Undistributed dividend tax applies


Revenue Authority rejects businesses complaint The Ethiopian Revenue and Customs Authority (ERCA) declined to exempt the new tax levy that enforce private limited companies and share companies to pay tax from undistributed dividend even though representatives of the business community claim it is against the law.
On the discussion that was held on Saturday January 19 at Desalegn Hotel the business community complained harshly that the new regulation imposed on private limited companies and share companies on undistributed dividend for shareholders is illegal. Although the tax claimed by the authority is ten percent of the accumulated net profit that will be divided between shareholders or owner, ERCA also claimed interest as well as penalty on the unpaid tax since the 2003/04 fiscal year. 
On the discussion facilitated by the Addis Ababa Chamber of Commerce and Sectoral Association Melaku Fenta, Director of ERCA, said that the newly applied regulation will not be lifted and companies will have to pay the tax requested by the authority.
“We will exempt the interest and penalty requested by us for sake of our common interest, as it creates a problem on the companies” Melaku said.
“Companies that do not accept this option will face legal measures” Melaku added.  
Nebyu Samuel advisor of Melaku Fenta said that the authority identified 1464 companies as possible payers and from these 470 companies are already notified. “From these 470 companies the authority needs 816 million birr including interest and penalty, from these 470 companies 120 companies paid fully, 115 companies paid a first payment and appealed for an extension period” Nebyu said. The advisor also added that 144 companies appealed to the authority for a revision on the decision.    
Several participants including legal experts highly disregarded the new scheme citing experiences of other countries.
Unusually several foreign business community have also attended the event and complained about the new scheme saying that it will not promote foreign investment.
In early December ERCA notified companies about the new scheme. 
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.