Published On  Nov 27,  2011






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In order to benefit from an increasing Asian interest in Africa, the latter needs to reorient its economic vision, argues Calestous Juma - - professor of international development at Harvard University in the United States.  

Tax Reclaim Contradicts Universal Canons


The recent actions of tax authorities to reclaim waived taxes on dividend payments of multinational oil distribution companies erodes predictability, argues Yohannes Woldegebriel -, a lawyer and former public prosecutor and chief prosecutor for the Federal Ethics & Anticorruption Commission (FEAC) as well as for the Ethiopian Revenues & Customs Authority (ERCA).

It has been nearly a decade since the current income tax proclamation came into force as one of the major parts of the nation’s long-awaited tax reform. The new income tax proclamation brought an end to the aging income tax proclamation of 1961, which outlasted three governments and their corresponding economic reforms by way of numerous patches of amendments.

The adoption of the income tax legislation was followed by an unprecedented decision by the Council of Ministers, which was of immense significance, particularly to large taxpayers. This happened at an extraordinary meeting held in March 2004.

The decision was to wipe the tax assessment and collection slate clean. The government waived all tax arrears previously assessed as well as pending court rulings and administrative tax collection decisions.

The scope of the decision covered income tax, profit tax, employment tax, dividend tax, and sales tax. This action was described as an “exit strategy” through which the government abandoned its tax claims up to and including the 2003 fiscal year, thereby offering a chance for the settlement of the amount declared by each taxpayer.

As explained in the notice that heralded the exit strategy, “Most taxpayers would be prosecuted for tax fraud, should the tax authority deploy its auditors to reassess for the payment of tax arrears,” the government clearly noted. It emphasised the need to avoid costly efforts of recovering back taxes. 

When the decision of the Council of Ministers was announced, there was indeed much jubilation throughout the business community. At the same time, there was also disappointment among other businesses, which, despite the burden imposed by tax assessors, had decided to grudgingly settle all arrears assessed and notified prior to the adoption of the exit strategy.

While this strategy undeniably cost the government some revenue, it helped the tax authority to concentrate on the enforcement of the new tax laws with renewed vigour, rather than to waste its resources on the less reliable, time-consuming, and costly venture to recover uncertain revenue.

A similar strategy was again adopted by the government in 2005, in response to the rising resentment among taxpayers over the unreasonably high tax burdens assessed and notified, following the fiercely contested and controversial election.

It has been nearly two months since a series of news stories were published about the decision by the Ethiopian Revenues & Customs Authority (ERCA), to seize and credit to its account more than 100 million Br, from the account of one of its taxpayers, Libya Oil Ethiopia Ltd (OiLibya), acquirer of Shell Ethiopia, without prior notice for fear of the funds being diverted. The measure was taken, following a tip provided by a whistleblower, who aspired to a reward totalling 18.2 million Br, the news stories also explained.

Yet, there has not emerged any official explanation of this reported action from the authority, aside from the confirmations and explanations of anonymous officials quoted in the stories. Similarly, OiLibya has not officially disclosed its reaction to the actions of the ERCA.

Undoubtedly, the amount confiscated from the company’s account would substantially affect its day-to-day operations and result in short-and long-term insolvency. The fact that the company failed to publicise its reaction is not an admission of the legality of the authority’s action.

The action against the company was directed at, among others, undeclared and unpaid dividend tax arrears to Shell Ethiopia shareholders from 1986 to 2003, which was said to total 91 million Br. The action to recover supposedly lost tax revenue on dividends paid over a period of 17 years to shareholders of Shell Ethiopia was, instead, imposed on Libya Oil Ethiopia Ltd, since the latter is liable for any debt or third-party claims arising from the acquisition agreement between the two companies, at least according to the news stories.

Dividend tax is one type of income tax that is payable under Ethiopian tax law, past and present. Taxable income, under the proclamation, shall include but not be limited to dividends distributed by a resident company. This type of tax is placed under Schedule D as income from dividends, and a 10pc tax is due in lieu of income tax, according to the proclamation.

Surely, Shell Ethiopia was a resident company liable for dividend tax, provided that it distributed dividends to shareholders. However, the company was a subsidiary of its London-based parent company, which ultimately determines the distribution of dividends to shareholders, but, since the income for the eventual distribution to shareholders was acquired in Ethiopia, it is quite legitimate for the tax authority to demand a payment. Hence, the tax authority is legally empowered to issue orders for the seizure of property, including bank deposits.

Nonetheless, the issue does not seem as simple as it looks.

In order to obtain tax payments from the dividends of a company, its shareholders must have already decided to distribute dividends based on the size of each group of shares.  A declaration of the dividend income must have also been obtained from each shareholder, and the subsequent transfer of tax payments to the tax authority must have been made from each shareholder.

With multinational companies operating in more than one country, each with a different legal regime, payments of dividend tax by multinational oil distribution companies appears to have been a headache for the Ethiopian tax authorities. The headache primarily stemmed from the ambiguity of the law and the different interpretations of it by administrative and judicial tax tribunals. Court cases were contradictory and unable to reconcile the differences.

Following the adoption of the new income tax proclamation and the introduction of the exit strategy, the, then, Federal Inland Revenue Authority (FIRA) identified and resolved in its favour, once and for all, the contradictory interpretations among judicial and administrative tribunals that had been a bone of contention between the authority and taxpayers.

Multinational companies should pay dividend tax on profit transfers when remitted abroad, as of 2004, it decided. However, it also pledged to the giant oil distributors in its letter dated July 27, 2005, to waive all its tax claims on dividends up to and including 2003.

Nearly six years after the companies received that letter from the FIRA, its successor, the ERCA, abrogated the waiver and issued instructions for the collection of tax on dividends from the companies. This surprising development even occurred one year after the five-year statute of limitations had expired, leaving the authority legally unable to collect the money. It also did not describe the revocation except for a single sentence, which stated that the authority is “convinced that it was not appropriate for you to be beneficiaries of the exit strategy when no income declaration or payment of tax was made.”

But, the available evidence illustrates how the companies were, in fact, granted a waiver for dividend tax payments on profits remitted abroad. Accordingly, a waiver on dividend tax was not granted based merely on the exit strategy notice issued by the Ministry of Revenues (MoR) in June, 2005, to which the ERCA’s notice specifically refers.

The companies had prepared and submitted a joint application to the ministry pleading for a final resolution of the endless litigation on dividend tax payments. Tax on dividend payments by the companies had, subsequently, been considered separately from all other types of taxpayers under the exit strategy notice.

In fact, the companies made separate negotiations that eventually culminated in a waiver by the FIRA of its demands for the payment of tax on dividend arrears up until 2003 and mutual acceptance of the authority’s interpretation of the proclamation on the payment of tax from dividends remitted abroad.

This being the case, it was a mystery how the ERCA finally decided to revoke the previously granted waiver to the companies and instructed the collection of tax arrears on dividends as far back as 17 years. Even the worst case scenario that the waiver might have been granted to the companies fraudulently through some sort of criminal act is not grounds to revoke the previous notice, for the simple reason that the exit strategy was adopted with the full knowledge of the solid fact that most beneficiaries of the exit strategy could have been criminally prosecuted for tax evasion.

It is also amazing that the information leading up to this huge dividend tax payment, which was obviously already well-known to the authority, was reported as being obtained from a whistleblower who is to benefit from the huge bounty confiscated.

The bulwark of any tax administration system, including assessment, collection, and waiver, is predictability. However, sometimes, tax collectors give one decision on a certain issue today and a different decision at another time, since they exercise immense power. Sometimes, such decisions may be inspired by a substantiated belief that crimes were committed or a desire to achieve the forecasted target for revenue collection. On the other hand, such decisions also signal that the system is degenerating fundamentally and is suffering from the violation of universally accepted canons of taxation. Either way, the tax system is operating with uncertainty and unpredictability.

The fact that the ERCA has decided to revoke a previously granted waiver and retroactively collect dividend tax is a bad omen, because it distresses the overriding principle of the rule of law. Arbitrariness and injustice, which are the natural consequences of the retroactive application of law, seem to have been allowed to reign.

If there are unrevealed and undiscovered facts that could justify the authority’s action on the issue, however, the public has the right to know them.

By Yohannes Woldegebriel
He is a lawyer and former public prosecutor and chief prosecutor for the Federal Ethics & Anticorruption Commission (FEAC) as well as for the Ethiopian Revenues & Customs Authority (ERCA).



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