By Tsegamlak Solomon, Lincoln Ford & Sintayehu Abebe | Mon Sep 05 2022
Our take on developments in the investment ecosystems of East Africa
New Tax Regulation Exempts Share Premium Tax on Newly Issued Shares
The Ethiopian Council of Ministers has approved an amended income tax regulation (“Amendment Regulation'') which exempts resident companies from payment of tax on share premium income obtained from newly issued shares. Investors have been disputing the implementation of the 2016/2017 Income Tax Proclamation and Regulation by the Ministry of Revenues. The Ministry of Revenues used to apply capital gains tax on the share premium of a company under Schedule D of the Income Tax Proclamation. Although different circulars and directives were issued by the Ministry of Finance directed toward alleviating the gaps in the application, the efforts remained on paper and only moved the tax on premiums from Schedule D (capital gains tax) to Schedule C (tax on profit). The Council of Ministers per the Amendment Regulation and the explanatory note issued therewith stressed the wrongful implementation of the provisions of the Income Tax Proclamation and Regulation and its impact on the country’s effort to attract foreign private equity investors. The Council of Ministers in its explanatory note emphasized that taxing investment discourages investors, especially foreign private equity investors, from investing in Ethiopia. The Amendment Regulation resolved this long-lasting issue between investors and the tax authority by specifically classifying share premiums on newly issued shares as exempt incomes. However, the Amendment Regulation still faced some criticism from domestic investors for specifically exempting share premiums by foreing investors (non-residents).
Introduction of Social Welfare Levy on Imported Products
Ethiopia is ranked among the top countries that tax imports heavily. In principle, there are five different taxes applicable on imported goods in Ethiopia. These are custom duty, excise tax, value added tax, surtax and withholding tax. In addition to this, the Ethiopian government has introduced a new tax on imported products. According to the regulation which introduced this levy the main reason for the introduction of this tax is to support the rehabilitation and construction of schools and medical facilities and the expansion of other social services in the country. The tax rate will be three percent (3%) on imported products and imposed on the Cost, Freight and Insurance (CIF) value of the imported goods. Goods that are exempted from surtax are required to pay the social welfare levies. For instance, petroleum and lubricants were exempted from surtax under the surtax proclamation. However, importers are now expected to pay a social welfare levy on imported petroleum and lubricants. The imposition of a new tax on petroleum and lubricants is expected to fuel the existing inflation in the country.
Opening of the Financial Sector to Foreign Investors
In Ethiopia, the financial sector has been a forbidden fruit for foreign investors. However, on August 6, 2022, the Council of Ministers approved the amendment of Proclamation No. 718/2011 A Proclamation to Provide for National Payment System, the purpose of this amendment is to open the sector for foreign fintech companies. The National Bank of Ethiopia (NBE) recently licensed Ethio-telecom and Kacha Digital Financial Services to engage in the country’s financial sector. Now, the opening of the sector to foreign investors is expected to contribute to the development of the country. Safaricom and other international companies had communicated their interest to engage in the financial sector and the amendment of this Proclamation will give them the right to operate in Ethiopia.
USD 2.7M fund to benefit over 10,000 youth and women
The Challenge Fund for Youth Employment, a Netherlands government funded program, will look to create several job opportunities for women and youth in Uganda during a six year time frame. The fund is partnering with the likes of Palladium and Randstad, Voluntary Service Overseas (VSO), and Marula Agribusiness B.V. to scope out viable solutions that will create favorable employment opportunities for the participants. According to an article in the New Vision, the fund has an estimated portfolio of 10 projects worth over EUR 5.85M and plans to create and match over 25,000 jobs for women and youth, through its implementing partners. According to macrotrends.net, as of 2021, the unemployment rate in Uganda stood at 2.94%, a 0.17% increase from 2020 while the youth unemployment rate was at 4.33%, a 0.33% increase from 2020. This program will create better job opportunities in a country that has one of the youngest populations but has exceedingly struggled with unemployment over the years.
Enhanced Public Finance Management Assured with New Legislation
A new law passed by the Rwandan senate earlier this month gives the Auditor General more powers to audit institutions that his office didn’t usually audit. Specialized entities such as the National Bank of Rwanda, which the AG’s office was not previously auditing, will now fall under the category of public organs which will be audited. According to an article in the New Times Rwanda, the Chairperson of the Committee on National Budget and Patrimony, Omar Munyaneza, stated that though such organs were not drawing finances directly from the national budget, they were using public funds. The new change is meant to ensure that, though they are not allocated funds from the approved national budget, their finances be audited to know how they manage public funds. The new law shall encompass all public organs including those that were originally being audited by auditing firms such as KPMG but under the supervision of the Office of the Auditor General. Under the new law, the Auditor General shall also have access to the audited financial statements of public organs a month earlier than in the previous law. This new legislation will go a long way in managing public funds and maintaining accountability within these institutions. Rwanda continues to maintain a zero tolerance towards corruption with such legislations in order to set a precedent for all public organs and citizens alike.