Businesses Raise Concerns Over Minimum Alternative Tax, Quarterly Tax Payments

Business taxpayers raised concerns over the minimum alternative tax (MAT), quarterly tax payment requirements, and stricter bookkeeping rules during a public consultation held this week by the Ministry of Finance on a draft income tax regulation.

The consultation, convened on March 10, sought feedback from private sector representatives and professionals on a draft regulation intended to implement the recently amended Federal Income Tax Proclamation. The meeting was chaired by Tewodaj Mohammed, director of Legal Affairs at the Ministry.

Following a presentation outlining the regulation’s provisions, participants from multiple business sectors raised questions about its implementation, with several warning that the proposed measures could discourage business activity and place additional strain on industries already facing economic pressure.

One of the most debated provisions was the minimum alternative tax, which is designed to apply to taxpayers who report losses. The draft regulation proposes that businesses declaring losses still pay a tax equivalent to 2.5 percent of their total turnover.

The regulation provides exemptions for income generated from goods and services whose prices are fixed by the government, including utilities such as electricity and water, house rentals, as well as companies declared bankrupt and undergoing debt consolidation.

Participants at the consultation argued that the provision may disproportionately affect businesses operating with narrow profit margins and those experiencing temporary financial setbacks.

Natae Eba, a tax specialist who attended the consultation, said the structure of the minimum alternative tax could place additional pressure on already struggling firms.

“I understand that around 63.7 percent of taxpayers reported losses, and integrating this into the tax system may help increase the tax-to-GDP ratio,” Natae said. “However, the minimum alternative tax being designed as a permanent tax makes it problematic.”

He explained that while the regulation allows businesses to deduct MAT payments from future tax liabilities within a five-year period, taxpayers who fail to offset the amount within that timeframe lose the right to claim it. In practice, he argued, this could make the tax effectively permanent for some companies.

Natae illustrated the issue with the example of a business operating on borrowed capital and low profit margins, arguing that such a business may only manage to pay the 2.5 percent turnover tax while simultaneously struggling to service loans and sustain operations. He suggested introducing an audit-based return system that would allow businesses to demonstrate losses through verification instead of automatically paying the minimum alternative tax.

Concerns about the design of the MAT were also echoed by a representative from the Ethiopian Millers Association. The representative noted that minimum alternative tax systems exist in several countries but typically provide taxpayers with options.

“Our regulation does not offer that alternative,” the representative said, stating that millers typically operate with profit margins that do not exceed four percent.

Factoring in the 2.5 percent minimum alternative tax would require them to  significantly increase their profit margins to roughly nine percent in order to remain financially viable. However, the representative says attempts to increase prices have already drawn scrutiny from authorities concerned about the impact on food costs.

He noted that when millers previously attempted to increase profit margins to six percent, the move prompted inquiries from the mayor’s office regarding rising food prices. The representative also warned that several industries operating in Adama and Awash are negotiating to sell their factories as part of efforts to exit the sector.

“Industries are paying the government what they should be paying toward their bank loans,” the representative said.

Participants also raised concerns about the quarterly tax payment requirement introduced under Article 89 of the amended income tax proclamation and further elaborated in Article 84 of the draft regulation. Under the system, taxpayers would be required to pay taxes in quarterly installments calculated based on previous years’ tax records.

Business representatives argued that the method does not sufficiently account for current business conditions or sector-specific challenges.

Girma Habtemariam, president of the Ethiopian Construction Contractors Association, said the construction industry faces multiple operational challenges that complicate the idea of advance tax payments.

He said the sector is dealing with project delays caused by security concerns, disputes between contractors and consultants, and budget shortages among project owners that often delay payments for completed work. According to Girma, payments received by contractors are frequently allocated to upcoming projects rather than reserved for advance tax payments.

He also noted that the sector is under pressure from currency depreciation, inflation in construction input prices and rising labor costs.

“The profit of a construction project can only be determined after the project is completed and all expenses are calculated,” he said.

Another participant questioned the calculation method used when the most recent tax year recorded losses. According to the participant, the regulation allows tax authorities to calculate installment payments using turnover figures from earlier years if the immediate previous year reflects a loss.

“A loss last year does not necessarily mean there will be profit this year,” the participant said.

Participants also raised concerns about strict bookkeeping requirements in sectors where informal transactions remain common. A manager representing the Addis Ababa Grain and Pepper Mill Owners Association Share Company described documentation challenges faced by milling businesses, explaining that grain purchased from suppliers in regional areas often arrives without receipts. However, when milling shops sell processed grain, they are required to issue receipts and may face penalties if their purchase records lack documentation.

According to the manager, the Association has already submitted a letter to the Ministry of Finance outlining these concerns and warning that milling shops may close if the issue remains unresolved.

“The company paid 11 million Birr in taxes two years ago and 16 million Birr in the previous tax year but is now facing possible closure due to documentation challenges,” the manager said.

Similar concerns were raised by a participant representing cultural clothing vendors from Merkato’s Shema Tera area. The participant said many artisans and handcraft producers in the sector operate informally, making it difficult to maintain the documentation required by tax authorities.

“Many artisans and handcraft producers involved in the sector operate informally and do not issue receipts or sign documents confirming transactions,” the participant said.

Ministry officials responded to the concerns by stating that the income tax proclamation has already been approved and that the regulation cannot amend provisions already established in the law.

Wasihun Abate, senior tax policy advisor at the Ministry, explained that the minimum alternative tax is part of the proclamation and cannot be removed through the regulation, although authorities are considering introducing directives aimed at simplifying expense registration.

Wasihun also said the policy requiring quarterly tax payments is intended to reduce the burden of paying a large amount of tax at the end of the fiscal year while ensuring that the government receives revenue without relying on borrowing from the National Bank of Ethiopia.