The Ethiopian government has recently revised existing Value Added Tax (VAT) legal regime that has been in place since 2002. The Federal parliament passed the VAT Amendment Proclamation No. 1157/2019 (“Proclamation”) effective from 13 August 2019. At a tertiary level, new directives addressing VAT refunds and VAT withholding have been issued by the Ministry of Revenue and Ministry of Finance respectively. This legal update covers the changes introduced by these new regulations.
Changes Introduced by the VAT Amendment Proclamation No. 1159/2019
Accounting Period and VAT Filing: The Proclamation amended the VAT accounting period from one calendar month to three calendar months based on the annual turnover of a taxpayer. Whereas all taxpayers with annual turnover transaction of more than 70 Million Birr will be required to file VAT every month; other taxpayers whose annual turnover is less than this threshold will be required to file VAT once in every three months. This eases the cost of filing VAT every month.
Definition of capital goods: Consistent with the definition provided under the Investment Incentives Regulation No. 270/2012 and Capital Goods Leasing Business (Amendment) Proclamation No. 807/2013, capital goods are defined as goods used to produce other goods for the purpose of sale or used directly or indirectly and with the duration of more than one year. The Proclamation provides illustrative list of capital goods such as building, vehicles, machinery and other tangible properties. The significance of providing definition is that it removes the ambiguity as to the category goods on which VAT can be refunded.
Withholding of VAT by the Payer: Previously, the VAT amendment proclamation No 609/2008 and Ministry of Finance VAT Withholding Directive No.27/2010 required government entities and public enterprises to withhold the tax from the total amount of payables, making these entities a VAT withholding agent. Under these laws, the withholding agents were expected to withhold the VAT and transfer the entire tax to the relevant tax authority. The Proclamation provides that withholding agents are required to transfer 50% of the tax payable to the seller and the remaining portion of the 50% to the Tax Authority. This is very helpful for the business community providing service or goods to the government institutions or public enterprises as this permits them to use the money refunded to use for their business operation.
VAT Refund: The Proclamation introduces three changes to the existing VAT refund regime. First, it affirms that VAT paid by a person prior to the date of registration are creditable in the first accounting period as long as it is proved that the taxes are used in connection with a taxable transaction. The limitation here is the purchase or import of goods shall not occur more than six months prior to registration. Second, the VAT paid on capital goods by a taxpayer - the total monetary value of whose taxable transactions is more than ETB 100, 000, 000 in 12 months’ period, at the date of registration or before that, is refundable in the accounting period provided that the capital goods are used for the taxable transaction. Third, the VAT paid while acquiring capital goods are creditable for the tax to be paid in the next accounting period and if there is any remaining balance, it has to be refunded in the next accounting period.
New Directive on VAT Refund No 148/2019
The Ministry of Revenue issued a VAT Refund Directive No. 148/2019 (“Refund Directive”) effective from March 2019 providing the manner of refunding VAT paid by the taxpayer in excess of the credits. The Refund Directive adopted a risk based tax refund system by repealing a number of existing directives namely the VAT Refund Directive No 15/2003, VAT Credit for the Mixed supplies and Capital Goods Directive No 20/2002, VAT Refund for Taxes paid for Humanitarian Goods and Service No. 23/2009, VAT refund for taxes paid on goods used for the operation of companies with a Special Privilege No.24/2008. The new Refund Directive provides comprehensive rules applicable across all the sectors. The main changes introduced by this directive are briefly highlighted below:
Scope: The Refund Directive, in addition to traders and business organizations, is also applicable to organizations with special privileges including embassies, international organizations or non-governmental organizations. NGOs will be refunded with an input VAT paid on the materials to be supplied to the aid recipients, who suffered a natural or manmade disaster. Companies undertaking capital goods lease financing business would be refunded with the input VAT paid to local importers or manufacturers while buying the capital goods.
Risk Levels: The Refund Directive introduces three kinds of risk levels of taxpayers i.e. Minimum Risk Level, Medium Risk Level and Maximum Risk Level. The risk levels are to be assessed by the Ministry of Revenues (“Ministry”) on the basis of risk appraisal parameters. Based on the risk level of the taxpayer, the Ministry may carry out an audit before providing the refund. Depending on the risk level, the audit could be higher level audit which requires full examination of the VAT invoices or a small level audit which requires partial examination of VAT invoices.
Eligibility for VAT Refund: Under the Refund Directive, the following transactions are eligible for VAT refund:
- A taxpayer with an investment project of a higher cost is allowed to refund the input VAT paid in relation with the project. Investment project with a higher cost includes an investment engaged in manufacturing or service provision activity with a project phase of three years until the date of actual production and with the cost of at least USD 100 Million.
- A company involved in the exploration of mining and petroleum will be refunded with the input VAT paid when the exploration bears no fruit and sufficient evidence is brought from the Ministry of Mines and Petroleum.
- An exporter, who is beneficiary of the Export Trade Duty Incentive Scheme under Proclamation No 768/2012, is allowed to refund the input VAT, even before exporting the products.
- If part of a transaction is a taxable transaction and some other part is tax exempted, VAT refund would be made if the value of the taxable transaction divided by the whole transaction is more than 90%. When the taxable transaction is less than 90% of the whole transaction, no refund is allowed.
- When at least 25% of the value of the registered person’s taxable transaction is taxed at zero rate, the amount of VAT charged as a credit in excess of the amount of VAT charged for export of goods and services will be refunded.
- VAT collected from transactions on capital goods and those who have the obligation to collect VAT is to be credited from the tax to be paid in the next five months and when the tax is not credited with in these months, the VAT will be refunded.
- A taxpayer, who paid the input VAT and collected an output invoice from a VAT Withholding Agent, may be refunded.
- The input VAT paid by the taxpayer six months before its VAT registration would be credited and the excess tax would be refunded.
- VAT paid by the taxpayer on unfinished buildings in the process of expanding its enterprise, will be credited with the output VAT and the remaining would be refunded.
- When a person, who is VAT exempt, enters into local transaction, it has to pay the VAT and request refund.
Ineligible VAT Refund Requests: the Refund Directive provides for transactions that are ineligible for VAT refunds and scenarios in which VAT refunds will not be permissible. These include:
- VAT refund is not allowed for a tax paid by the taxpayer after its business license is cancelled.
- VAT paid for inputs of a construction will be refunded after the construction of a building is completed and the building begins to generate an income. The tax will be credited from VAT collected in the first month and the remaining will be refunded in the next month of generating an income. However, the crediting cannot be made from the VAT collected from other transactions.
- A taxpayer is not allowed to refund when the input VAT is registered as the capital of the company and depreciation deduction is allowed.
- An organization with a special privilege, such as embassies, consulate offices, international organizations, regional organizations and foreign aid organizations are allowed to refund the VAT paid for the purchase of goods and services within a month. The request for refund will be barred by period of limitation if the request is filed one year from the date of transaction.
New Directive on VAT Withholding
The Ministry of Finance adopted an Amendment Directive on the VAT withholding Directive No. 27/2012 effective from 28 June 2019. The basic change introduced by the new Directive is that the VAT withholding agent, government entities and public enterprises may procure goods and services worth of more than 200, 000 Birr only from VAT registered suppliers of goods and services. Previously, the threshold was only 50,000 Birr. This amendment follows the VAT registration threshold increment from 500,000 to 1 Million.