40 Questions
What kind of expenditure is not allowed as a deduction from gross income?
Losses not connected with the business activity
What is the condition for interest expense to be an allowable deduction?
The lending institution is recognized by the National Bank of Ethiopia or a foreign institution
What is the maximum amount of interest that can be paid to shareholders on loans and advances?
The average of four times the amount of share capital in a tax period
What is the purpose of a representation allowance?
To promote and enhance business with guests from outside the enterprise
What percentage of salary is allowed as a representation allowance?
10% of the salary of the employee
What is the limitation on gifts and donations as an allowable deduction?
10% of the taxable income
Which of the following is not an allowable deduction?
Losses not connected with the business activity
What is the requirement for interest paid to foreign banks to be deductible?
The lending bank must file a declaration in writing with the Tax Authority
What is the tax rate applicable to an employee with a monthly income of Birr 2,500?
15%
What is the deduction applicable to an employee with a monthly income of Birr 6,500?
955 Birr
What is the tax rate applicable to an employee with a monthly income above Birr 10,900?
35%
What is the method of employment income tax computation where the amount of tax is calculated for each layer of tax bracket?
Progression method
What is the tax rate applicable to an employee with a monthly income of Birr 1,200?
10%
What is the deduction applicable to an employee with a monthly income of Birr 3,500?
302.5 Birr
How many tax brackets are there in the employment income tax schedule?
7
What is the tax rate applicable to an employee with a monthly income of up to Birr 600?
Exemption
What is the main objective of Turnover Tax (ToT)?
To generate revenue for the government
Which of the following services are exempt from Turnover Tax?
Services supplied to diplomatic missions
What is the Turnover Tax rate on goods sold locally?
2% of the sale value
Who is responsible for collecting and transferring Turnover Tax?
Seller
What is the base of computation of Turnover Tax?
Gross receipts
What is the Turnover Tax rate on services rendered by contractors?
2% of the service value
What is Customs Duty?
A charge on imported or exported goods
How is Customs Duty normally calculated?
As a percentage of the CIF value
Who is the party that grants rent of the building?
Lessor
What is the term for the first lessee when they sub-lease the building to another party?
Sub-lessor
What is the sub-lessor liable to pay tax on?
The difference between income from sub-leasing and rent paid to the lessor
Who is responsible for paying the tax if the sub-lessor fails to pay?
The owner of the building (lessor)
What is the responsibility of the Kebele Administration?
To inform the tax office about the completion of the building
What is included in the gross rental income?
Brokerage fee paid on behalf of the lessor
What is part of the taxable income under this schedule?
The value of any renovation or improvement to the land or the building
When should the owner and contractor inform the Kebele Administration about the completion of the building?
When the building is rented before its completion
What is the primary purpose of fines and penalties?
To punish individuals for violating laws
What is the main difference between a fee and a license fee?
A fee is charged for a service, while a license fee is charged for permission
What is the purpose of special assessments?
To levy a compulsory contribution in proportion to the special benefit derived
What happens to the property of a person who dies intestate with no legal heirs?
It is taken over by the government
What is the main purpose of forfeitures?
To punish individuals for not complying with the law
What is a characteristic of a fee?
It is compulsory and charged for a specific service
What is the main difference between a fine and a fee?
A fine is imposed as a punishment, while a fee is charged for a service
What is the primary purpose of non-tax revenue?
To generate revenue for the government
Study Notes
Employment Income Tax Rates
- Up to 600 Birr: Exemption
- 600-1,650 Birr: 10% tax rate
- 1,650-3,200 Birr: 15% tax rate
- 3,200-5,250 Birr: 20% tax rate
- 5,250-7,800 Birr: 25% tax rate
- 7,800-10,900 Birr: 30% tax rate
- Above 10,900 Birr: 35% tax rate
Employment Income Tax Computation Methods
- Progression method: Calculate tax for each layer of tax bracket by multiplying the given rate
- Deduction method: Calculate tax by subtracting upper taxable income from previous tax bracket tax rate of given bracket-cumulative threshold
Taxable Income
- All payments made by the lessee on behalf of the lessor (e.g. brokerage fee, ownership fee)
- Value of any renovation or improvement to the land or building borne by the lessee
- Salary, wages, or other personal emoluments to the proprietor or partner of the enterprise
- Losses not connected with or arising out of the activity of the enterprise
- Grants and donations exceeding 10% of taxable income
Allowable Deductions
- Interest expense: Allowable if not in excess of the rate used between National Bank of Ethiopia and Commercial banks increased by 2%
- Representation allowances: Hospitality expenses incurred in receiving guests, deductible to the extent of 10% of the salary of the employee
- Gifts and donations: Allowable under certain conditions, including excisable services supplied to diplomatic or consular missions, foreign governments, international organizations, or aid agencies
Turnover Tax (ToT)
- A tax levied on goods supplied and services rendered locally by persons not registered for VAT
- Base of computation: Gross receipts in respect of goods supplied or services rendered
- Rates: 2% on goods sold locally, 2% on contractors, grain mills, tractors, and combine harvesters, and 10% on others
- Obligation to collect and transfer the Turnover Tax lies with the seller
Exemptions
- Certain goods and services are exempt from Turnover Tax
Customs Duty
- A charge levied and collected on imported or exported goods
- Calculated as a percentage of the duty-paying value (CIF value)
Non-Tax Revenue Terms
- Fee: Compulsory payment made by individuals who obtain a definite service in return
- License fee: Fee collected for giving permission or a privilege to do a special or specified work
- Fines and penalties: Imposed as a form of punishment for mistakes committed
- Forfeitures: Penalty imposed by courts on persons who have not complied with the notice served or breached a contract
- Escheats: Property of a person having no legal heirs, taken possession of by the government
- Special assessment: Compulsory contribution levied in proportion to the special benefit derived to defray the cost of specific improvement to property
This quiz covers the tax rates applicable to employment income, including exemption rates and percentage tax rates for different income brackets.
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