for the authority.
Over 10,000 high and medium tax payers in the city are expected to be asked to pay the arrears. The eastern Addis Ababa medium tax payers’ office is already working on notifying its tax payers the amount it is expecting to collect from the companies. Capital learnt that the branch office is looking into the accrued tax with interest and penalty fee from over 5000 share companies and PLCs.
Auditors whom Capital contacted to get their views on the arrears collection said that the current ERCA’s move is not right. One auditor said that any share company or PLC can decide not to give out profit to its shareholders. “They can keep the profit under retained earnings and ERCA does not have a legal right to ask the accrued tax from the unpaid dividend. If they declare dividend, companies have a responsibility to pay the 10 percent dividend tax however if they did not distribute it for shareholders they are not obliged to pay tax on it,” the auditor said.
Meanwhile, ERCA’s contention is that, should the company decide to keep the surplus it did not pay out to its shareholders as capital, then proper procedures should be followed through the notary office and the company’s capital should be raised.