Ethiopia: Undelivered Promises Erode Governmental Credibility

OPINION
It was yet another sad twist in the exercise of executive power that brought about the most recent directive, supposedly to correct the wrong doings of a previous directive on "Dividend Income Tax". This is after it had already inflicted grievous harm, not only to the law-abiding taxpaying business community, but also to the credibility of the country's legal framework - and of the country's highest executive authority, Prime Minister Hailemariam Desalegn, in particular. According to a report that appeared in the business and economy section of one of Addis Abeba's Amharic newspapers, I read that the Ministry of Finance & Economic Development (MoFED) had issued a new directive requiring enterprises to pay dividend income tax on undistributed profits(retained earnings) that have been kept for 12 months or more. It was stated that only "profits" reinvested and shown with all the proof and evidence laid down by the directive as paid up capital shall not be taxed.
Needless to say, this provision was already there except that hitherto, it was applicable to specific sectors of the economy. The recent widening of the scope of its application to all sectors is a welcome improvement.
The latest communication in the form of a letter from the minister of MoFED to the Ethiopian Revenues & Customs Authority (ERCA), enclosing a more detailed three-page implementation instruction, flatly refuses to accept the application of net profits after tax to nothing other than dividends or paid up capital. But, of course, to businesspersons 'capital' is not 'paid up capital' only.
This is especially so in an economy where, on the one hand, access to credits has increasingly become a critical bottleneck and, on the other hand, a 'lack of liquidity' severely limits an enterprise's ability to pay dividends. Undistributed profits are commonly employed as 'working capital'. The advantage in such a case is that such profits, as are being used to overcome temporary cash shortages, may be distributed as dividends any time cash becomes available.
Under the circumstances, the idea of putting a time limit as to how long undistributed profits may be retained without paying dividend tax may be a preferred option. An implementation amendment to such an effect could be introduced without, of course, any retroactive application.
On the other hand, would it not be rubbing salt in someone else's wound for the new directive to stipulate that taxes already paid under the earlier directive shall not be returned?
True, the tax authority is not known for returning and may not even be expected to write its cheques to return monies it may have wrongly collected. However, if it has collected monies that it should not have done in the first place, it is expected to at least issue tax credits so that the amount collected wrongly or in excess of what was legally due to it would be deducted from any future payments the tax payer may owe the Authority.
Would not doing otherwise be considered outright confiscation by a supposedly lawfully constituted authority? And would not this be tantamount to yet another contradiction in terms of the kind of governance we profess to follow?
The "million-dollar" questions at this point are: wouldn't the foregoing ruling, touted by ERCA as the last word on the subject, put the credibility of the finance minister - who at the National Business Conference chaired by the Prime Minister received a thunderous applause for upholding the existing laws of the country - on the line? For, under these laws, one does not pay dividend income tax, if profits are not shared; corporate profits do not automatically become income to shareholders unless and until declared as dividends; and ipso facto, where there is no income there will not be income tax?
Wouldn't the 'last word' on the issue put the credibility of the Prime Minister himself on the line? Did he not confirm that the word of the finance minister was the position of government when, at a press conference a day after the National Business Conference, he was asked if he would care to clarify the seeming contradiction between the statement of the finance minister and the directive from the ERCA?
One of the main arguments against the earlier directive was that it had no legal basis and, as such, it was no less than a new tax levy authored by the tax collecting agency, in violation of and in contradiction to the country's constitution. This clearly states that levying taxes and collecting duties on revenue sources are reserved to it; drawing up, approving and administering the federal budget go to the federal government.
What is the legal basis for the revised Directive? Does the finance ministry have the authority to levy a new federal tax (dividend income tax on undistributed profits) without going through the federal parliament?
At the risk of sounding alarmist, I sense a grave danger in the way the consultation between business and government has just been nipped in the bud by a bureaucracy that appears occupied much more with protecting itself, than anything else.
How else could it choose to risk the credibility of the highest officers of government (the Prime Minister and the minister of MoFED) to cover up a mistaken and unfortunately misleading interpretation of the country's tax laws in the first place?
If one has to call a spade a spade; the root cause of the saga of the notorious dividend income tax directive (when and where there was no income) was none other than the seemingly innocent, but dangerously mistaken, interpretation given to the tax laws of the country. As the participant who articulated the problem at the National Conference, I wish to recall the strong plea I made to the Prime Minister to at least set up a Committee at which experts would be given a chance of a hearing before the government's final reply.
I might boldly assert that my specific request was prompted by my observation of certain obvious knowledge gaps in accounting and finance on the part of those who were interpreting, as well as those implementing the tax laws. I was not aware that such a process occurred before the revised "last word" instructions were issued by the finance ministry.
I see that no plea to the legislature "to check" the executive branch of government can undo the harm the branch is doing to itself by its failure to deliver on its promises regarding such clearly sensitive and emotive issues.
The writer is a businessperson and former president of the Ethiopian Chamber of Commerce & Sectoral Associations (ECCSA).

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