Draft Tax Advice Sarens

Confidential

SARENS FRANCE TAX AND BUSINESS SET UP ADVICE

JANUARY 2012

Ernst & Young Bole Road - MEGA Building, 11th floor P.O. Box 24875 Code 1000 Addis Ababa, Ethiopia Tel: +251 11 550 4933 Fax: +251 11 550 4932 www.ey.com

Confidential – All Rights Reserved Sarens France Infrastructure Developers PLC 2 -Ernst & Young 2011

Mr. Vincent Rouanet Directeur Administratif & Financier Sarens France T +33 3 28 64 01 10 F +33 3 28 64 02 10 M +33 6 09 61 13 46 [email protected]

January 16 2011

Draft Report

Dear Mr Rouanet, We have prepared the following report in response to our discussion and e-mail communications regarding your questions on various tax issues related to the transaction to be made with ALSTOM WIND under contract a project for Crane & Erection Services for Ashegoda Wind farm and other tax issues as per the Ethiopian laws and practices which might be applicable to Sarens activities in Ethiopia. Please note that the scope of our work is limited to answering the specific questions stated on the terms of reference (TOR) with preliminary review of various regulations and survey of other similar organizational practices analyzed in the context of the questions you have raised. If you have further queries, please don’t hesitate to contact us. Sincerely, Zemedeneh Negatu Managing Partner

http://www.ey.com

mailto:[email protected]


Contents

1. Company Types ................................................................................................................................... 4 2. The Pros and Cons of Company Types ................................................................................................... 5 3. Requirment to set up companies .......................................................................................................... .6 4. Rules & regulation regarding tax and tax authority in Ethiopia ............................................................... 12


1. Company Types

Companies in Ethiopia can be established in different forms as per the Commercial Code of Ethiopia. These are: ► Ordinary partnership, ► General partnership, ► Limited partnership, ► Private limited company, ► Share Company, ► Joint venture and Branch office.

Among these, we will see the nature and requirements of the two types, Private Limited Company and Branch office. 1.1 The nature of Private Limited Company (PLC) in Ethiopia

A private limited company is a company whose partners are liable only to the extent of their contributions. The maximum number of the partners is fifty while the minimum is two. The company shall not issue transferable securities. The company shall have a minimum share capital of Birr 15,000, which must be paid up on registration. The capital contributed by the partners may include in kind contribution, which is subject to valuation. The registered capital is presented on the Memorandum and Articles of Association with shares divided (prescribed) into the number of shareholders. Shares may be transferred among shareholders as provided in the Memorandum of Association, but they can be traded with third parties only after the approval of shareholders who own at least three-quarters of the capital. The company may have one or more managers. These managers must be individuals appointed by the shareholders, but they need not be shareholders. Although the Memorandum of Association may provide limitations on a manager’s power, these limitations are not binding on third parties. The appointment of auditors is compulsory if the number of shareholders exceeds twenty. The name of the PLC may contain a disclosure of the nature of its activity and must include the words “private limited company”. The firm’s name and the amount of capital of the company shall appear on all of the company documents, publications and other papers.


Nowadays, most of the companies established in Ethiopia by foreign or domestic investors are private limited companies. 1.2 The nature of establishing foreign branch office in Ethiopia

According to Article 556 of the commercial code of Ethiopia, firms incorporated abroad and have subsidiary office or branch in Ethiopia, with permanent representation shall be registered in Ethiopia using the Memorandum and Articles of Association of the parent company. Branch offices with respect to each office or branch are subject to the provisions of this code relating to deposit and publication of the Memorandum of Association and publication of balance sheets. Such firms shall be subject as regards their branches or subsidiaries to the provisions governing the operation of the enterprise and imposing special conditions and shall publish the name of persons representing them permanently in Ethiopia and shall furnish their signatures. The liability arising out of failure to the comply with the requirements of these kinds of firms is “The persons acting in the name of the firm who have not complied with the provisions of Article 556 of the Commercial Code of Ethiopia shall be jointly and severally liable in respect of the firm’s undertakings”.

2. The Pros and Cons of Company Types Private Limited Company (PLC):

A PLC is the most common form of a company. The shares of a private limited company are not available to the general public to buy and sell on a recognized stock exchange. The company is owned by shareholders and they enjoy “limited liability” – i.e., the maximum they can lose is the amount they have invested in their shares. Advantages ► As indicated in the name the liability is limited and therefore is the most

advantageous form of incorporation. ► Limited liability protects the personal wealth of the shareholders, because it’s

limited to the extent of the members’ contribution. ► Finance can be raised both through the sale of shares and debt which makes it

easier to get the required finance. ► It is a stable form of structure in that a business continues to exist even when

shareholders change that it provides more privacy of information than a Share company.

► A PLC is allowed to repatriate its dividend out of the country. Disadvantages ► A PLC cannot be established as a wholly owned single foreign investor, i.e., there

has to be a minimum of two shareholders, however it is not obligatory to incorporate a local partner.


► It is not easy to transfer properties and close the branch at the time of liquidation because it will be considered as a sell of share/ asset and will have a tax implication including VAT.

Branch office

The Advantages ► A company who intends to open a branch office will set up a branch office easily by

using the Memorandum and Article of Association of the parent company. ► It is easy to transfer properties and close the branch at the time of liquidation. ► A branch office is allowed to repatriate its dividend and profit out of the country.

The Disadvantage ► The persons acting in the name of the firm who have not complied with the

provisions of Article 556 of the Commercial Code of Ethiopia shall be jointly and severally liable with respect to the firm’s undertakings. The liability may go to the extent of the parent company.

A best choice for Sarens France

Based on the points noted above, we would advise you to setup a PLC considering the outweighing advantage of non- transferability of legal liability against the tax advantage you would get at time of liquidation.

3. Requirements to Set Up a Company All foreign companies intending to invest in Ethiopia must be registered in accordance with the Commercial Code of Ethiopia. The Ethiopian Investment Agency (EIA) with the delegation of Ministry of Trade and Industry (MoTI) carries out such company registration. In general, both foreign and local companies are required to register for investment permit, principal registration, trade name and license, Value Added Tax (VAT) and Tax Identification Number (TIN). An investment permit and principal registration is issued to an investor to establish a new enterprise or to expand or upgrade one that already exists. As per the Investment Proclamation No. 280/2002 (as amended), a foreign investor or a domestic investor who is eligible for and wants to get incentives, is required to obtain an investment permit and principal registration to invest in Ethiopia. An Investment permit and principal registration can be obtained in one of the following ownership forms: Sole proprietorship, Business organization incorporated in Ethiopia or abroad, public enterprises and Cooperative societies. 2.3 Application to Obtain an Investment Permit Documents that are required to get the difference licenses differ based on the company set up and a foreign investor who need to acquire investment permit need to full fill the following requirements.


Where the applicant is a private limited company (PLC) A) If the PLC is a wholly foreign owned the required documentation will be: An application form duly filled and signed by the manager or agent of the business organization; where the application is made by an agent, a photocopy of his/her power of attorney; photocopies of memorandum and articles of associations. If it is to be newly established, photocopies of the relevant pages of a valid passport of each shareholder, clearance letter from the Ministry of Trade and Industry for the company name and draft memorandum and articles of associations. Where the shareholders are companies the memorandum and article of association of the investing company together with board resolution. All documents need to be notarized in each country of the investee and should be registered in the Ethiopian embassy of that country. The document should also be registered in the Ministry of foreign affairs in Ethiopia. Where foreign nationals taken for domestic investors or Ethiopian nationals are among the members of the shareholders, photocopies of certificates evidencing the domestic investor status of the foreign nationals or identity cards (for companies to be established); and Three passports sized recent photographs of the general manager. B) If the foreign partner is a business organization, the following documents are also required: ► A copy of the memorandum and articles of associations or equivalent document of

the parent company; ► A photocopy of a document ascertaining the legal personality of the business

organization (i.e., registration certificate);

► Minutes of the parent company passed by an authorized body for the establishment of a company in Ethiopia, authenticated by the public notary, or a letter written by the owner in case of a one-man company; and

► A photocopy of an authenticated power of attorney of the representative of the company and photocopies of the pages of the representative’s valid passport or identity card in case the representative is an Ethiopian national.

► Where the application is signed by an attorney; a power of attorney given by all of the founders, photocopies of kebele identification card or valid passport of the attorney and the manager and the passport size photographs of the manager taken within six months time,

► The manager of a business organization other than a share company shall not be a manager in more than one any business organization at the same time.

► Before the registration of a business organization other than a share company in the commercial register, there shall be submitted a bank statement that the capital of the business organization to be contributed in cash has been deposited and all appropriate documents relating to contribution in kind.


► The registering office shall write a letter to the bank for the capital to be contributed in cash of the business organization other than a share company, under formation, to be deposited in a blocked bank account.

► After a business organization other than a share company has entered commercial register and obtained legal personality, testimonials issued by appropriate government office, which show all contributions in kind have been transferred to the newly formed business organization, shall be submitted to the registering office.

► Where the commercial registration of the business organization is completed, the registering office shall write a letter to the bank to release the capital of the business organization kept in a blocked account.

Where the applicant is a branch of a business organization the required documentation are as listed below: ► An application form duly filled and signed by the agent of the business organization;

copy of the memorandum and articles of associations, or equivalent document of the parent company;

► A photocopy of a document ascertaining the legal personality of the business organization (i.e. registration certificate);

► Minutes of the parent company passed by an authorized body for the establishment of a branch company in Ethiopia, authenticated by the public notary, or a letter written by the owner in case of a one - man company; and authenticated photocopy of the power of attorney of the representative of the company, and photocopies of the pages relevant of the representative’s valid passport or identity card in case the representative is an Ethiopian national.

► Where the application is signed by an agent, document of agency issued by head of the enterprise and copy of the agent’s kebele identity card or passport,

► All documents need to be notarized in each country of the investee and should be registered in the Ethiopian embassy of that country. The document should also be registered in the Ministry of foreign affairs in Ethiopia.

The Ethiopian Investment Agency shall, upon receipt of the above documents, issues a certificate of registration evidencing the registration of a private limited company and a branch of an overseas company. The registering office shall request the tax collecting office, in writing, to give the business organization applying for registration a taxpayer’s identification number, before registering it. The tax collecting office shall inform the registering office, in writing of the taxpayer’s identification number it has issued to the business organization which is under formation.


2.4 Application to Obtain a Business License

According to the Commercial Registration and Business Licensing Proclamation No. 67/1997, an investor is not allowed to commence commercial activity without obtaining a valid business license. The Agency up on receipt of the required documentation will issue the business licenses to investors. Any amendment, renewal or replacement is made by the Ministry of Trade and Industry. The following documents are required for business license registration: An application form duly filled and signed by the investor; where the application is made by an agent, a photocopy of his power of attorney. Where the applicant is a business organization, photocopies of memorandum and articles of associations, or equivalent documents, including the amendments (if any); A photocopy of the investment permit and TIN; An undertaking signed by the investor to comply with the rules and regulations of the country; Identity cards of Ethiopian nationals, or domestic status certificate; and Three passports sized recent photographs of the investor or general manager as the case may be. 2.5 Capital requirement to setup a company A foreign investor, who intends to invest on his/her own, except in consultancy services and publishing, is required to invest not less than USD 100,000 in cash and/or in kind as an initial investment capital per project. The minimum capital required of a wholly foreign investor investing in consultancy services or publishing is USD 50,000, which may be in cash and/or in kind. A foreign investor reinvesting his/her profit or dividends, or exporting 75 per cent of his/her outputs, however, is not required to allocate a minimum capital. In line of the above facts our response to your specific questions is presented as follows: Creation of a Local Company: What is the administrative process? Sarens need to consider the above facts which are mentioned in order to determine which types of organizations to establish; additionally on the registration process all the documents required from head office like Memorandum of association and article of association of the parent company and board resolution should be notarized in Ethiopian embassy of the investee country. Those documents should also be submitted in ministry of foreign affairs, and document authentication and registration office. What is required in terms of shareholding? Members of shareholders can be companies or individuals. All shareholders can be foreigners or in joint venture with local investors. However, the number of shareholders should not be less than two for companies and five for share companies. What is required in terms of capital invested? The capital requirement is as it has been mentioned in the other part of this report the minimum capital requirement for an investment type Sarens engaged is USD 100,000. This


capital should be deposited in one of the commercial bank of Ethiopia and the transfer advice should be submitted to the investment office as part of the company establishment process. Sarens should consider that from the above mentioned services, engaging in any kind of maintenance and repair services are exclusively reserved for domestic investors. Sarens should discuss the issue with the proper government authority and EEPCO. If the problem could not be resolved then Sarens should change the service scope to areas of advising and training local providers of the above service as these providers may lack technical capacity to give the service. The investment proclamation states that All areas of Investment, other than those exclusively reserved for the Government, Ethiopian nationals or domestic investors or for joint investments with the Government shall be open for foreign investors. The following areas are exclusively reserved for domestic investors: 1. Retail trade and brokerage; 2. Wholesale trade (excluding supply of petroleum and its by-products as well as wholesale by foreign investors of their products locally produced); 3. Import trade (excluding LPG, bitumen and upon approval from the Council of Ministers, material inputs for export products); 4. export trade of raw coffee, chat, oil seeds, pulses, hides and skins bought from the market and live sheep, goats and cattle not raised or fattened by the investor; 5. Construction companies excluding those designated as grade 1; 6. Tanning of hides and skins up to crust level; 7. hotels (excluding star-designated hotels), motels, pensions, tea rooms, coffee shops, bars, night clubs and restaurants excluding international and specialized restaurants; 8. Travel agency, trade auxiliary and ticket selling services; 9. Car-hire and taxi-cabs transport services; 10. Commercial road transport and inland water transport services; 11. Bakery products and pastries for the domestic market; 12. Grinding mills; 13. Barber shops, beauty salons, and provision of smith workshops and tailoring services except by garment factories;


14. Building maintenance and repair and maintenance of vehicles; 15. Saw milling and timber making; 16. Customs clearance services; 17. Museums, theaters and cinema hall operations; 18. Printing industries The following areas of investment are exclusively reserved for Ethiopian nationals:

• Banking, insurance and micro credit and saving services; • Forwarding and shipping agency services; • Broadcasting services; and • Air transport services using aircraft with a seating capacity of up to 20 passengers.

Fees and costs for a temporary service by foreigners No person shall enter into firm financial commitment involving payment of foreign exchange with a foreign person or institution for the temporary employment of Foreign Service without the prior consultation; with the bank in the case of the Government, and approval by the Bank in all other cases. Where approval for the temporary employment of a foreign service may be obtained, the local employer shall buy the round trip ticket from local travel agencies. Applications to enter into firm financial commitments with foreign persons or organization to employ a foreigner shall include, information as to the purpose and duration of the temporary employment, detail of costs and basis of selection duly supported by photocopies of correspondences exchanged between the applicant and the foreign institution or person regarding the acquisition of the service. Repatriation of profits Foreign currency issues: conversion and transfer of currency in and out of Ethiopia Any foreign investors who have approved investment has the right to make the following remittances out of Ethiopia in convertible foreign currency at the prevailing rate of exchange on the date of remittance:

► profits and dividends accruing from investment ► principal and interest payments on external loans ► Payments related to a technology transfer agreement that is approved

and registered by authorized government authority. ► Proceeds from the sale or liquidation of an enterprise. ► Proceeds from the transfer of shares or of partial ownership of an

enterprise to a domestic investor. ► Capital Gain from liquidation and transfer of sales of foreign investors are

exempted from capital gain tax. ► Expatriates employed in an enterprise may remit, in convertible foreign

currency, salaries and other payments accruing from their employment in accordance with the foreign exchange regulations of the country.


However, Sarens should consider that in order to repatriate profit or dividend that it should get the capital invested in foreign currency or in kind registered in the national bank of Ethiopia. All foreign loan and credit import of goods and import service should be registered in the national bank of Ethiopia as a precondition to repatriate the loan and the credit. Foreign exchange regulation of the country allowed only 30 % of expatriate employee’s net earnings to transfer out of the country in foreign currency amount only for the first three years of their contract of employment in Ethiopia. Expatriate employees can transfer their salary and other benefit accruing from their employment in foreign currency amount in accordance with the foreign exchange regulations of the country. However, there should be prior approval by national bank before repatriation of foreign exchange. The amount that a foreign employee can take out of Ethiopia during the term of his service and upon final departure shall not exceed the aggregate itemized below; a) Single with free accommodation 50% of the total net earnings; b) Single without free accommodation 45% of the total net earnings; c) Married with free accommodation 45% of the total net earnings; and d) Married without free accommodation 40% of the net earnings, The value of free accommodation shall not be included in the total net earnings in calculating the remittable savings; Lump sum payments such as gratuity and accumulated leave pay shall not be included for remittance purposes except in the case of foreign employees in the public sector.

4. Rules & Regulation Regarding tax and tax authority in Ethiopia

Companies which established in Ethiopia are required to go along with the relevant proclamation and regulation in relation with both direct and indirect tax based on the residency principle. Residence can have the following scope and meaning according to the Ethiopian income tax proclamation. ► An individual shall be resident in Ethiopia, if he/she has a domicile/ habitual abode

within Ethiopia and/or is a citizen 'of Ethiopia and a consular, diplomatic or similar official of Ethiopia posted abroad.

► An individual, who stays in Ethiopia for more than 183 days in a period of twelve (12) calendar months, either continuously or intermittently, shall be resident for the entire tax period.

► A body shall be resident in Ethiopia, if it has its principal office or place of effective management in Ethiopia and /or is registered in the trade register of the Ministry of Trade and Industry or Trade bureau of the Regional Governments.

Resident person or companies in Ethiopia are taxable on their world wide income.A non-resident’s trade or business income is taxable with respect to Ethiopian source of Income.


Please note that "Resident person" includes a permanent establishment of a non-resident person in Ethiopia. Direct taxes: Income Tax from Employment The tax law defines an employee as “employee shall mean any individual, other than a contractor, engaged (whether on permanent or temporary basis) to services under the direction and control of the employer” Every person deriving income from employment is liable to pay tax on that income based on the rate specified hereunder. The marginal tax rates range from 10% to 35%. Employment income per month Income tax payable (%)

Over Birr To Birr 0 150 Exempt threshold

151 650 10 651 1,400 15

1,401 2,350 20 2,351 3,550 25 3,551 5,000 30

Over 5000 — 35 According to the Ethiopian Income Tax Proclamation, employment income shall include any payments or gains in cash or in kind received from employment by an individual, including income from former employment or otherwise or from prospective employment. As stated above tax obligation depends on the residence principle. An individual, who stays in Ethiopia for more than 183 days in a period of twelve (12) calendar months, either continuously or intermittently, shall be resident for the entire tax period. Individuals are taxed on their worldwide income if they are resident, if not, they will be taxed on their Ethiopian source of income. Income received in the form of wages does not include representation and other similar expenditures (On social functions, guest accommodations, etc.) Considering the above, the following categories of income shall be exempt from payment of income tax:

a) Income from employment received by casual employees who are not regularly employed provided that they do not work for more than one (1) Month for the same employer in any twelve (12) months period;


b) Pension contribution, provident fund and all forms of retirement benefits contributed by employers in an amount that does not exceed 15% (fifteen percent) of the monthly salary of the employee;

c) Amounts paid by employers to cover the actual cost of medical treatment of employees;

d) Allowances in lieu of means of transportation granted to employees under contract of employment;

Travel allowances shall be exempted from tax based on a clearly defined provision stipulated in the contract of employment between the manager/employer/ and employee. The allowance can only be exempted from tax if it is spent on travel directly related to the discharge of the employee’s work. However the income tax free transport allowance does not apply to transport expenses from office to home and vice versa, and to beneficial who use company cars. This monthly travel allowances which are exempted from tax shall account for 1/4 of the employee’s gross salary and shall under no circumstances exceed 1,000 ETB for federal tax payers and 15% and 600 respectively for regional tax payers. In case of daily travel allowances for an employee who travels outside of their regular work area to a place more than 25 kilometers away may be exempted if amount does not exceed 150 ETB. This amount shall under no circumstances exceed 4% of the employee’s salary.

e) Hardship allowance; f) Amounts paid to employees in reimbursement of travelling expenses incurred on

duty; In accordance with the terms of the contract of employment, travel expenses incurred by an employee who is assigned to a new place of work or who is returning to their permanent place of work following a temporary mission/ assignment shall be reimbursed and this will be done based on evidence provided by the employee to demonstrate their out-of-pocket expenses. Under no circumstances can these expenses exceed the standard air/land fare.

g) Amounts of travelling expense paid to employees recruited from elsewhere than the place of employment on joining and completion of employment or in case of foreigners travelling expenses from or to their country, provided that such payment are made pursuant to specific provisions of the contract;

Travel expenses paid to a foreigner when he/she leaves the country at the completion of his/her contract shall be made based on the work contract and taking into account air and land transport fare.

h) Allowances paid to members and secretaries of boards of public enterprises and public bodies as well as to members and secretaries of study groups set up by the Federal or Regional Government;

i) Income of persons employed for domestic duties;


Employees are required to be registered as employment income tax payers at the Ethiopian Customs and Revenue Authority (ERCA) and shall have a Tax Identification Number (TIN). An employer shall withhold tax from every payment to an employee (both foreign and local), unless the payment is expressly made tax-exempt by the Proclamation. The obligation of an employer to withhold tax has priority over all other obligations to withhold any other amounts from payments to an employee.

If the tax on income from employment, instead of being deducted from the salary or wage of the employee, is paid by the employer in whole or in part, the amount so paid shall be added to the taxable income and shall be considered as part thereof. Managers/employers who pay allowances which exceed the amount exempted from tax are required to add the amount paid to the employee’s salary and deducting the tax, pursuant to the proclamation, they must deposit it in the Authority’s account on a monthly basis. An employer shall pay the withheld tax to the Tax Authority within thirty (30) days of the end of each calendar month, and each payment shall be accompanied by a statement with respect to each employee who derives taxable income for the month. The statement shall be in the form and furnished in the manner prescribed by the Tax Authority. Any tax that is to be paid to the Tax authority by a stated date shall be payable on that date. Failure to make a timely payment shall result in the imposition of interest and the late payment penalty. An employer who fails to pay employment tax liability on the due date is subject to:

• A penalty of 5% (five percent) of the amount of unpaid tax on the first day after the due date has passed: and

• An additional 2 % (two percent) of the amount of the tax that remains unpaid on the first day of each month thereafter.

Social Contribution Employers should contribute a social security at the rate of 11% of the basic salaries of Ethiopian employees each month and should collect 7% from employees and submit to tax authority.

Employment Income Tax of foreign resident employees If the service is given inside Ethiopia As per the income tax proclamation every non-resident person who gets employment income in his short term duty of employment in Ethiopia will be required to pay employment income tax. Sarens France will be required to withhold employment income tax on foreign


resident employee as per the Schedule-A Employment tax at a progressive rate range from 10% to 35 % as stated above. If the service is given outside Ethiopia If the service is provided outside Ethiopia either by Sarens France head office or other person it is consider as external consultant. Therefore Sarens France required collecting 10% of Withholding Tax on payment from foreign resident employees. Business Income Tax According to the Ethiopian Income tax proclamation and regulation taxable income is defined as the amount of income subject to tax after deduction of all expenses and other deductible items. The rate of corporate income tax on all corporate taxable projects earned by businesses is 30%. While the tax rate for income from mining operation, excluding petroleum, natural gas and oil shall be taxed in Ethiopia at 35%. Deductible Expenses In the determination of business income, subject to tax in Ethiopia, deductions shall be allowed for, expenses incurred for the purpose of earning, securing, and maintaining that business income Non-Deductible Expenses The following expenses are not deductible for tax purpose: ► Voluntary pension or provident fund contribution over and above 15% of the monthly

salary of the employee, ► Declared dividends and paid-out profit, ► Interest in excess of the rate used between the National Bank of Ethiopia and the

Commercial banks increased by two (2) percentage points, ► Damages covered by insurance policy, ► Punitive damages and penalties, ► The creation or increase of reserves provisions and other special purpose funds

unless otherwise allowed by the income tax proclamation, ► Income Tax paid on employment income and recoverable Va1ue Added Tax, ► Representation expenses over and above 10% of the salary of the employee, ► Personal consumption expenses, Entertainment expenses, ► Donation or gift; however donation for registered charity, to disaster and

preventive, public hospital and school will be allowable to the extent of 10% net profit before tax,

► Interest paid to shareholders on loans and advances shall not be deductible to the extent that the loan or advances in respect of which the interest paid exceeds on average during the tax period four times the share capital.


Capital Allowances/Deprecation Buildings and other structures are depreciated using the straight-line method at an annual rate of 5%. A straight-line depreciation rate of 10% applies to intangible assets. The following assets are depreciated using a pooling system: Assets Rate (%) Computers, information systems, software products & data storage equipment 25 Other business assets 20 Under the pooling system, the depreciation rate is applied to the depreciation base, which is the book value of the category as recorded in the opening balance sheet of the tax year, increased by certain costs incurred during the tax year, and decreased by certain amounts received during the tax year. The depreciation base is increased by the following costs: the cost of assets acquired or created; the cost of improvements that are capitalized; and the costs of renewal and reconstruction of assets. The depreciation base is decreased by the sales price of assets disposed of and compensation received for the loss of assets. A negative depreciation base is added to taxable income. If the depreciation base is Birr 1,000 or less, the entire depreciation base is deductible. No depreciation is allowed on the revaluation of business assets. Depreciation shall not be allowed for assets in respect of which all capitalized costs have been fully recovered if the transfer of such assets is made between related persons. Accounting & Tax Treatment According to income tax law of Ethiopia a company shall account for tax purposes on an accrual basis. In case of long term construction contract the company shall be accounted for on the basis of the percentage of the contract completed during any tax period. The percentage of completion is determined by comparing the total costs allocated to the contract and incurred before the end of the tax period with the estimated total contract costs. Since Sarens France’s contract duration is between 8 to 12 months period the company need not use percentage of completion method but in-case if the contract period is more than one year the company shall apply percentage of completion method. Tax filling and penalty on late filling The business income tax (balance sheet, income statement) for each period should be reported or filed within four month from the period of year end. The yearend will be July 7, but upon request the tax authority may allow the company to change its accounting period.

Failure to make a timely tax declaration and payment shall result in the imposition of interest and the late payment penalty. A taxpayer who fails to file a timely tax declaration is liable for a penalty equal to:


• 1,000 Birr for the first thirty (30) days (or part thereof) the declaration remains unfiled);

• 2,000 Birr for the next thirty (30) days (or part thereof) the declaration remains unfiled);

• 1,500 Birr for each thirty (30) days (or part thereof) thereafter that the declaration remains unfiled.

Withholding Tax Organizations having legal personality, or private non-profit organizations and non-governmental organizations have the obligation to withhold income tax of 2% from payments they make to tax payers who provide the following goods and services. 1) Supply of goods involving more than Birr 10,000 in any one transaction or one supply contract; 2) Rendering of the following services involving more than Birr 500 in one transaction or one service contract: ► Consultancy service; ► Designs, written materials, lectures and dissemination of information; ► Lawyers, accountants, auditors and other services of similar nature; ► Sales persons, arts and sports professionals, and brokers including insurance brokers

and other commission agents; ► Advertisements and entertainment programs for television and radio broadcasts; ► Construction services; ► Advertisement services; ► Patents .for scientific and intellectual works; ► Rent for lease of machineries building and other goods including computers; ► Maintenance services; ► Tailoring; ► Printing; ► Insurance,

Splitting procurements, which otherwise should be made in a single transaction, with the intention of hindering the withholding of tax, shall be a criminal offence punishable under the Proclamation. Companies are also obliged to withhold tax on payments to at the rate of 30 % from all suppliers who cannot submit a Tax identification number (TIN). In addition, ERCA shall withhold 3% of the total CIF (cost insurance and fright) value of all imported goods. Upon declaring the annual profit tax the company will receive a tax credit for the total amounts withheld during that period. In case a loss is incurred, the tax office shall refund the deducted withholding amount.


Other types of Withholding Dividends A 10% final WHT is levied on dividends paid to residents and non-resident entities or persons; the payer is required to withhold and pay the amount to the tax authority within 15 days after the end of the month of the payment. Interest Income on Deposits A 5% final WHT is levied on interest paid to resident and non-resident entities or persons on deposit; the payer is required to withhold and pay the amount to the tax authority within 15 days after the end of the month of the payment. Interest on foreign loan A 10% final WHT is levied on interest paid to non resident entities or persons for on foreign loan; the payer is required to withhold and pay the amount to the tax authority within two months after the year end. Royalties A 5% final WHT is levied on royalties paid to resident and non-resident entities or person; the payer is required to withhold and pay the amount to the tax authority within 15 days after the end of the month of the payment. If the payer is non resident the recipient is required to withhold from himself and pay the amount. Income from Rendering of Technical Services A 10% WHT is levied on technical fees paid to resident and non-resident companies for technical service rendered outside Ethiopia. The payer is required to withhold and pay the amount to the tax authority within 15 days after the end of the month of the payment. If the technical service is rendered inside Ethiopia by non-resident companies the company is required to collect a 30% WHT. Income from Casual Rental of Property A 15% final WHT is levied on income from casual rental of property (including land, building, or moveable asset) not related to a business activity ;The annual gross income should be reported to the tax authority within two months after the year end. Gain on Transfer of Certain Investment Property Income Tax shall be payable on gains obtained from the transfer (sale or gift) of building held for business, factory, office 15% (fifteen percent) and shares of companies 30% (thirty percent)


Withholding tax on sub contractors fee (consultants fee) If the service is given outside Ethiopia All payments made in consideration of any kind of technical services rendered outside Ethiopia to resident persons in any form shall be liable to tax at a flat rate of ten percent (10%) which shall be withheld and paid to the Tax Authority by the payer. The term "technical service" means any kind of expert advice or technological service rendered. Thus, sarens France will be required to withhold a 10% technical service tax on work of consultancy service outside Ethiopia whether the work is performed by resident or non resident sub contractors. If the work is performed by the parent company/inter company, the local company should submit necessary supporting to the tax authority on request, The payment in question was made for services actually rendered and said service was necessary for the contract and could not be performed by other persons or bodies or by the business itself at a lower cost. Sarens France may also be required to collect 10% technical WHT from the parent/ intercompany as these parties may be considered as separate legal entity by the tax authority and additionally a15% of VAT on reverse taxation shall be collected and paid to the amount for the tax authority on service. If the service is given inside Ethiopia A) If the service is provided by non-resident and non- registered suppliers

If the services are rendered inside Ethiopia by non-resident and non- registered suppliers who have no Tax payer identification number (TIN) certificate, Sarens France will be required to collect 30% WHT and 15% of VAT on reverse taxation and shall pay the amount for the tax authority. B) If the service is provided by resident or local Suppliers

If the service is rendered inside Ethiopia by a resident or local suppliers, Sarens France will only be required to collect 2% WHT if the sub contractor manages to submit TIN certificate on payment, if not it should collect 30% WHT. Indirect taxes: Value Added Tax Value Added Tax is levied at the rate of 15% on value added at every taxable transaction and is transferred to consumer’s expenditure. Value added tax is charged on those businesses whose total annual turnover exceeds 500,000 Birr per year. The following tax payers are also required to register for VAT regardless of their annual sales turnover: Grade 1 to Grade 9 Contractors, Leather and leather products manufacturers, Shoe factories, Computers and related products suppliers, Electronics,


refrigerators, television sets, Decks suppliers, Importers, Flour producers, Plastic and plastic products producers and Jewellers. There are also products and services that are exempted from paying VAT. This includes the following: Financial services, Imported raw materials used for production of exportable produce, Raw materials and packaging materials purchased domestically and used for exportable produces, Medical services, Human drugs, Books, Electricity, Kerosene, Water, Education, Milk, Bread, Transport service, Postal services, License and certification fees, Used houses, Fertilizer, pesticides and improved seeds and seedlings. All export is under zero percent VAT rate. VAT recognition in Construction contract Sarens France is expected to be registered for VAT if it meets the 500,000 threshold. According to Ethiopian VAT proclamation if the service is provides in constant bases, it is consider that the service is provided and hence VAT is due when each time VAT invoice issued in connection with the service or if payment is made earlier, at the time when payment is made. Therefore Sarens France should raise VAT on any advance payment and paid to ERCA. If there is no advance payment for the contract work certified then when each work is certified a VAT invoice should be issued and paid to the tax authority Irrecoverable Input VAT The following purchases are not recoverable. Locally purchased or imported passenger Vehicles which designed or adopted for the transport of eight or fewer seated persons including a double cab vehicles unless the person is in a vehicles dealers or hires. Local or imported supplies of goods and service for the purpose of entertainment unless the person is in the entertainment business Other VAT issues A purchase of good and service by registered person to a use other than in a course or furtherance of a taxable activity is consider to be a supply of goods or service by that person in the course or furtherance of a taxable activity. The supply of goods or rendering of services by an employer to his employees gratuitously any other form consider as a supply of goods or services in the course or furtherance of a taxable activity. Time of Supply Supply occurs when a VAT invoice is issued for that transaction,


If a VAT invoice is not issued within 5 days after the moment described below, the supply will be considered as having taken place

► at the time the goods are made available to the recipient, sold or transferred, or the services are rendered; or

► In the case of a delivery of goods that involves shipment of the goods, when the

shipment starts. Reverse Taxation

If a service is provided by non residence and none registered for VAT in Ethiopia and the service is not in the exempted list, a person who receives that service in Ethiopia is responsible to withhold 15% VAT and paid to the authority in the time period specified below. If the person who withhold this VAT is registers for VAT in Ethiopia the withhold amount considered as input VAT. If payment is made in advance of the time described above, and if VAT invoice is not issued within 5 days after the date of payment, the supply will be considered as having taken place at the time payment is made Filling of VAT return and late filling penalty VAT return should be filed and paid to the authority:

► Within thirty days from the end of every month if the company has a net VAT payable at the end of the month,

► Within twenty days from the end of every month if the company has a net VAT receivable at the end of the month,

► Within ten days from the end of every month if the company has Zero VAT. A person who fails to file a timely VAT return is liable for penalty 10,000 and if the unpaid VAT is more than 200,000 Ethiopian birr the penalty will be 5% of the amount of tax on each month until it reach 25% of such amount but the first month penalty should be limited to 50,000.00 Ethiopian birr. Moreover, a person is liable for 25% interest rate over and above the higher commercial interest rate for the amount of tax not paid during the due date. Turnover Tax Turnover taxpayers are those persons who are not required to be registered for Value Added Tax because the total value of their yearly taxable transactions is less than 500,000 Birr. A 2% tax is payable for goods sold locally and for services rendered locally. The services rendered include contractors, grain mills, tractors and combine-harvesters. 10% tax is levied on other services. Base of computation of the Turnover Tax is the gross


receipts in respect of goods supplied or services rendered. Goods and services which are exempted from VAT are also exempted from turnover tax. Excise Tax Excise tax is charged on 19 locally produced goods or imported goods. The base for computation of Excise Tax is the cost of production in respect of goods produced locally, and cost, insurance and freight (C.I.F.) in respect of goods imported. The rate of tax depends on the type of goods produced or imported, and ranges from 10% to 100% and shall be paid to the authority every 30 days. Stamp Duty Stamp duty is levied on specific instruments. Depending on the type of the instrument, the rate of stamp duties ranges from 0.5% to 2%, for those instruments whose basis of valuation is flat; and from Birr 5 to Birr 350, for those instruments whose basis of valuation is value. The instruments chargeable with stamp duty include Memorandum and Articles of Association of any business organization, award, bonds, warehouse bond, contract and agreement and memoranda thereof, security needs, collective agreement, contract of employment, lease, including sub-lease and transfer of similar rights, notaries acts, power of attorney and documents of title to property. Custom Duty The customs duty is a prepaid tax on imports upon the import of merchandise to be paid by the importer of goods to the Ethiopian Revenue and Customs Authority. This pre-paid tax is offset at the end of the tax year upon tax filing by the importer. On the other hand, the Ethiopian investment proclamation has allowed the investor to import duty-free capital goods and construction materials necessary for the establishment of a new enterprise or for the expansion or upgrading of an existing enterprise. Notwithstanding the provisions of this Article the Board may, by its directive, bar the duty-free importation of capital goods and construction materials where it finds that they are locally produced with competitive price, quality and quantity. Generally Importers are required to file the investment permit, other registration document and importing document (such as bill of loading, supplier invoice, certificate of origin and other related document) to Ethiopian Revenue and Custom Authority to process duty free permission.


4. Customs rules with respect to import of equipments and materials which are intended for consumption of the project and a retransfer of assets which have a useful life at the completion of the life of the project. Goods for construction work may temporarily be imported without payment of duties and taxes subject to their re-export at the completion of such tasks. However, spare parts and consumable goods shall not be temporary imported. The company shall provide security equivalent to the duties and taxes payable with respect to such goods. Customs duties and taxes shall be paid on the depreciated values of temporarily imported goods up on their re-exportation based on the tariff currently applicable. Imported goods for construction works, as per a project agreement shall be re exported within the time limit prescribed in the agreement. Sarens France could deprecate the book value of the imported asset with 20% rate on the pooling method according to Ethiopian depreciation law. Under the pooling system, the depreciation rate is applied to the depreciation base, which is the book value of the category as recorded in the opening balance sheet of the tax year, increased by certain costs incurred during the tax year, and decreased by certain amounts received during the tax year. Sarens France may also able to transfer temporarily imported goods within the authorized period to the other duty free right holders with respect to similar goods with the approval of Ethiopian Revenue and customs Authority. If Sarens France transfers temporarily imported goods to other person the company will have the obligation to pay duties and taxes on the depreciated value of the goods calculated for the period from the date of importation until the date of transfer. 5. Customs: taxes on imported goods, equipment and materials and re-export of machinery and equipment - both for permanent and temporary imports Custom taxes are based on Cost, Insurance, and frights (CIF). The customs tax rate for equipments and materials vary from 5% to 20% and for vehicles vary from 10% to 35% depending on seating and cylinder capacity and types of vehicles. There is also excise tax ranging from 10% to 100% on some vehicles with engines exceeding 1800 cc. Vehicles which are used for construction purpose are taxed at the rate of 10%. The following charges not to be included in Customs Value Provided that they are shown separately from the price actually paid or payable, the following shall not be included in the customs value:


a) charges for construction, upgrading, erection, maintenance or technical assistance, which have been undertaken or are to be undertaken after the importation of industrial plants, machinery or equipment; b) Charges for the transport of goods after their introduction into the customs territory of Ethiopia; c) Charges for interest under a financial arrangement entered into by the buyer and relating to the purchase of imported goods; d) Charges for the right to reproduce imported goods; e) Buying commissions; f) Import duties or other charges paid in Ethiopia related to importation of the goods. 100 % exemption from the payment of import customs duties and other taxes levied on imports is granted to an investor to import all investment capital goods, such as plant machinery and equipment, construction materials, as well as spare parts worth up to 15% of the value of the imported investment capital goods, provided that the goods are not produced locally in comparable quantity, quality and price. Investment capital goods imported without the payment of import customs duties and other taxes levied on imports may be transferred to a further investor enjoying similar privileges Sarens need to submit for Ethiopian revenue and customs authority a duty free privileged request letter so as to import those capital goods and materials. Temporary Importation Goods for construction work may temporarily be imported without payment of duties and taxes subject to their re-export at the completion of such tasks. However, spare parts and consumable goods shall not be temporary imported. Customs duties and taxes shall be paid on the depreciated values of temporarily imported goods up on their re-exportation based on the tariff currently applicable. Imported goods for construction works, as per a project agreement shall be re exported within the time limit prescribed in the agreement.

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