Taxation and Its Importance in Ethiopia: Challenges and Solutions

Introduction 

There is a saying that there are two things that you cannot avoid in life. One is taxes and the other is death. We can't stay away from taxes however such a significant number of people attempt to evade taxes. Yet, whatever you do or whoever you might be; regardless of your status, you can't maintain a strategic distance from taxes. This is the importance of taxation essay where the topic is discussed; attention is drawn to the problem of taxation in Ethiopia.

The Importance of Taxation

The importance of taxation in the process of development is unquestionable. Moreover, taxation has got a central role in the development of LDC's and developing states after the adoption of Sustainable Development Goals (SDGs). Furthermore, country like Ethiopia has a commitment under the Addis Tax Initiative (ATI), a multi-stakeholder partnership aiming at enhancing domestic revenue mobilization (DRM) in partner countries. ATI fosters partner countries’ efforts to increase reliance on domestic revenue to fund their development agenda and meet the Sustainable Development Goals (SDGs) by 2030.

Thence, enhancing national development through domestic revenue has a pivotal part in achieving SDG by 2030. This requires modernization of tax governance and broadening tax bases. However, Ethiopia’s tax gap has been widening compared to other Sub-Saharan African countries. And it’s mainly because of the factors including illicit financial flows, tax exemptions, informal sector and other tax evasions in addition to poor tax administration and revenue collection system in the country.

Besides, digital marketing has become a new phenomenon that brings together customization and mass distribution to accomplish marketing goals, and, of course, it also becomes a major source of taxation.Marketing on the Internet has pushed the limits towards another idea of digital marketing user-centered, ubiquitous and interactive. The advancement of digital marketing strategies offers a lot of potential for brands and organizations. One of the models of Digital Marketing platform is Social Media Business which addresses planning and the most important tools used to maximize communication through social media.

Within essay about tax it's needed to mention thta social media is growing rapidly and becoming a new trend for businesses to reach targeted costumers easily. It can be characterized as the utilization of social media channels to promote an organization and its products. There are various social media sites, and they take many different forms and contain different features. Social networking sites like Facebook and Twitter have transformed the way some businesses think about advertising. Some businesses direct customers toward their social network pages more than they direct them to their websites.

Apart from Facebook and Twitter, numerous social media platforms are used by business organizations and individuals to create wealth and profit. This includes YouTube, Instagram, Telegram and Blogging are the most widely accessed across the world including Ethiopia.

According to Forbes report on 3 Dec 2018, only the top ten YouTubers make an aggregate of 180.5 Million USD by streaming videos through their respective channels. Top 10 Ethiopian based YouTube channels have got around 1.5 billion views since their establishment. Of course, this includes individuals, private and government organizations that actively engaged in entertainment and broadcasting media. There are many YouTube channels, telegram channels and bloggers based in Ethiopia, but their tax issues seem unregulated.  Ethiopia has got its latest Income Tax Proclamation in 2016 with some amendment and modification from the previous tax proclamation No. 286/2002. But tax concerns of digital marketing specifically social media businesses like that of YouTube, Telegram in one hand and Blogging activities on the other may not have the place in the new tax proclamation No. 979/2016.

Statement of the Problem

Within essay about taxes it’s evident that many countries are facing less revenue, excessive public expenditure and high finical constrain. Given that enhancing revenue through taxation serves as a primary means of financing public goods, public infrastructure and maintaining law and order. Besides, the digital world has become one of the challenges of taxation and tax law administration. Digital marketing has a dynamic and changing characteristic which demands dynamic and up to date tax laws and tax administration to achieve the public needs by increasing the revenue of the country.

Ethiopia’s new tax proclamation addressed various gaps of the amended income tax proclamation to enhance the revenue of the country. But still, there are many issues unsolved or needs to be updated to the addressee the contemporary tax issues of digital marketing; specifically, income from social media channels and blogs.

Unlike proc No. 282/2002, the latest income tax proclamation tries to include every income from any transaction to be taxed at the rate of 15 percent. Specifically, any other income which does not fall under the three schedules or other provisions of the proclamation will be governed by this proclamation. But there three major problems related to income from social media and blogging businesses. 

First, the proclamation has no clear provision that applies to the income derived from social media business and bloggers. Second, if one argued based on article 63 of the proclamation, there are pieces of evidence that show any person involved in these business activities are not paying taxes. The concerned organ has no information about its activities and transactions. Third, those who taking part in social media and blogging businesses are most of the time private individuals who do not have a business license and not registered as per the law of the country. Additionally, the proclamation does not talk about the status/fate of the persons who employed themselves in such business activities hence it creates a clear legal gap for tax administration.

The income of a business, professional, vocational, occupational and any activities considered as a trade by the Commercial Code of Ethiopia are charged under schedule C of proclamation No…/2016. Whether the businesses are run by sole proprietors or entities organized mainly as companies, schedule C serves as the basic source of rules for taxation. Moreover, article 2(2) of the proclamation tries to define business types that fall under the ambit of the proclamation, “any industrial, commercial, professional, or vocational activity conducted for profit and whether conducted continuously or short-term but does not include the rendering of services as an employee or the rental of buildings”. Unfortunately, the business types under the central question of this paper are not registered and it’s difficult to identify them according to the words of the proclamation. 

Moreover, countries' experience shows that there are specific rules and regulations to administer taxation of social media and blogging businesses. As per the law of the U.S, working as a YouTuber makes a person self-employed. Subsequently, a self-employed YouTuber treated under the status of sole-proprietor and it entitles any deductions related to the youtube business hence it will be subtracted from the annual income of the business. Moreover, any YouTuber can also form either LLC or Limited Liability Company but is considered as a sole proprietor.On the other han d, Indian tax law categorized any income from the social media business, blogging or website as an income from business or profession for income tax. And it’s considered as a company or sole proprietorship business. Moreover, any deductions are applicable to the income derived from those business activities.

Conclusion

To conclude this taxation essay, ccording to the Digital in 2018 Report released recently, there are 16.4 million Internet users in the country with Internet penetration at 15 percent. Out of those 3.6 million are active social media users. Data on Ethiopia shows that annual growth for Internet users is at 37 percent and the number of active social media users is growing by 20 percent. This shows how it's timely to think for the effective regulation of social media and blogging businesses to enhance the revenue of the country. Additionally, Ethiopians resident bloggers and social media business holders have many more sources of income from the worldwide base. Thus, leaving unregulated the area of social media and blogging business activities and unable to collect tax from the income they derived goes against the fundamental principles of tax law and makes the country loss possible public revenue.