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The New Investment Incentive Scheme is Expected to Change the Investment Ecosystem
By Sintayehu Abebe | Tue Jul 05 2022
As part of the country’s economic reform program, the government of Ethiopia adopted a new investment proclamation and regulation in 2020, repealing the decade-old investment Proclamation No. 769/2012 (read our blog on the new investment proclamation here) and Regulation No. 272/2012, hereinafter referred to as the Repealed Regulation. Despite the adoption of these investment laws, investment incentives provided under the Investment Incentives and Investment Areas Reserved for Domestic Investors Council of Ministers Regulation No. 270/2012 were not repealed and were kept as transitory provisions until a new Incentive Regulation is enacted. The business community has been waiting for the introduction of new investment incentives and after more than two years, the Council of Ministers has approved new regulations to provide for investment incentives, hereinafter referred to as the Incentive Regulation.
Investment Proclamation No. 1180/2020 clearly stipulates the necessity to further increase and diversify foreign investment inflow into Ethiopia to accelerate inward transfer and diffusion of knowledge, skill, and technology. The adoption of a separate and detailed Investment Regulation compared to the previous one can be considered as a move to achieve this commitment and make the country a destination for Foreign Direct Investment (FDI). Nevertheless, whether the Investment Regulation will achieve its targeted goal will be seen in the coming years. With this in mind, we have covered the major highlights of the Incentive Regulation briefly below.
Administration of Investment Incentives - The Incentive Regulation has given the Ministry of Finance (MoF) a broad range of powers in administering investment incentives. Previously, various government bodies were empowered to govern different sections of the incentives. For instance, the Ethiopian Investment Board was assigned to come up with a directive to regulate the exemption of motor vehicles, and the Ethiopian Investment Commission had the power to decide on the importation of duty-free capital goods and construction materials. However, under the Incentive Regulation, the MoF has the power to issue directives to govern these matters. In addition to this authority, the MoF can grant tax incentives, issue directives on the eligibility criteria for tax incentives, and conduct a cost-benefit analysis on investment incentives to determine the impact of tax incentives on the economy. Furthermore, the MoF is empowered as an overseeing body over other regulatory institutions in ensuring whether tax incentives are used for their designated purposes.
Investment Areas and Incentives - Investors which invest in areas that are far from Addis Ababa have additional investment incentives provided under the incentive laws. The Repealed Regulation clearly mentions these areas; however, the Incentive Regulation does not. It states that investors who invest in areas far from the urban center and/or with very low infrastructure development will be entitled to an income tax deduction of 30% for three consecutive years after the expiry of the income tax exemption period. The MoF is expected to come up with a directive listing these geographic areas. Similarly, investors who invest in new, atypical, and selected tourist destination areas in hotels, lodges, and resorts with a rank of a star will be entitled to a five-year income tax exemption. The MoF directive is also expected to list these atypical and selected tourist destination areas.
Employment Opportunities for Ethiopians Abroad - Investors who provide job opportunities for Ethiopians abroad are provided with income tax exemptions. There are three requirements to be fulfilled by the investors in order to benefit from this exemption. First, the employee who will go outside of Ethiopia should obtain a qualification certificate from an institution recognized for providing training to persons who are to be placed in a foreign country. Nonetheless, the Investment Regulation does not state the type of qualification or training necessary for employees who will go outside of Ethiopia. Secondly, the employer should bring evidence from the Ministry of Labor and Skills that proves the employment of Ethiopians outside of Ethiopia. Lastly, based on the number of Ethiopians sent abroad, the income tax exemption schemes provided under the Incentive Regulation can differ. Nevertheless, the investor will not get more than six years of exemption, regardless of the number of Ethiopians it sends abroad for work.
Exemption for Expansion or Upgrading of Existing Investment - In relation to exemptions provided for investors who expand and upgrade their existing investment, the Incentive Regulation has made some changes. Under the new law, investors should bring evidence to benefit from such incentives. They should show whether the investment has achieved the type and volume of product and other preconditions as mentioned in their investment license. In addition, the expansion should be in line with the eligibility criteria listed under the directive that will be issued by the MoF. Finally, to benefit from such exemption the investors are expected to submit audit reports about their existing investment.
Incentives for the Mining, Petroleum and Geothermal Works - Section four of the Incentive Regulation gives detailed coverage for mining, petroleum and geothermal works. Investors who engage in these sectors can import machinery, equipment and vehicles without paying customs duty for the operation of their investment. However, capital goods that are imported into Ethiopia cannot be sold to other parties without securing prior approval from the MoF, but the investor can re-export these goods without paying customs duty. Expatriate employees of a contractor and/or a subcontractor that engages in petroleum and geothermal works are allowed to import household goods and personal effects of any kind free of customs duties in accordance with regulations.
Commencement Period for Income Tax Exemption - The starting period for the income tax exemption under the Repealed Regulation is the date of commencement of production or provision of services by the investor. The Ethiopian Investment Commission is required to notify federal or regional tax organs about the commencement of production or provision of services by the investor. Under the new Incentive Regulation, income tax exemption starts after the investor obtains its investment license or expansion permit. The EIC or a federal government body delegated by the EIC to issue investment permits will notify the Ministry of Revenue about the obtainment of an investment license or expansion permit.
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