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The dividend tax controversy that seemed to have come to an end last week is still creating confusion among the public.
Officials from the Ethiopian Revenue and Customs Authority (ERCA) and the Ministry of Finance and Economic Development (MoFED) are expected to clarify the government’s stance, tomorrow, July 8. Since the end of last year, ERCA and the private sector have been at odds following the decision of the Revenue Authority to collect tax from ‘undistributed dividend’ or money lying under ‘retained earnings’ in companies’ financial statements.
Since then, the two parties have met on different occasions to discuss the matter. ERCA had kept insisting that it will continue implementing its decision up until the Public Private Conference chaired by PM Hailemariam Desalegn was held on Thursday, June 28 at the UNECA.
During the conference, Sufian Ahmed, Minister of MoFED, explained that tax shall not be levied on undistributed dividend. His statement was followed by a great deal of cheers and clapping in approval by the participants attending the conference.
On Friday June 29th, a day after the conference, the PM stated at a briefing given to journalists that the statement made by the Minister of Finance at the conference was correct. But he clarified his administration’s viewpoint further by stating: “There will only be tax collection from dividend that is distributed to shareholders.” “If the profit is reinvested or added to increase the company’s capital, it will not be taxed,” the PM explained. According to representatives of the private sector who had strenuously argued against ERCA’s decision, implementation of such tax collection is unacceptable.
“It is totally against the country’s law; therefore, it is an illegitimate move by ERCA. The Authority has imposed a new tax regimen with no legal standing,” Zafu Eyesuswork Zafu, challenged ERCA’s measure.
“I was appalled by the so-called Dividend Income Tax Directive on Retained/Un-appropriated Profits issued by the Ethiopian Revenue and Customs Authority (ERCA). I believed and continue to believe that there is no legal basis for the Directive; that it was indeed ill-advised, and above all, represented a gross abuse of authority/power,” Zafu commented on his Facebook wall.
“As far as I am concerned, they should not insist on such kind of tax,” he told Capital a day after the conference.
“To my understanding the government has to change its stance, or else we will have no choice but to go to court,” he said.
High ranking officials at MoFED, who requested anonymity naming the sensitivity of the issue, said that the government shall not lift the tax which it expects to collect from undistributed dividends unless companies can come with evidence attesting to the re-investment of the profit or transfer to their capital.
Mostly, companies would leave the undistributed profit under retained earnings on their financial statements.
“Without this plan, even if shareholders did not receive/collect their dividend, it will be considered as distributed,” officials at MoFED said. “Therefore, they will have to pay the 10 percent dividend profit tax to the government,” they added.
Officials at the Ministry, who spoke to Capital, further argued that such tax collection has legal basis. “Everything will be clarified at Monday’s meeting,” they promised.
Although the tax claimed by the Authority is ten percent of the accumulated net profit that will be divided between shareholders or owners, ERCA has also claimed interest as well as penalty on the unpaid tax since the 2003/04 fiscal year when it launched its dividend tax collection campaign. Later however it agreed to drop the interest and penalty for those who agree to pay fully the amount stated by ERCA. ERCA officials strongly maintained on various discussions with the business community that companies still have to pay the required tax, if necessary even in a pre-agreed instalment payment scheme.
On one of the discussions held in January with the private sector, Nebiyu Samuel, advisor to the Director of ERCA, said that the Authority has identified 1,464 companies who are required to pay the levied tax. “From about 470 companies, the Authority will collect 816 million birr, including interest and penalty,” he announced on the occasion.
The introduction of the controversial tax is based on a circular signed by Eshetu Dessie, Deputy Director of Change and Modernization Works Sector at ERCA in October. The tax arrears collection concerns the registered net profit and undistributed in the form of dividend of the past seven years. However, the calculation sets aside five percent of the net profit registered that is legally authorized, and even encouraged, to pass into the capital of the company. This amount should however not surpass ten percent of the registered capital of the company.
Before the implementation of the collection of unpaid dividend tax, the Authority sent the draft proposal to MoFED for review and check whether it had a legal framework to support it. After the review, Wasyihun Abate, Head of the Legal Department of MoFED, sent a reply to ERCA in July 2012 stating that, based on the Commercial Code and Tax Proclamation, the Authority can go ahead and collect the stated tax arrears from the companies that did not pay out dividends for their shareholders and kept their net profit as retained earnings on their financial statement.
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.
The 2002 Income Tax proclamation, section 5, article 34 indicates that;
1) Every person deriving income from dividends of a share company or withdrawals of profit from a private limited company shall be subject to tax at the rate of ten percent(10%).
2) The withholding Agent shall withhold or collect the tax and account to the Tax Authority.
3) This tax is a final tax in lieu of income tax