Application of Value Added Tax in The Construction Industry: The Case of Ethiopia 2/8/2018 16th VADA Annual Conference 28th-30th November 2013 Freetown, Sierra Leone

1. Highlights of VAT implementation in Ethiopia Introduced since January 2003 replacing the sales tax, as a basic component of modernizing the tax system. VAT introduced in Ethiopia is the input-output model of VAT. Proclamation No 285/2002 provides unless there is an express exemption, VAT applies to: Supply of goods and rendition of services in Ethiopia, and , Importation of goods and acquisition of services into Ethiopia at the standard rate of 15%, Exported goods and related services, supply of gold to the National Bank of Ethiopia, and a supply by a registered person to another registered person in a single transaction of substantially all of the assets of a taxable activity or an independent functioning part of a taxable activity as a going concern, are zero-rated, 2/8/2018

1. Highlights of VAT implementation in Ethiopia...Contd. 2/8/2018 VAT exemption has been extended to basic necessities such as education, medical services, electricity and water, kerosene, basic foods, transportation service, finance service, the sale of a used dwelling or the lease of dwelling, the supply of goods and rendering services in the form of humanitarian aid, etc. As per the power granted to exempt other goods and services and issue directives to implement the VAT Proclamation to the Minister of Finance and Economic Development, various supplies have been made exempt and directives issued. The amendment made to the original Proclamation is mainly on the use of Sales Register Machine (Electronic Fiscal Devices), possibility of filing a VAT return through electronic devices and clarifications that were vague for implementation.

1.Highlights of VAT implementation in Ethiopia...Contd. 2/8/2018 Registration Requirements: Obligatory Registration- business activity with annual taxable turnover of Ethiopian Birr 500,000 (USD 31,250) is qualifying a taxable person; Voluntary Registration- to those who regularly transact at least 75% with registered persons; Cancellation of Registration-where the registered person ceases to make taxable transaction/annual sales less than threshold.

1. Highlights of VAT implementation in Ethiopia...Contd. 2/8/2018 VAT LIABILITY Though VAT liability is created with every transaction, considering practical conditions the tax is accounted monthly, The VAT liability in any accounting period (Ethiopian calendar month) will be the total amount of output tax charged on sales, less the input VAT paid relating to taxable sales. REVERSE TAXATION Applied on services acquired from non-residents, Reported as output tax within 30 days of the date of payment, The payment document for non- resident is considered to be a VAT invoice, The corresponding input tax can be claimed as a credit provided that the buyer is registered person.

1. Highlights of VAT implementation in Ethiopia...Contd. 2/8/2018 REFUNDS Allowed if at least 25 percent of the value of a registered person’s taxable transactions for the accounting period is taxed at a zero rate, For non-zero rated transactions the amount of VAT applied as a credit in excess of the amount of VAT charged for the accounting period is carried forward to the next five accounting periods and credited against payment for these periods. VAT Administration Administered at national level as per the joint decision made by the House Representatives and House of Federation pursuant to article 99 of the constitution, Although VAT is administered centrally, the revenues will be shared between different tiers of governments based upon the established sharing formula.

Highlights of VAT implementation in Ethiopia...Contd. 2/8/2018 VAT Administration... Contd. Regional and city administration revenue bodies delegated by the federal Revenue Authority to administer VAT payers with their respective jurisdictions since September 2005. Assisted by automated program known SIGTAS, Integrated with other taxes and currently administered at all tax centres of the Federal and regional governments, VAT Withholding Scheme in place since April 2010 as per the amended VAT Proclamation No, 609/2008 and the Directive issued by the Ministry of Finance and Economic Development, VAT registrants are obliged to use sales register machines.

2. VAT application in the Construction Industry 2/8/2018 participants in the construction industry: Contractors General/Prime Contractors Construction Managers Commercial Contractors Commercial Project Owners Residential Construction Developer Sub-contractors

2. VAT application in the Construction Industry ...contd. 2/8/2018 participants in the construction industry…Contd. Highway Contractors Heavy Construction Contractors Architect/Engineers Material Suppliers Construction Equipment Lenders Surety Companies

VAT application in the Construction Industry ...contd. 2/8/2018 The contracting process is an important component of the construction industry and may impact the VAT treatment of the contract. Types of construction contracts includes: Long-Term Contracts Short-Term Contracts Fixed Price or Lump-Sum Contracts Cost-Plus Contracts Time and Material Contracts Unit Price Contracts The VAT proclamation provisions apply to all participants in the construction industry.

2. VAT application in the Construction Industry ...contd. 2/8/2018 VAT administration challenges (with regard to taxpayers) Non-compliance to the VAT law: Failure to register, Issuance of fictitious invoices among related persons without actual transaction so that the buyer can claim refund or overstate input VAT, Prevalence of significant number of non-filers and nil-filers, even though they make taxable businesses, Non-remittance of VAT collected , Non accounting (non-issuance of VAT invoice) for advance collected from clients, Non-issuance of VAT invoice for VAT withheld on time, (on the date withheld), Accounting of VAT on Materials supplied by the owner,

2. VAT application in the Construction Industry ...contd. 2/8/2018 VAT administration challenges (from the RA point of view) Lack of effective audit capacity, Mal-practices in the administration aspects, Reluctance to identify eligible participants in the industry and conduct registration, Exemption privileges extended to micro & small scale enterprises, but engage on major construction projects, Failure to promptly process refund requests (companies having more than 50% of their taxable transactions with VAT withholding agents need to get their refund within one month from the date of request). VAT collection from the Construction sector is not commensurate with the fast growth of the sector . Tax evasion is a significant revenue risk (both for VAT and business profit tax).

3. Measures for improvement 2/8/2018 Enhance engagement with the different stakeholders in the construction sector. Strengthen Audit Capacity. widen risk-based audit coverage. Identify and register eligible taxpayers. Expedite refund with due care Issue assessment notice on non-filers Enforcement measures on fraudsters Name and shame fraudsters

2/8/2018 Thank you!!