Ethiopia has been hitting the African news headlines lately - in a positive way. Itel Mobile Ethiopia expects to generate US$40 million from assembling and exporting mobile phones this year, with the figure predicted to grow to US$300 million by 2020.
The Ethiopian Airlines Group has just been recognised as the Middle East and African airline of the year by Airline Economics, the world’s largest finance and leasing print publication.
And the country has also concluded a deal with the Italian Trade Agency to help enhance its textile industry, which it is hoped will generate US$ 271 million in exports over the forthcoming financial year, creating 30 000 new jobs in the process.
As a result, with so much positive news around, it would seem a good time to learn more about the rules governing payroll in the region.
Country background
Ethiopia is Africa’s oldest independent country and its second largest in population size. A founding member of the United Nations (UN), it serves as a base for many international organisations, but is, unfortunately, commonly associated with food shortages as the country has suffered periodic droughts and famines, which have led to civil unrest over recent years.
Ethiopia fact sheet (UN World Bank)
Population: 86.5 million
Capital: Addis Ababa
Major languages: Amharic, Oromo, Tigrinya, Somali
Major religions: Christianity & Islam
Currency: Birr
Employment in Ethiopia
1. Normal hours and overtime
Employment legislation in Ethiopia is largely laid out in Labour Proclamation No. 42/1993. Normal working hours may not exceed eight hours a day or 48 hours per week. Overtime rules are covered in Section 68 of the Proclamation and are summarised in the table below:
|
Hours of work
|
Rate of overtime payment |
|
Overtime between 6am – 10pm (day work) |
1.25 multiplied by ordinary hourly rate |
|
Overtime between 10pm -6am (night work) |
1.50 multiplied by ordinary hourly rate |
|
Overtime on a weekly rest day |
2.00 multiplied by ordinary hourly rate |
|
Overtime on a public holiday |
2.50 multiplied by ordinary hourly rate |
Overtime is normally paid at the same time as normal salaries.
2. Leave
• Annual leave
Unless provided for in the Labour Proclamation, employers cannot pay employees wages in lieu of annual leave. Staff members are entitled to a minimum of 14 working days leave for their first year of service and this entitlement increases by one working day for each additional year of service. This means that an employee who has completed five years of service would be entitled to a minimum of 18 days annual leave.
• Sick leave
Employees are not entitled to sick leave until they have completed their probationary period. Sick leave cannot last for more than six consecutive months over any 12- month period, commencing on the first day of illness.
Staff members are entitled to be paid 100% of their wages during the first month of sickness. This figure drops to 50% over the next two months and to zero during the final three months when they are entitled to no sick pay at all.
• Special leave
There are a number of special leave types covered in the Labour Proclamation, but an important one covers family events. Employees are eligible to receive payment for three working days when they get married or if their spouse, children or a close relative dies.
Also bear in mind that education or training leave is determined by collective agreements or work rules.
“For tax purposes, an employee is defined as
an individual engaged to perform services under
the direction and control of another person.”
3. Income tax on employment income
For tax purposes, an employee is defined as an individual engaged to perform services under the direction and control of another person. This engagement can take place on either a permanent or temporary basis. The definition does not include independent contractors but does cover directors, other office holders when it involves managing an entity, government appointees and people holding public office.
Income tax applies to any employment income that such individuals receive - whether payments or gains are in cash or in kind - by virtue of that employment. Income from former or prospective employment is also included.
All income tax regulations are issued by the Council of Ministers, which outlines what are classed as taxable fringe benefits and how they will be assessed.
Employers are obliged to withhold income tax from each payment made to an employee. The taxes withheld must be paid to the Ethiopian Revenues and Customs Authority (ERCA) within 30 days from the end of each calendar month in which the tax was withheld. Such payments should also be accompanied by a statement about each employee receiving taxable income for the month.
Tax rates are set out in Schedule A, Article 11. Employment income tax rates are progressive, with the maximum being set at 35% for employment income that is greater than 10,900 Birr (US$402).
The employment income tax that an employee has to pay amounts to a final tax on their employment income. Current rates are set out in the following table:
|
Employment income per month (Birr) |
Rate of income tax (%) |
Deduction (Birr) |
|
0 –600 |
0% |
NIL |
|
601-1,650 |
10% |
60.00 |
|
1,651-3,200 |
15% |
142.50 |
|
3,201-5,250 |
20% |
302.50 |
|
5,251-7,800 |
25% |
565.00 |
|
7,801-10,900 |
30% |
955.00 |
|
Over 10,900 |
35% |
1,500.00 |
4. Exemptions
Certain categories of income are exempt from employment income tax. The most common components of an employee’s package that are fully or partially exempt are listed below:
• Any amount paid by an employer to cover the actual cost of an employee’s medical treatment would be exempt from tax;
• An allowance paid to an employee in lieu of transportation, which meets certain conditions, would qualify for exemption. The allowance must be referred to in an employment contract.
The maximum tax-exempt allowance is currently set at 2,200 Birr (US$81) per month, but the allowance cannot exceed 25% of an employee’s salary. It is also important to note that the allowance does not cover instances in which an employer arranges for, or gives, a vehicle to a staff member who then uses it to travel between their residence and place of work;
• If an employee is granted a hardship or weather allowance as a result of working in a remote and/or desert area within Ethiopia, for example in Asosa or Gambela, a portion of that allowance would be tax-exempt. The taxexempt percentage depends on the specific place in which the staff member works. More details can be found in Directive No. 21/2001 and Directive No. 102/2007 issued by ERCA;
• If an employee receives a per diem allowance for traveling more than 25km from their place of work, either 255 Birr (US$9) per day or 4% of their monthly salary, whichever is greater, will be exempt from income tax. The allowance must be referred to in the employment contract and the wording should indicate that the allowance will only be paid for per diem purposes and will not cover expenses incurred by staff members in their daily commute from their place of residence to the office. It will also not cover expenses paid to an employee who possesses a company vehicle or uses a transportation service provided by their employer. Moreover, there is a monthly limit, which means that the maximum amount a staff member can receive in tax-exempt form per month is 2,200 Birr. This monthly amount should not exceed 25% of the employee’s monthly salary;
• Amounts paid to an employee for workrelated travel costs are exempt from tax as long as documented evidence of those costs exists and they are in line with prevailing land and air transport fares. Transport expenses paid to expatriate employees on leaving the country following the termination of their employment contract are exempt subject to certain conditions too. These expenses should be covered under their employment contract, which is supposed to include a clause outlining the cost of repatriation. But such expenses should not exceed prevailing land or air transport fares and there are also limits on how much luggage can be transported - the limit is currently 300kgs. This exemption also covers inbound expatriate travel expenses, but again the employment contract must contain appropriate wording on the matter;
• Employees who work in the mining, manufacturing or agricultural sectors and receive food and beverages on a free-of-charge basis from their employer will have a portion of the cost exempt from employment income tax. How much depends on the industry concerned.
• If an employer contributes towards an employee’s pension, provident or other retirement fund, these contributions will be exempt from employment income tax as long as their total monthly contribution does not exceed 15% of the staff member’s monthly income.
Conclusion
Having a basic overview of employment and tax legislation in Ethiopia should enable payroll managers to provide valuable input into any discussions about expansion into the region. Because it is critical that employment contracts are drafted correctly before engaging staff and local knowledge is key to ensuring compliance, it is clear that payroll departments have a strategic role to play in this area.
After graduating with a degree majoring in taxation, accounting and managerial accounts and finance, Sharon gained considerable experience in the field of training, tax issues and financial/ ICT management, including mergers and acquisitions. She started her career in education, but progressed to a position within the South African Revenue Services, before moving on to Anglo American Property Services. Here Sharon climbed the ranks to become group financial director, with ICT and payroll as part of her management portfolio. As Anglo American managed properties on behalf of their owners, she also gained experience of the outsourcing field. During this time, Sharon undertook further specialised studies focusing on property practice, financial markets and instruments.
She joined Praxima Payroll Systems in 2001, steering the company through the process of developing its own software and establishing them as a key provider of payroll services to some of the largest legal practices in South Africa. After relocating to the UK, Sharon continued in a consulting role with Praxima before joining global consolidator Celergo in 2012 as head of UK operations. She oversaw a right-sizing process and refined the company’s payroll processes to improve productivity. Sharon was asked to take on the chief operating officer role at Praxima Holdings in 2013 and assisted the firm in extending its footprint into Africa and beyond. In March 2017, she joined BDO as an account manager in its global outsourcing division.
Ethiopia has been hitting the African news headlines lately - in a positive way. Itel Mobile Ethiopia expects to generate US$40 million from assembling and exporting mobile phones this year, with the figure predicted to grow to US$300 million by 2020.
The Ethiopian Airlines Group has just been recognised as the Middle East and African airline of the year by Airline Economics, the world’s largest finance and leasing print publication.
And the country has also concluded a deal with the Italian Trade Agency to help enhance its textile industry, which it is hoped will generate US$ 271 million in exports over the forthcoming financial year, creating 30 000 new jobs in the process.
As a result, with so much positive news around, it would seem a good time to learn more about the rules governing payroll in the region.
Country background
Ethiopia is Africa’s oldest independent country and its second largest in population size. A founding member of the United Nations (UN), it serves as a base for many international organisations, but is, unfortunately, commonly associated with food shortages as the country has suffered periodic droughts and famines, which have led to civil unrest over recent years.
Ethiopia fact sheet (UN World Bank)
Population: 86.5 million
Capital: Addis Ababa
Major languages: Amharic, Oromo, Tigrinya, Somali
Major religions: Christianity & Islam
Currency: Birr
Employment in Ethiopia
1. Normal hours and overtime
Employment legislation in Ethiopia is largely laid out in Labour Proclamation No. 42/1993. Normal working hours may not exceed eight hours a day or 48 hours per week. Overtime rules are covered in Section 68 of the Proclamation and are summarised in the table below:
|
Hours of work
|
Rate of overtime payment |
|
Overtime between 6am – 10pm (day work) |
1.25 multiplied by ordinary hourly rate |
|
Overtime between 10pm -6am (night work) |
1.50 multiplied by ordinary hourly rate |
|
Overtime on a weekly rest day |
2.00 multiplied by ordinary hourly rate |
|
Overtime on a public holiday |
2.50 multiplied by ordinary hourly rate |
Overtime is normally paid at the same time as normal salaries.
2. Leave
• Annual leave
Unless provided for in the Labour Proclamation, employers cannot pay employees wages in lieu of annual leave. Staff members are entitled to a minimum of 14 working days leave for their first year of service and this entitlement increases by one working day for each additional year of service. This means that an employee who has completed five years of service would be entitled to a minimum of 18 days annual leave.
• Sick leave
Employees are not entitled to sick leave until they have completed their probationary period. Sick leave cannot last for more than six consecutive months over any 12- month period, commencing on the first day of illness.
Staff members are entitled to be paid 100% of their wages during the first month of sickness. This figure drops to 50% over the next two months and to zero during the final three months when they are entitled to no sick pay at all.
• Special leave
There are a number of special leave types covered in the Labour Proclamation, but an important one covers family events. Employees are eligible to receive payment for three working days when they get married or if their spouse, children or a close relative dies.
Also bear in mind that education or training leave is determined by collective agreements or work rules.
“For tax purposes, an employee is defined as
an individual engaged to perform services under
the direction and control of another person.”
3. Income tax on employment income
For tax purposes, an employee is defined as an individual engaged to perform services under the direction and control of another person. This engagement can take place on either a permanent or temporary basis. The definition does not include independent contractors but does cover directors, other office holders when it involves managing an entity, government appointees and people holding public office.
Income tax applies to any employment income that such individuals receive - whether payments or gains are in cash or in kind - by virtue of that employment. Income from former or prospective employment is also included.
All income tax regulations are issued by the Council of Ministers, which outlines what are classed as taxable fringe benefits and how they will be assessed.
Employers are obliged to withhold income tax from each payment made to an employee. The taxes withheld must be paid to the Ethiopian Revenues and Customs Authority (ERCA) within 30 days from the end of each calendar month in which the tax was withheld. Such payments should also be accompanied by a statement about each employee receiving taxable income for the month.
Tax rates are set out in Schedule A, Article 11. Employment income tax rates are progressive, with the maximum being set at 35% for employment income that is greater than 10,900 Birr (US$402).
The employment income tax that an employee has to pay amounts to a final tax on their employment income. Current rates are set out in the following table:
|
Employment income per month (Birr) |
Rate of income tax (%) |
Deduction (Birr) |
|
0 –600 |
0% |
NIL |
|
601-1,650 |
10% |
60.00 |
|
1,651-3,200 |
15% |
142.50 |
|
3,201-5,250 |
20% |
302.50 |
|
5,251-7,800 |
25% |
565.00 |
|
7,801-10,900 |
30% |
955.00 |
|
Over 10,900 |
35% |
1,500.00 |
4. Exemptions
Certain categories of income are exempt from employment income tax. The most common components of an employee’s package that are fully or partially exempt are listed below:
• Any amount paid by an employer to cover the actual cost of an employee’s medical treatment would be exempt from tax;
• An allowance paid to an employee in lieu of transportation, which meets certain conditions, would qualify for exemption. The allowance must be referred to in an employment contract.
The maximum tax-exempt allowance is currently set at 2,200 Birr (US$81) per month, but the allowance cannot exceed 25% of an employee’s salary. It is also important to note that the allowance does not cover instances in which an employer arranges for, or gives, a vehicle to a staff member who then uses it to travel between their residence and place of work;
• If an employee is granted a hardship or weather allowance as a result of working in a remote and/or desert area within Ethiopia, for example in Asosa or Gambela, a portion of that allowance would be tax-exempt. The taxexempt percentage depends on the specific place in which the staff member works. More details can be found in Directive No. 21/2001 and Directive No. 102/2007 issued by ERCA;
• If an employee receives a per diem allowance for traveling more than 25km from their place of work, either 255 Birr (US$9) per day or 4% of their monthly salary, whichever is greater, will be exempt from income tax. The allowance must be referred to in the employment contract and the wording should indicate that the allowance will only be paid for per diem purposes and will not cover expenses incurred by staff members in their daily commute from their place of residence to the office. It will also not cover expenses paid to an employee who possesses a company vehicle or uses a transportation service provided by their employer. Moreover, there is a monthly limit, which means that the maximum amount a staff member can receive in tax-exempt form per month is 2,200 Birr. This monthly amount should not exceed 25% of the employee’s monthly salary;
• Amounts paid to an employee for workrelated travel costs are exempt from tax as long as documented evidence of those costs exists and they are in line with prevailing land and air transport fares. Transport expenses paid to expatriate employees on leaving the country following the termination of their employment contract are exempt subject to certain conditions too. These expenses should be covered under their employment contract, which is supposed to include a clause outlining the cost of repatriation. But such expenses should not exceed prevailing land or air transport fares and there are also limits on how much luggage can be transported - the limit is currently 300kgs. This exemption also covers inbound expatriate travel expenses, but again the employment contract must contain appropriate wording on the matter;
• Employees who work in the mining, manufacturing or agricultural sectors and receive food and beverages on a free-of-charge basis from their employer will have a portion of the cost exempt from employment income tax. How much depends on the industry concerned.
• If an employer contributes towards an employee’s pension, provident or other retirement fund, these contributions will be exempt from employment income tax as long as their total monthly contribution does not exceed 15% of the staff member’s monthly income.
Conclusion
Having a basic overview of employment and tax legislation in Ethiopia should enable payroll managers to provide valuable input into any discussions about expansion into the region. Because it is critical that employment contracts are drafted correctly before engaging staff and local knowledge is key to ensuring compliance, it is clear that payroll departments have a strategic role to play in this area.
After graduating with a degree majoring in taxation, accounting and managerial accounts and finance, Sharon gained considerable experience in the field of training, tax issues and financial/ ICT management, including mergers and acquisitions. She started her career in education, but progressed to a position within the South African Revenue Services, before moving on to Anglo American Property Services. Here Sharon climbed the ranks to become group financial director, with ICT and payroll as part of her management portfolio. As Anglo American managed properties on behalf of their owners, she also gained experience of the outsourcing field. During this time, Sharon undertook further specialised studies focusing on property practice, financial markets and instruments.
She joined Praxima Payroll Systems in 2001, steering the company through the process of developing its own software and establishing them as a key provider of payroll services to some of the largest legal practices in South Africa. After relocating to the UK, Sharon continued in a consulting role with Praxima before joining global consolidator Celergo in 2012 as head of UK operations. She oversaw a right-sizing process and refined the company’s payroll processes to improve productivity. Sharon was asked to take on the chief operating officer role at Praxima Holdings in 2013 and assisted the firm in extending its footprint into Africa and beyond. In March 2017, she joined BDO as an account manager in its global outsourcing division.
Thank you for this comprehensive explanation of payroll regulation of Ethiopia and thereby assessing tax system of the country.