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The recent actions of tax
authorities to reclaim waived taxes on dividend
payments of multinational oil distribution companies
erodes predictability, argues Yohannes Woldegebriel
- johnwaa@hotmail.com, 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. |
