Part of the Ethiopian government’s actions to reduce Covid-19’s effect on the economy is the recently issued directive to remit tax liabilities of taxpayers number 64/2020 (the “Directive”). This directive was issued by the Ministry of Finance pursuant to the mandate bestowed to it by the Federal Tax Administration Proclamation Number 983/2016. The purpose of the directive is to reduce the damage caused by Covid-19 on taxpayers. And, the tax liabilities subject to remission are tax liabilities of before and during 2018.
In order to utilize or decline from the directive’s benefits, taxpayers are required to notify their intention to the tax authority within a month i.e. until 5 June 2020. However, now on the eleventh day, and remaining with only nineteen days, taxpayers are facing some problems emanating from lack of clarity of the directive or miscommunication of different government offices.
This piece of work, therefore, sketches the problem that I came across in helping taxpayers and calls for an explanatory statement. Its scope is limited to the directive but on the sideline, it touches issues related to the power and manner of issuing directives.
Overview of the Directive
The directive is applicable to tax liabilities levied pursuant to the income tax proclamation, mining income tax proclamation, value added tax proclamation, turn over tax proclamation, and excise tax proclamation over the tax years of before and during 2018. But not all taxpayers are beneficiaries of this directive. Taxpayers engaged in the service, manufacturing, export, finance, and construction sectors are the beneficiaries. In other words, sectors that do not fall within these categories cannot benefit from the new arrangement. From the perspective of the principle of equality and ability to pay, all taxpayers should have benefited from this directive because the pandemic affects not only these sectors but also the whole economy. As far as the purpose of the directive is to reduce damage caused by Covid-19 on taxpayers, all taxpayers/sectors that may be affected by this pandemic should share the fruits of the directive.
Be that as it may, the directive categorizes tax liabilities into category “A” and category “B” based on the tax years. Category A refers to tax liabilities of before and during 2014 and Category B refers to tax liabilities of 2015 to 2018.
For tax liabilities falling under category A, all tax liabilities (the outstanding tax, penalties, and interests) are subject to remission. But only penalties and interests are subject to remission for tax liabilities falling under category B. Of course under category B, ten percent of the outstanding tax may be reduced if the tax payer agrees to pay the ninety percent of the outstanding tax within thirty days. Further, in order to obtain the remission of penalties and interests under category B, the taxpayer must agree to pay the twenty-five percent of the outstanding tax immediately and the remaining seventy-five percent within one year.
The presumption of the law in category A is that taxpayers want to use it as it remits all tax liabilities including the outstanding tax, interests, and penalties. As a result, it does not require taxpayers to make official notification of intention to benefit from the arrangement. If taxpayers do not appear before the tax authority and notify their intention, it is presumed that the taxpayer wants to benefit from the new arrangement. Any appeal proceeding in the tax review committee, tax appeal commission, or the court will be terminated immediately. It is only if the tax payer does not agree with the new arrangement that s/he shall notify the tax authority.
Opposite to the category A, the presumption in category B is that taxpayers do not want to take the new arrangement as it does not remit the outstanding tax and forces taxpayers to make the payment within a month. So, the directive requires taxpayers to notify their intention to the tax authority within a thirty days if the taxpayer wants to benefit from the directive’s arrangement. Absence such notification of intention, the tax authority considers that the taxpayer wants to proceed with the measures available in the previous laws other than the directive.
Problems in Implementation
The problem lies in the tax payer’s right to choose the category of tax liabilities. Out of the two categories, category A, as presumed by the law, is beneficial to all taxpayers. But taxpayers may not be willing to utilize category B benefits if they believe that they can reverse the whole decision through different levels of appeal. The decision of a tax appeal commission or a court may be more beneficial than the benefits that they may obtain from the directive.
As a result, taxpayers may want to benefit from category A but continue their appeal on tax liabilities falling within category B. Although the directive does not contain an express provision to this effect, the categorization by itself, and the purpose of the directive indicates that taxpayers can choose to benefit from both categories or either of them.
Practically, however, branch offices are refusing to split tax liabilities of 2014 from tax liabilities of 2015 when the tax assessments are made in one audit report. And, taxpayers are being forced to either take both or to decline both categories. In fact, the tax authority is accepting taxpayers’ decision to benefit from only category A if the tax assessment of 2014 is found in a different audit report from 2015 and the following years. What is being refused is splitting tax assessment of category A form category B when both categories of tax assessment are made in one audit report.
According to them, it is only if the tax assessments are made separately that taxpayers can choose to benefit from either category. But if tax assessments of 2014 are made together with 2015, taxpayers have to choose between taking all or losing all. This assumption treats two similar taxpayers in a different situation based on how the tax assessment was made. That is to say, the taxpayer whose audit report of 2014 was made separately from 2015 will be able to split his tax liabilities to benefit from category A and not from category B, but the taxpayer whose tax liabilities of 2014 and 2015 was reported in the same audit report will not have that chance.
This stand, however, is not something expressly provided in the directive. As a taxpayer, it is not easy to obtain any explanation as to why they refuse to split tax assessments made in the same audit report. One of the sources of lack of clarity emanates from the fact that the directive is issued by the Ministry of Finance while tax matters are within the power of the Ministry of Revenues. The Federal Tax Administration Proclamation Number 983/2016 was enacted in 2016, and at that time the Ethiopian Revenues and Customs Authority was under the then Ministry of Finance and Development. It is due to this fact that the proclamation bestowed the power to issue a directive to the Ministry of Finance and Development. But now, the Ethiopian Revenues and Customs Authority is transformed into a ministry level-the Ministry of Revenues.
Technically speaking, it is the Ministry of Revenues that has the expertise to issue the directive. However, according to Article 4 of the Federal Administrative Procedure Proclamation Number 1183/2020, it is the organ with a delegated power by law that can issue a directive which is the Ministry of Finance in this case.
Further, the directive, under its article 9, delegates the Ministry of Revenue to provide an execution system that will be through a directive. Then, it poses the question of hierarchy between the Ministry of Finance’s directive and the Ministry of Revenues’ execution directive.
Thus, the fact that the Ministry of Finance issues the directive for the Ministry of Revenues creates the barrier of communication. How can an employee of the Ministry of Revenues or a taxpayer request an explanation directly from the Ministry of Finance? At least, it requires the involvement of both ministers. So, this hinders the possibility of getting a direct response or explanation from the concerned authority.
An Explanatory Statement or an Execution Directive to Avoid Confusion
As envisaged under the Federal Administrative Procedure Proclamation Number 1183/2020, it is necessary to prepare and disseminate and explanatory note to fill the gaps. Or, as mandated by article 9 of the directive, the Ministry of Revenues shall solve the problem through an execution directive. The application of the directive is limited by a period of limitation. Hence, the Ministry of Finance must send the explanatory statement of the directive to the branch offices of the Ministry of Revenues and make it accessible to all taxpayers. Or, the Ministry of Revenue shall issue the execution directive and make it available online.
As indicated in the Federal Administrative Procedure Proclamation Number 1183/2020, the explanatory statement shall contain explanation of each provision, a summary of comments on the draft and measures taken, the objectives and legal basis for adopting the directive.
But most importantly, the explanation statement must address the above concerns in relation to the split of 2014 tax assessments from the 2015 and the following so taxpayers may choose, specifically when the tax liabilities of both years was found in the same audit report. This must be done within the few days before the period of limitation lapses unless the thirty-day period of limitation can be extended.
Looking into the purpose of the directive, it has no intention of denying taxpayers from splitting the tax years and benefiting from only category A. Also, there is no clue to differently treat taxpayers that has different audit report for 2014 and 2015 from a tax payer whose audit report is the same for 2014 and 2015. Both are entitled to benefit from the benefits of the directive as pandemic has similar effect over both of them. Hence, the explanatory statement or the execution directive shall address these issues.
To sum up, directives must be issued in the way the new Federal Administrative Procedure Proclamation Number 1183/2020 requires and must be clear containing an explanatory statement. During its draft stage, the concerned organ shall obtain necessary comments and conduct a public hearing to gather inputs. Once it is issued, the explanatory statement shall also be made accessible to all. And, in case gaps are found during implementation, there should be a way to correct it as soon as possible. Thus, either the Ministry of Finance shall circulate the explanatory note or the Ministry of Revenues must explain the intention of the government in relation to splitting tax liabilities through an execution directive.