There is a long-running controversy over the adoption of incentives. In the eyes of government officials, they are essential to foster the growth of domestic businesses across all sectors, which is crucial for generating more tax revenues in the long run. It is also seen by policymakers as a comparative advantage to draw in more Foreign Direct Investments (FDI), which has been sitting at around USD 3.5 billion over the last five years.
On the other hand, some observers suggest it has helped a bit in promoting investment, noting instances where foreign and local companies were discovered abusing the privilege they have been granted.
Budget constraints and mounting discontent among experts pushed the Ministry of Finance to make a revision. In 2017, it launched a study to assess the benefit of incentives to the economy. One result of this initiative is the new investment regulation, which became effective last month. It was approved by the Council of Ministers exactly two months prior to that.
The regulation, like the one before it, aims to encourage existing businesses to grow while also fostering an environment that is favorable to newcomers. The laws that permit investors to enjoy a temporary tax exemption on top of enjoying duty-free privileges are prime examples. The change is seen by experts as a step intended to share the burden of companies making new investments.
“Though the government is losing tax revenue, it is partly playing a big role by sharing the burden of starting a business with different establishments, as they work with a tight budget,” said Abinet Belay, a business and investment consultant at MPE Business and Investment Consultancy.
Incentives will be applied beginning from the early stages of businesses. When importing capital goods and building materials needed to construct a new establishment, businesses will not be required to pay customs duty. Companies with expansion projects may be eligible for similar incentives, but the conditions will be laid out in a directive that will be issued by the Ministry of Finance.
The privilege doesn’t come free.
Beneficiaries would be required to present a list of the capital goods and construction materials along with a bill of quantities, only to be reviewed and approved. If eligible, the investor is also allowed to import spare parts for the goods they have imported, but that should not exceed 15 percent of the total value with a five year duration period. If a business imports USD 100 million worth of goods using duty free privileges, it means it can import spare part worth USD 15 million for five consecutive years.
In case of vehicles, the story is a little different.
Vehicles the investors might request to import on duty free are to be determined with a directive the Ministry will issue depending on the types of the investment projects, similar to the former regulation.
What seems to be bold about the new regulation is that it already specified pick-up and station-wagon types of vehicles are not to be exempted from customs duty. This is a major departure from the former regulation as it never specifies as such.
Abinet urged for a strict control of this privilege by the government bodies as many might misuses the opportunity, and utilize the vehicles in a way that never benefits their business and the intended goal.
“It should be controlled in a very strict manner. Some businesses have already been observed misusing the vehicles they imported duty free for their businesses,” Abinet said.
Schedules for income tax exemptions for businesses have also been detailed in the regulation, ranging from a one year tax holiday to six, depending on the types of businesses and their places.
The investors’ preference of places for work determines the schedules for income tax exemptions. If they desire to be based in Addis Ababa and in Oromia Special Zones surrounding Addis Ababa, they would see a relatively smaller number of years in income tax exemptions.
However, those looking for investment in places farther than Addis Ababa and its surrounding will have a chance to enjoy income tax exemptions for a year or three more than those based in the center, depending on the type of businesses they engage in.
Nevertheless, there are businesses that are not going to be exempted from income tax, no matter where they are based at. Among the few are; printing industry, hotels, restaurants, tour operators, construction, water well drilling, mineral, petroleum, and geothermal exploration.
Sectors, considered being critical to the society but what both regulations didn’t include in the tax holiday privilege are: education and trainings beginning from kindergarten to vocational schools, and also health services such as hospitals, diagnostic and clinical services.
Depending on the directive the Ministry will prepare, investments on tertiary specialized hospital services will benefit from the income tax privilege for two and three years based on their location.
Unlike the education and hospital sectors, on the other hand, the incentives to the beverage industry continue despite the government’s measure to include the products to the list of luxury items listed under goods imported with excise tax.
Investments in alcoholic beverages, soft drinks and bottled waters will have a year of income tax free season while wine factories will enjoy a three year exemption and beer factories two years, if they are located in Addis Ababa or the surrounding special zones of Oromia. The investors in these sectors can enjoy a year more in exemptions if they are based farther than the capital.
Abinet sees this positively as investment in the beverage industry is favored for the massive job opportunity it can create. Their advantage in playing the corporate social responsibilities is also big, as he explained. “Companies in this sector are high taxpayers contributing big to the Gross Domestic Product (GDP),” he said.
Information and communications technology seems to have received a big attention from the government in the preparation of the new regulation.
They will enjoy four years of income tax exemptions if they are based in Addis Ababa and surrounding special zones of Oromia and five years of the same privilege if they are based in other places. It will be granted to software developers, data centers and cloud services, business outsourcing processes, startup developers, and research and innovation centers.
This is a major takeaway as it never was in the now annulled regulation.
However, information technology service providers and services that are enabled by information technology, like ride-hailing companies, are not to be exempted from the income taxes, wherever they will be based.
For Markos Lemma, Co-founder and CEO of ICE Addis, an innovation hub and tech incubator company, it is a good start that the government made attempts to focus on the information technology sector on this regulation. The older one focused only on the hardware developments and import/export of the technology sector.
However, a huge part of the new regulation about the technology sector is perplexing to him. The regulation has information technology service as one of the sectors not exempted, but it gives exemptions to sectors Markos believes are related to information technology.
“It is unclear on what they might have thought of in the information technology. Cloud services, data centers, software development, and others are also information technology related services,” he said.
Different government bodies including federal and regional investment commissions as well as revenue and customs offices are tasked with various activities to administer the incentives.
The Ethiopian Investment Commission (EIC) has the mandate to receive the requests from the investors about the exemptions and assure they comply with regulations and enabling directives before submitting to the Finance Ministry for a final decision. EIC is further mandated with following up on the investors to reconfirm proper use of the privileges and report to the Ministry in good time.
Failure to report in due time about the execution of the incentives will result in penalties of three months of salary to any government official, with criminal and administration responsibilities still being applicable. These penalties would be collected by the Ministry.
Until the series of directives are enacted by the Finance Ministry, the directives already in place for the former regulation will also be used for this one as well.