CHAPTER FOUR

ACCOUNTING FOR BUSINESS

INCOME TAX IN ETHIOPIA
 4.1 Meaning of Business
The term ‘’Business’’ is highlighted as
:-
industrial,
commercial,
professional and any other activity
recognized as trade by commercial
code of Ethiopia.
4.2 Business Income Tax
Is the tax imposed on taxable business
income/profit realized from
entrepreneurial activity.
2 4/8/2011
 6.3 Business IT Rate
1. Taxable Business income of ‘’Bodies’’
is taxed @ 30% flat rate
2. Taxable business income of ‘’Other
tax payers’’ is taxed on progressive
tax rate stated in schedule ‘’ C’’ of
proclamation no. 286/2002

3 4/8/2011
 (cont...)

Business Rate Adjustment/

Income/ yr Deduction/
0-7,200 Exempted 0
7,201- 10% 720
19,800
19,801- 15% 1,710
38,400
38,401- 20% 3,630
63,000
63,001- 25% 6,780
93,600
4 93,601- 30% 11,4604/8/2011
 4.4. Categories of tax payers
 Category ‘’A’’ tax payers:-
 Business that have legal
personalities. E.g. SCs, PLC,
Public Enterprises, Financial
institutions
 Other entities having annual
turn over Br. 1000,000 and more
 Should maintain all records and
accounts of their business
 Category ‘’B’’ tax payers
 Other business having annual turn
over of more than Br. 500,000 and
more
 Should maintain profit and loss
account
5 1 07 2011
 (cont...)
Category ‘’C’’ tax payers
No legal personality
Annual turn over up to Br. 500,000
Should not maintain book of account
Tax liability is computed by Standard
assessment (presumptive method)
4.5. Method of accounting
Accrual Basis
Employed by Share Comp, PLC….
Cash Basis
Can be used by all business other than
companies
6 4/8/2011
 (cont...)
 Percentage of completion
 Income related to a long term contract
 E.g. Manufacturing, Construction, installation….
4.6. Determination of taxable business income
1. Gross revenue:- all revenue receipts:-
 whether recurrent or non-recurrent,
 in cash or in kind
 The follow. are some e.g. of revenue items
 Sale of merchandise
 Gain on sale of capital asset
 Surplus on foreign currency exchange
 Rent

7 1. s
4/8/2011
 (Cont…)
2. Exemptions
 Awards of adopted or suggested
innovations and cost saving
measures. E.g. Fuel and power
saving devices…
 Public awards for outstanding
performance in any field.
 Income specifically exempted

3. Deductions (Expenses)

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 (Cont…)

 For IT purpose expenses can be classified as:-

 Fully deductible expenses
 Deductible based on condition
 Non-deductible expenses
1. FULLY DEDUCTIBLE EXPENSES
A. Direct cost of producing the income
o Direct cost of Mfg, Purchasing, Importation…
o Selling and distribution costs
o CGS, should be computed by WA method
B. General and administrative expenses
o Salary of administrative personnel, Utility
costs, Rental, Stationary, Maintenance and
repair costs

9 4/8/2011
 Cont…
C. Insurance premium
 Directly connected with the business activity
2. DEDUCTIBLE BASED ON CONDITION
Are business expenses that needs certain
conditions to be meet
1. Commission paid
Conditions to be meet:-
 The service must have be actually rendered to
the business
 The payment should not exceed the normal rate
paid by other similar business
2. Promotional expenses:- such as Advertising expenses
and Gift coupons…are deductible based on the directives of
Ministry of revenue
10 4/8/2011
 Cont……
3. Payment to foreign Head office
Conditions…
The payment in in question was made for
service actually rendered
Said service was necessary for the business
And could not be performed by others and
the business by itself at lower cost
4. Salaries to the partners of PLC
Conditions…
They shall have the qualification
The payment shall not be exaggerated

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 (Cont…)

5. Representation allowance :
 Deductable to the extent of 10% of the BS of employee
6. Employer contribution to pension fund
 Deductable to the extent of 15% the BS of employee

7. Special reserve for financial institutions

 The deduction shall be allowed for special(technical)
reserves in accordance with the directives issued NBE.
8. Participation deduction (Reinvestment relief)
 Conditions….
 The investing body shall hold at least 25% of share
capital or 25% voting right in the investee share co.

12 4/8/2011
 Cont…
 The investing body shall hold at least 25% of the
value of the basic capital in the in the investee
PLC
 However, the allowable deduction does not
exceed 5% of taxable business income of a year.
9. Bad debt expenses
 Conditions…
 Debt is taken in to account in income competition
 Bad debt is written-off in account
 Legal action paid

10. Donation & Gifts(Grants) by the business

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 (Cont…)
Conditions…If
 The recipient of the donation is registered organization &
Certified for its outstanding achievement
 Donation is made in response to emergency call by government
 Donation is made to non commercial
But the allowable deduction is not 10% of taxable Income
11. Interest on Borrowed Capital
A. Interest paid to lending institution recognized by NBE
 Up to in excess of 2% from the rate used by NBE & commercial
banks
B. Interest paid to foreign banks permitted to lend to business in Ethiopia
The lending bank shall file a declaration that provide information
about the loan to grants to tax payers in Ethiopia

14 4/8/2011
 Cont….
The borrower shall with hold and pay 10% of the gross interest
which is payable to the lender
12. Depreciation
Conditions…
 Shall keep satisfactory record showing the date and cost of the asset
 Shall keep satisfactory record showing the total deducted for
depreciation since the date of acquisition

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 (Cont…)

A. Assets Eligible for depreciation for tax

purpose
 Allowed for the legal owner only
 The asset shall be used for business purpose
 The assets shall not be subject to wear and
tear and obsolescence
• Based on the above criteria depreciation is
allowed for deduction for the following assets
1. Tangible Assets
 Building and construction
 Machinery and equipments
 Furniture and fixture
2. Intangible assets
16  Patents, Copyright, Trademark,
 (Cont…)
B. Depreciation method and rate of depreciation (for IT
purpose)
1. Direct straight line method
• Used for Building, construction and Intangible assets
 For Building and construction:- individually at 5%
(20yrs)
• Intangible assets
 Preliminary expenditure ( Organization costs) at 25%.
 Intangibles with USL > 10 years: computed individually
on at 10% (10 years of life)
 Other intangibles: 100% divided by the useful life of the.
2.Pooling straight line method
• Used to compute the depreciation expense of pooled
assets
 Computers, information systems and software products
17
and data storage equipment are depreciated at 15%
 Cont…..
 Other assets Such as, Machinery, all types of
vehicles, furniture and fixture depreciated at 15%
Depreciation expense/year = Depreciation base x prescribed rate
Depreciation base
 BV of the pooled asset at the beginning of the
yr……………........xxx
 Add. (I) Actual cost of any asset acquired(created) during the
yr….xxx
(II) The cost of improved, renewal and reconstruction………
xxx
 Less. (I) The sales price of the asset disposed off during he
yr……..xxx
(II) The compensation received from the loss of asset due to
natural climate or other involuntary
conversion………..xxx
Depreciation base for the pooled asset………………………xxxx
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 Legal provisions relation to
Fixed asset
1. Negative depreciation base:
 If the depreciation base is negative at the
beginning of the period the negative amount is
added to taxable income of the year
 The depreciation in income tax return become
zero
2. Depreciation base less than Br. 2000:
 Depreciation base of a pooled asset does not
exceed Br. 2000 the entire depreciation base shall
be reported as depreciation expense of the tax
year.
3. Maintenance and improvement costs :
 Is permitted for the actual amount of
depreciation base but not exceeding 20% the
19 depreciation base of the pooled asset at the4/8/2011
end
of the year
 Cont…
3. NON DEDUCTABLE EXPENSES OR
DISALLOWABLE DEDUCTION
 Capital expenditure
 Additional investment
 Dividends and profit Shares
 Entertainment expenses
 Personal consumption expenses
 Penalties and fines
 Damaged recoverable by insurance and business
unrelated loss
 Business profit tax and VAT

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 4.7 APPROACHES TO DETERMINE
TAXABLE BUSINESS INCOME
 INDEPENDENT APPROACH
 DEPENDENT APPROACH
 Independent approach
 Two separate set of rules are applied that
have considerable difference; Accounting
principle and tax principle
 Two separate set of accounting are
mentioned
 One for financial reporting purpose
 The other for tax purpose
 And calculate taxable profit separately in
the following manner
XXX Company
Tax Income statement
For the period 1st Sene, 20xx to 30th Hamle, 20x6
20
  Revenue
Cont…
Sales……………………..xxx
Less: CGS……………………….xxx
Gross Profit…………………….xxx
Add: Other income……………xxx
Sub total………………………….xxx
Less: Expenses
Selling and admin……xxx
General and admin…..xxx
Promotional exp……..xxx
Interest exp…………..xxx
Depreciation exp…….xxx
Donation Exp…………xxx
Audit fee………………xxx
Total expense……………………..xxx
18–22 4/8/2011
Taxable business Income (loss)….xxx
  Dependent Approach
 The profit results from commercial activities (based
on GAAP) are taken as primary bases for tax
assessment.
ABC Comp
IT return
For the period 1st Sene, 20x6 to 30th Hamle, 20x6
Net profit as per audited I/stmt……………………..xxx
Add: (1)In admissible expenses……………………...xxx
(2) Admissible revenue…………………………xxx
Sub total…………………………………………….xxx
Less: (1)Admissible expense………………………….xxx
(2) Exempted revenue………………………….xxx
Taxable business income/profit/……………………...xxx
18–23 4/8/2011
 THANK YOU

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