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Tsega Asamere, managing director and major
shareholder in the family owned Tsega Asamere and
His Family (TAF) Plc, is shocked with the letter he
received from the Ethiopian Revenue and Customs
Authority (RCuA) on March 11, 2009, stating that he
owes the government millions of Birr in tax arrears.
Though he has lodged an appeal to RCuA against this
demand, he is worried that if the decision on his
petition does not turn out in his favour, his
business may be seriously threatened; he may even
end up out of business in trying to comply with the
government’s demand.
The now five million Br capital company, established
10 years ago with an initial capital of one million
Br is engaged in the import of auto spare parts from
Torino, Italy. The company has been requested by
authorities at RCuA to pay close to 2.3 million Br
in tax arrears; the demand is a result of “desk
audits” by the tax authorities, a form of review and
appraisal of accounting books. These audits have
targeted more than 1,000 companies, including TAF.
The three years under revision and appraisal of
accounting transactions are 2006, 2007 and 2008.
“We have no idea how this has happened; after all,
we have documents that show our exact transactions,
and we paid tax based on their [the RCuA] rates,
though we have no documentation to show this,” Tsega
told Fortune.
This statement was in reference to the way tax
authorities calculate rates on the commodities
businesspeople like him import. These businesses
allege that there are discrepancies that stem from
three factors: the actual prices of the imported
commodities against the corresponding prices of the
respective items in customs’ database; changes in
the foreign currency exchange rate in the interval
between the time of order payment and customs
clearing; and the cost of transport from Port
Djibouti to Galafi, a point which marks that a
certain consignment has entered Ethiopia’s
territory.
Putting it into context, this means that if an
importer bought a certain commodity from a foreign
market for 100 dollars on March 3, 2009, if the
exchange rate was one dollar to 10 Br on that date,
the actual price of the commodity would have been
1,000 Br. Assuming that the shipment takes 15 days
and gets to port on March 18, 2009, if the exchange
rate has changed to, say, one dollar for 12 Br, the
importer has to pay tax on the price of the
commodity calculated at the exchange rate on the day
the commodity arrives at one of the customs clearing
points the authority runs across the country, which
would have been 1, 200 Br. Add to that the 9.94 Br
per quintal transport cost from Port Djibouti to
Galafi.
There is also the possibility that the price of the
particular commodity imported as stored in customs
database, which is updated every three months could
differ with the actual market price; if the price as
registered in customs database is 1,500 Br, tax is
calculated based on this rate. The problem arises
when all these price differences are not documented,
the importers claim.
Hence, up to last Tuesday, March 31, 2009, Tsega and
more than 50 other companies lodged complaints to
the committees formed at the authority within the 10
days deadline they had been given. They want to
explain their side of the story, hoping that they
will manage to bridge the differences and finally
reverse the decision by the RCuA, which is currently
under the directorship of Melaku Fenta. Should they
be unsatisfied with the final verdict of these
committees - comprising five members each of staff
from the three tax centres - they have the right to
take their cases to the Tax Appeal Board.
The Appeal Board consists of members from the tax
authority, ministries of Justice, as well as Finance
and Development, and chambers of Commerce and
Sectoral Associations. The hitch though is that they
have to deposit half of what the authority claims
from those appealing in order to have their case
heard. The final resort it to take their cases to
court; this time around, they are not required to
add the remaining balance during the litigation as
was the practice in the past.
But for those who settle on a deal with the
authority to pay what they will have been asked, the
authority will furnish payment modalities so that
they could complete their debts within one or two
years, Melaku told Fortune a week ago.
This settlement will vary depending on the size of
the companies, and how much they are asked to pay.
With those found to have grossly evaded tax, the
authority will begin prosecution, although no
taxpayer has yet been put on the dock since the
latest operation was launched. So far, it has been
those who have violated customs laws who have been
prosecuted by the authority.
“We are not merely interested in collecting money,”
Melaku said. “We want to establish a tax regime that
is respected, functioning, and well integrated.”
Tsega filed his complaint on March 17 and 21, 2009,
against the income tax and VAT decisions,
respectively, served to his company.
Tax authorities want importers to produce documents
that justify the differences in the volume of
transactions as recorded in the books of the
authority against those of the share and private
limited companies, or pay the tax arrears; 36.2pc
(of the arrear in the case of income tax) and the
20.9pc (of the arrear in the case of VAT) annual
interest rates for the three years, as well as the
penalty amount (100pc the initial arrear) within 30
days of the date they have been served the letters,
dubbed “Notice on the Decision for Due Value Added
Tax (VAT)” and “Notice on the Decision for Due
Income Tax.” These are issued by the Law Enforcement
Work Process with the Authority office headed by
Mulugeta Balcha (acting head), whose signature the
letters bear.
“In fact, the way RCuA see the issue may even
entitle the businesses to a tax refund,” a prominent
businessman engaged in the imports of edible oil
told Fortune on condition of anonymity;
although he is not one of those to have been served
with the letters. “I think the root problem sources
from the way the customs people calculate the tax,
which I believe should be changed.”
Beyond being an extreme contradiction of what
businesses served with the letter say, Melaku’s
response to such allegations is very strong. He and
other tax officials at the authority say that the
whole issue mainly boils down to the under and over
invoicing practices by such businesses. For them,
the discrepancy is due to the businessperson’s
“fixing” as manifested in their import dealings.
“We all know what many of our businesspeople do [by
cooking documents in their business deals] in China
and Dubai,” Melaku said during a press conference
last Tuesday. “In addition, our tax collection
system is a self-declare one; therefore, we are
using the information these very tax payers have
given us. Period!”
Nonetheless, Melaku has not denied that the 100
auditors and intelligence officers the authority
recruited for the desk audits operations also use
information from the customs offices for
crosschecking. That [the documents crosscheck] and
all the discrepancies the particular tax payers
complain about, according to him, are all matters of
law. The tax law states that taxes and duties have
to be calculated in the way the businesses allege
causes the discrepancies. That has been the method
these tax payers are familiar with, and RCuA has
been accepting the self-declare rates by the
businesses, according to the Director General.
“But the authority has the right to check the books
whenever we deem it necessary,” Melaku said. “They
have been operating under a law that clearly states
how taxes are calculated, which they know very well;
if they want the law changed that is another
question.”
Tsega argues that he has been paying all that has
been expected of him over the three years and says
that his imports of spare parts under permission by
the Automotive Manufacturing Company of Ethiopia (AMCE)
are all well documented and are unlikely to allow
under or over invoicing. But he also agrees that
there are those who do cook their books.
Many in the business community argue that the
problem is with the Tax Law.
However, for Melaku, raising the issue of changing
the law as a result of the recent audit decisions is
absolutely inappropriate and the concern is
misplaced. Yet, he has not denied that there are
problems on the part of the authority; the all too
apparent lack of frequent revision of the customs
price rate database to ensure better dynamism being
a case he referred to as “the only problem on our
part.”
Despite the controversies, it is this sturdy drive
to check the books of the share and private limited
companies against those of the authority that has
revealed the stringent facts on both sides;
stringent indeed as the results of the desk audits
show that tens and even, in some cases, hundreds of
millions of Birr differences in the volume of
transactions between those declared by the
businesses and the crosscheck documents from
customs.
For instance, TAF had declared that its total
turnover in the three years under investigation was
a little over 16 million Br. But the tax authorities
claim that it is about 20.9 million Br. The 4.8
million Br difference instigated tax authorities to
demand a payment of the about 2.3 million Br tax
arrears from Tsega, an amount that includes a
penalty plus interest accumulated over the years.
His is just one of similar cases involving more than
1,000 share and private limited companies - a vast
majority of them from the services sector - whose
accounts are under review and appraisal by six audit
teams the RCuA has formed to conduct the desk
audits. The number could increase as the audit
operation casts its nets wide to include all the
13,000 taxpayers registered at the federal level.
The teams are scattered among the three branches of
the authority: Large taxpayers, eastern and western
tax centres. The audits they conduct are to
reconcile documents companies have self-declared
during the three years (2006, 2007, and 2008),
reports they have obtained from fiscal printers, and
data collected from customs. The companies
identified are given two weeks to respond to queries
from tax officials, or to submit documents to
support their claims; however, heads of the three
tax centres have been granted the discretionary
power to extend this deadline by one additional
week.
Close to 700 of the businesses have already
responded to queries from tax officials; 680 of
these are in the category of large taxpayers, while
the audit on 410 companies has been completed.
Compared to the highest reported amount on tax dues
up to March 27, 2009 - close to 100 million Br as
stated in the notice served to Salini Construction
for the goods it had imported - and the 22 million
Br notice served to SNAP and OMEDAD Plc on the
income tax front, TAF’s figure appears to be among
the smallest of amounts.
Despite the widely held view that this is a
desperate attempt by the Federal Government to meet
its target of generating 30 billion Br revenue from
domestic sources during this fiscal year - in its
desire to achieve its ambitious goal of cutting
budget deficit below zero - officials argue that
there is a broader agenda behind their current
aggressive drive.
It all begun in 2003, when the Federal Government,
which strongly believes that collection and analysis
of information is key to tax administration, hired a
Canadian IT firm to install an integrated tax
administration system, a software applied in 20
countries and known as “SIGTAX.” This was followed
by the introduction of tax identification numbers
(TIN) for close to 600,000 tax payers across the
country.
The application of TIN will not only be expanded to
a potential 1.6 million taxpayers, including those
on payrolls; manual identification will also be
upgraded to biometrics technology beginning May this
year. The authority has contracted the pilot project
to CopyCut, a Kenyan and South African consortium.
But the breakthrough was when tax authorities
introduced fiscal printers on 300 selected
companies. Although there are now 800 of these
machines operating largely in the capital, the
authority hopes to increase their presence to 20,000
taxpayers. It is negotiating with an Italian
manufacturer, FASY, to supply the market on credit.
Add to this the customs data administration system
known in the industry as ASYCUDA.
Authorities believe that the combination of all
these helped the government integrate the tax
system; collect quality and accurate information on
taxpayers; and assist in revenues collections and
enforcement.
Subsequent to these was the legislative process of
the new Tax Law, as well as the organizational
restructuring of the authority that has amalgamated
customs and revenue agencies into one entity led by
Melaku. One key component of this reform program was
the introduction of a segregation of duties and
responsibilities between officers deployed on
customer services and those auditing in back
offices.
“Those who are responsible for decisions on tax
don’t deal with taxpayers,” Melaku told Fortune.
“Taxpayers are handled by our staff at customer
services.”
Melaku attributes the current operation in
reclaiming tax payments to the undertakings of the
reform programme over the past three years.
At last Tuesday’s press conference, he hinted that
updating the customs price rate database every
single day can stop the claims of the businesses
that there are discrepancies, though he was very
careful not to indicate changing the Tax Law as a
possible alternative.
If the complaint Tsega lodged ends in vain, one of
the options he may take would be selling whatever he
has in his stock of spare parts at a loss in order
to settle the arrears and, probably, focus on the
oil distribution businesses he is involved in. He is
a major shareholder and board member of the
Yetebaberut Beherawi Petroleum (YBP), a local oil
distribution company which runs about 50 refuelling
stations across the country. He also owns lorries.
But the decision by the committees at the RCuA over
his complaint are very likely to affect not only his
business, but the lives of about 18 employees under
his spare parts import and distribution line of
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