To Tax or Not To Tax: Is that Really the Question? - VAT, Bank Foreclosure Sales, and the Scope of Exemptions for Financial Services in Ethiopia
| Author | Taddese Lencho |
| Position | Addis Ababa University, LL.B (AAU), LL.M (University of Michigan Law School, Ann Arbor) |
| Pages | 264-310 |
TO TAX OR NOT TO TAX: IS THAT REALLY THE
QUESTION?
VAT, BANK FORECLOSURE SALES, AND THE SCOPE OF
EXEMPTIONS FOR FINANCIAL SERVICES IN ETHIOPIA
Taddese Lencho ♣
“To tax and to please, no more than to love
and to be wise, is not given to men.”
Edmund Burke
Abstract
The Ethiopian Value Added Tax of 2002 follows the standard approach of
exempting financial services from VAT. Not all ‘financial services’ are,
however, exempted from VAT. A number of services provided by the financial
institutions are made taxable by the VAT laws of Ethiopia. No subject in this
regard has probably attracted as much attention and controversy as that of sale
by foreclosure of property held as security by banks. Both sides (i.e., members
of the financial industry and the tax authorities) seemed locked in their
conviction over the treatment of foreclosure sales in VAT. Members of the
financial industry (in particular banks) are convinced that foreclosure sales
enjoy the privilege of exemption in VAT while some within the Tax
Authorities are equally convinced that foreclosure sales should be chargeable
with VAT. These controversies have played out in the courtrooms, the press
and a number of communications between the Tax Authorities and the
members of the financial industry. This article examines these controversies
and analyzes the scope of exemptions for financial institutions under Ethiopian
VAT laws.
Key words:
VAT, exemptions, zero-rating, foreclosure sales, financial services, taxable
transactions, taxable activity
DOI http://dx.doi.org/10.4314/mlr.v5i2.4
_____________
Introduction
Ethiopia joined what is now a large chorus of nations in the world by
introducing the value added tax (VAT) in 2002 (effective January 2003). 1 The
♣ Addis Ababa University, LL.B (AAU), LL.M (University of Michigan Law School,
Ann Arbor), PhD candidate (University of Alabama Law School, Tuscaloosa); I am
grateful to members of the informal colloquium (Seyoum Yohannes and Yazachew
Belew) for their comments on the earlier drafts of this article. I am also grateful to the
DLA Piper Foundation for providing me with funds for research on the Ethiopian tax
system in general.
TO TAX OR NOT TO TAX …: VAT, BANK FORECLOSURE SALES AND THE SCOPE OF EXEMPTIONS … 265
VAT laws of 2002 replaced the then general sales tax law (in force since 1993),
which was a single-stage sales tax whose application was limited to
manufacturers or producers and/or importers.2 The VAT which replaced this tax
is a multiple-stage sales tax with the ability to reach all levels of economic
distribution (manufacture, wholesale and retail). Although VAT has the
potential to reach all levels of economic distribution, the reach of VAT in
Ethiopia was limited for administrative reasons to those businesses whose
annual volume of trade exceeded half a million Ethiopian Birr (ETB). For those
businesses whose annual volume of trade did not reach the half – a – million
ETB, another tax was introduced along with the VAT, namely the turnover tax. 3
The novelty as well as structural complexity of the VAT is such that small and
medium-sized businesses could not be immediately brought within the fold of
the VAT system.
Although VAT is generally recognized as a broad-based general sales tax,
the VAT laws of Ethiopia issued in 2002 (the Proclamation and Regulations)
came out with a fairly long list of exemptions for certain transactions in goods
and services. The public policies (to the extent public policies could be inferred
from the laws) that produced the exemptions vary from one exemption to
another. We may, however, generalize the policies into two.
There are, on the one hand, lists of exemptions which seem to be motivated
by the desire on the part of the government to encourage consumption of certain
goods and services. Many of the exemptions fall in this category. The social
policy of the government to encourage consumption drives the exemption for
1 The value added tax has become one of the most remarkable fiscal phenomena of the
modern times. All but one (i.e., the USA) of the industrial nations have adopted the
VAT as one major source of government revenue, and more than 150 nations have
now adopted VAT as their favorite indirect tax. In Africa, Ethiopia was the 36th
African nation to catch the VAT-bug; see Alan Schenk and Oliver Oldman (2001),
Value Added Tax: A Comparative Approach, with Materials and Cases, Transnational
Publishers, Inc, New York, at 1; Richard Krever (ed., 2008), VAT in Africa, Pretoria
University Law Publications (PULP), at 3; even in the United States, there are serious
debates about the possible introduction of VAT to the United States; see Michael J.
Graetz, “100 Million Unnecessary Returns”, Yale Law Journal, vol. 112, No. 2 (Nov.
2002); N. Gregory Mankew, “Much to Love, and Hate, in a VAT”, the New York
Times, May 1, 2010; Lori Montgomery, “Once Considered Unthinkable, U.S. Sales
Tax Gets Fresh Look”, the Washington Post, May 27, 2009.
2 See Sales and Excise Tax Proclamation No. 62/1993, Negarit Gazeta, 52nd year, No.
61.
3 See Turnover Tax Proclamation No. 308/2002, Federal Negarit Gazeta, 9th year, No.
21.
266 MIZAN LAW REVIEW Vol. 5 No.2, December 2011
merit goods like education, health and medical services, as well as those for
books and transportation.
There are also exemptions in VAT which are not really motivated by the
desire of the government to encourage consumption. Certain types of
transactions in goods and services have proved difficult for conventional VATs
to apply because of the technical challenges involved in levying VAT on these
transactions. In this category of exemptions, we place the exemptions granted
for the supply of residential houses, investment instruments like shares and
bonds and the supplies of financial services.4
Whatever the motivations for exemptions may have been, exemptions for
various types of goods and services are mainly to be found in the VAT
Proclamation (hereinafter VATP) and VAT Regulations (hereinafter VATRs) –
both issued in 2002.5 The Ministry of Finance is empowered by the VATP to
grant exemptions to additional lists of goods and services not listed in the VATP
and VATRs. 6 The Ministry has since then added its own list of exemptions to
the catalogue of exempted goods and services under the Ethiopian VAT regime.
The exemptions for supplies of bread, injera, milk and agricultural inputs are
some of the lists of goods added by the Ministry.7
The existence of exemptions in any tax law often leads to disputes over the
nature and extent of the exemptions, and VAT is not an exception in this regard.
Of the long list of exemptions, nothing has so far attracted as much attention
from the Ethiopian tax authorities as the exemption of financial institutions.8
This is hardly surprising. Financial institutions, in particular banks, generate
huge sums of revenue and it might at first be galling to think that these services
4 See Value Added Tax Proclamation No. 285/2002, Federal Negarit Gazeta, 8th year,
No. 33, Article 8(2)(a) (b) (c); and Council of Ministers Value Added Tax Regulations
No. 79/2002, Federal Negarit Gazeta, 9th year, No. 19, Articles 19, 20, and 21.
5 See VAT Proclamation 2002, supra note 4; VAT Regulations 2002, supra note 4.
6 See VAT Proclamation 2002, supra note 4, Article 8 (4).
7 See FDRE, Ministry of Finance and Economic Development, 1995 E.C., in Amharic,
unpublished; see also T. Lencho, The Ethiopian Tax System, Michigan State Journal
of International Law (upcoming).
8 See Getahun Worku, “Do Banks really need to Register for VAT for Collection of
Loans?” Reporter, Vol. 16, No. 22/1126, Yekatit 6, 2003 E.C. in Amharic (translation
mine); see also Kirubel Tadesse, “Unpredictable Tax Measures will Hurt
Investments”, Capital, Vol. 13. No. 626, Sunday December 12, 2010; Mahlet Mesfin,
“Financial Institutions, Tax Authority Disagree Over VAT”, Addis Fortune, Vol. 11,
No. 552, November 28, 2010; Shimelis Abebe, “The Application of VAT on Sales
Upon Foreclosure,” Addis Ababa University, Faculty of Law Library Archives,
unpublished, May, 2009; ላሁ Aሊሉ “ መ ል Eም Eለ” -
ል ህ 29 2003 .ም. 10-11 መል
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