Some of the sections of the Ethiopian tax laws are very “general” and merely stipulate that detailed procedures should be issued by the relevant government agencies by way of directives. These directives sometimes don’t exist and can sometimes be in conflict with each other.

Taxes on monthly salaries are calculated during the monthly payroll preparation and have to be paid to tax authorities within one month after having been deducted from the employee. The same applies also for the various provident funds and pension schemes. There are stiff penalties for late submission of tax returns and all other statutory deductions.

The directives for fringe benefits and other income from employment are sometimes difficult to apply due to inefficient distribution of directives to all stakeholders.

Here in Ethiopia, all income from employment like various allowances like fuel, representation, cash indemnities etc are taxable. It is not one of those countries where one can mysteriously reduce taxable income by calling it “housing allowance” or “transport allowance”!

The tax rates for payout for accrued, unutilized annual leave during termination processing are heavy: they are pro-rated over the period of months the income applies to and are subject to the maximum tax rate.

The tax rate for severance pay, however, is much lighter as it is taxed at a monthly salary rate to support the concept that the employee may not have financial difficulties whilst searching for his next employment. Employment contracts whether permanent or temporary are always copied to the private organization employees’ pension offices.

The rates applied for provident fund & pension schemes sometimes confuse accountants and cause inaccuracies as the rates for provident fund varies from company to company.

Payments for outstanding performance or the award of cash prizes at times like marriage are not tax effective. They are taxed at the same rate as the normal monthly salaries.

Most allowances like fuel, representation & house allowances are taxed fully as long as the whole remuneration package is above a certain level.

The payment of accrued leave is complicated. Accrued annual leave paid on termination of contract should be prorated over several months and should reflect that actual income received and the tax rates applicable at time of earnings. It is therefore strongly recommended to get employees to take their vacation – much simpler all round!

It is thus tedious & time consuming to compile earnings history if it is not a stored data on currently used software.

One of the challenges is the fact that monthly information comes from a lot of different sources, some of which are communicated manually. This makes for difficulties for the payroll/accounting service, especially when a the preparation work changes hands within the payroll/accounting team.

Obtaining substantial data from payroll is also made complex and difficult as salary increments & bonus are usually made retroactively. Retroactive payments of increments & emulation payments do entail commensurate adjustment payments to statutory deductions.

Lack of clarity or absence of clear laws on taxation of variety of allowances paid to employees or Board Directors of private concerns are some of the issues that make payroll preparation more complex and result in a misunderstanding between the tax payer & the authorities.