Government relaxes dividend tax collection plans

Ethiopia’s government has promised to stop collecting tax on unpaid dividend to shareholders of companies. The Prime Minister, Hailemariam Desalegn, made the pledge while hosting his first National Business Conference at the UN Conference Centre. The conference focused on tax and multimodal issues. Government officials and the Prime Minister answered questions from the private sector on a number of issues.

High on the private sector agenda was the government’s demands for huge sums of money from companies and shareholders in the form of unpaid dividend profits. The private sector has long argued that the new unpaid divided tax payment system is illegal – a claim consistently denied by government officials. But at the conference, the Minister of Finance and Economic Development, Sufian Ahmed, said that the government will not demand payment of tax from unpaid dividend profit, a move that is likely to satisfy the demands of the private sector.

Heads of private companies who attended the event had not been expecting this move, because the Ethiopian Revenue and Customs Authority (ERCA) has previously refused to exempt private limited companies and their shareholders from the sudden tax levy. The tax that the ERCA claimed it was owed amounted to 10 per cent of the accumulated net profit that would be divided between company shareholders. The authority was also demanding interest and penalty charges on unpaid tax, dating back to the 2003/04 fiscal year. It has later agreed to drop its demand for interest payments and penalty charges. Under the original plan, the authority identified 1464 companies as possible payers. From these 470 companies the authority expected 816 million birr including interest and penalty.

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 apportioned their net profit, and it was not usual to impose the tax unless the company distributed the dividend to its shareholders. Many companies would leave the undistributed profit under retained earnings on their financial statement or transfer it to their capital. Shareholders are legally obliged to pay 10 per cent tax to the Authority when they collect their dividend from PLCs or share companies, or the company is expected to withhold ten percent from their dividend and pay it to ERCA.

Analysts say such a move would stifle private businesses, as it would drain off their cash flow and working capital, especially for capital-intensive types of commerce. In addition, representatives of the business community raised questions about private sector involvement in multi modal shipping services, which is now monopolised by the Ethiopian Shipping and Logistics Service.

The PM responded that the government is not crowding out the private sector, and in fact it is preparing a new law that concerns private participation. He noted that the few areas closed for now are power, telecom and foreign banking. Private sector companies also raised the idea of establishing a manufacturing bank to solve loan constraint problems for other banks and the reformation of the commercial code. Government officials stressed that current collection rates are low. They said most of the tariffs are very small, with a maximum amount of 35%.

Meanwhile, it was noted that growth in the manufacturing sector has been high in Ethiopia in past years, but tax revenues are low, accounting for just 12% of total tax income. This is lower than in other African countries, where the average is 17%.

“Our procurement directive is clear and it is based on a competitive manner. We use an open bid approach for our procurement procedure,” Sufian responded, when asked about the government’s procurement process. Private sector companies also raised questions about growth in public investment. Delegates at the conference – including athlete Haile Gebresellassie – claimed that public investment will influence private sector growth in the long-term.

Sufian said that government has been advised by some to minimise public investment, in the face of claims that it is damaging the private sector. “But it is basic to expand the country’s development,” he argued. According to the long serving MoFED head, public sector investment in Ethiopia is huge compared with other countries and the development in the country. “If we do not apply this it is difficult to end poverty and compete with other countries,” he added. The minister said that public investment is focused on training skilled manpower for infrastructure (road and electricity) development. “The railway sector is also the other major public investment,” he explained. According to Sufian, once finalised, this investment will significantly reduce trade logistics costs. “How ever the government is working on this project, the private sector is part of it – directly or indirectly,” he added.

Teklewold Atnafu, Governor of the National Bank of Ethiopia, classified public investment in two ways: capital budget investment and public enterprise subsidiary investment. He also confirmed that government investment has increased. In the last 11 months of this budget year, 224 billion birr was invested in different sectors. 57% of that was invested in public enterprises and the rest in the private sector. The Governor said that 90% of government loans allocated for public enterprises were for investment. He said that of the 95 billion birr loaned to the private sector, only 15% was allocated as long-term loans, while the rest was dispersed as short-term loans. He added that private banks have to contribute to long-term loan schemes. Public investment is not influencing financial demand or business activity in the private sector, according to National Bank data. Teklewold added that loans are available to the private sector from state banks for long-term investments with a 70% loan facility.

To raise funds, the government has imposed a 27% bond purchase on private banks to contribute a sufficient amount for investment and loans given by the Development Bank of Ethiopia (DBE). He said that the majority of loans from DBE for the private sector are allocated for foreign investment, suggesting local investors are not using the loan schemes.

The conference also addressed complaints from the private sector about the credit scheme affecting business transactions on different markets in the country. This scheme is not related to the banking service or loan services that are considered financial business activities. Teklewold also mentioned that higher purchase is a product of banking sector. On the new law it will include on NBE, he explained that receiving goods on credit is related with financial part.  He said that the difference is between loans in kind and loans in cash. Most of the transaction especially in the major market centres in the country such as Merkato is undertaken by credit.

According to the governor, a new directive has been drafted to include the lease financing proclamation that allows the bank to control the credit system. The capital equipment lease financing and operating proclamation was amended in 1998 to allow investment in the equipment lease business. But only construction machinery lease companies are using this sector under the operating lease financial scheme. For this investment the licence will be given by the Ministry of Trade and based on the new regulations as one of the financial institutions governed by NBE. “Business transactions that include taking goods on credit is going to be included under NBE regulation,” said Teklewold.

On the discussion, private IT companies on their pat called for the government to give attention to the sector’s development growth. “Manufacturing sector is first for this transformation. The IT sector is also included in this transformation,” the PM said. “We have to expand the IT sector and we are ready to discuss with the private sector to expand it,” he added. “Government investment in infrastructure is a must to boost the economy,” he clarified. He said that the trade logistics price is higher in Ethiopia than elsewhere in the world. “Due to that we have to invest in this sector,” he said, in relation to public investment in the transport sector. “The other sector we have to invest in is the power sector, which is one of the back bones to boost the investment sector.

These kinds of investment are our only option to boost manufacturing,” he said. He also said that the government’s intention is to transform the private sector (trade and service) to the manufacturing sector. “The government investment is not the priority. Our anxiety is how we include the private sector to manufacturing,” Hailemariam said. “FDI is basic but the private sector has to transform from the current service and trade sector to manufacturing,” he added.