In the year since the Ethiopian government and the International Monetary Fund (IMF) signed off on an all-encompassing economic reform program, the country’s tax officials have been very busy indeed.
The past 12 months have seen amendments to various tax legislations and the introduction of new ones including a minimum alternative tax system that could see businesses forced to cough up even when they are not registering profits.
The Minister of Revenue recently disclosed that around 2,000 taxpayers have exited the system over the past year, while even large corporations, multinational firms are reportedly re-evaluating their operations and publicly airing grievances.
Seeing as domestic revenue mobilization is a core component of the IMF program scheduled to last another two years, and the government is intent on raising the country’s extremely low tax-to-GDP ratio, the aggressive approach is likely to continue, prompting experts and investors to sound the alarm about what they see as a misguided and dangerous approach to improving state income.
The Reporter Magazine explores further.
………………………………………………………………………………………………………………………………………………
Over the past year, from August to August, Ethiopia has undergone a series of aggressive tax reforms, involving both the tightening of existing legislation and the introduction of new taxes. These reforms span a wide range, from adjustments to the Value Added Tax to the introduction of a new Property Tax Proclamation, and most recently, controversial changes to income tax, notably introducing a Minimum Alternative Tax (MAT) system. The government has adopted a remarkably stringent approach, even moving to tax businesses that report losses. This concerted effort to broaden the tax base was a direct, strong “recommendation” from the International Monetary Fund (IMF), and the Ethiopian government, a recipient of an 850 percent quota under the Extended Credit Facility (ECF), has responded swiftly.
Nevertheless, Bretton Woods institutions persist in their strong admonition for “continued domestic revenue mobilization.” The recent ‘2025 Article IV Consultation, Third Review Under the Extended Credit Facility Arrangement, and Financing Assurances Review’ published by the IMF mentioned the word “tax” an astonishing 262 times across its 169 pages. This underscores the enduring emphasis on the IMF’s “golden rules” for all nations: reducing subsidies and broadening tax bases, with the document strongly advocating for government commitments on “mobilizing more domestic revenue.”
The IMF gives the highest priority to boosting domestic revenues, which the review describes as “essential to consolidate recent gains and foster a more favorable environment” in order to “sustain reform momentum.”
Nigel Clarke, deputy managing director, was quoted in the document as saying, “Building on the strong start, revenue mobilization is critical to create space for social and development spending. Next steps are income, excise, and property tax reforms and efforts to broaden the tax base and enhance customs administration. Continued prudence in spending and domestic bond market development are important.”
The Ethiopian government appears to fully embrace the IMF’s prescriptions. In a letter directly addressed to the IMF Managing Director, Minister Ahmed Shide, and National Bank Governor Mamo Esmelealem Mihretu affirmed the government would “promptly take any additional measures that may become appropriate for that purpose [the implementation of the policies outlined in the MEFP], in consultation with the IMF, and in accordance with applicable IMF policies.”
Ethiopian officials also reported significant progress in an attachment sent to the IMF team during the third review. During the first eight months of the 2024/25 budget year, tax revenues grew by 80 percent compared to the same period the previous fiscal year, reflecting “strong efforts to achieve the ambitious revenue mobilization targets.” Specifically, domestic indirect tax revenues (VAT and excise) rose by 87 percent following VAT and excise reforms, while customs revenues increased by 124 percent.
The push to expand the tax base in Ethiopia remains as strong as ever.
During a recent financial forum, Eyob Tekalign (PhD), a state minister of Finance and a key figure in tax policy, highlighted the “huge controversy regarding Ethiopian taxation.”
While commending the Revenue Ministry’s “huge success,” Eyob urged for more to achieve the mid-term goal of increasing the tax-to-GDP ratio.
“The Ethiopian tax situation continues to paint contradictory pictures,” he stated. “While revenue has dramatically increased to over 900 billion Birr (nearly four times the 2012 EC fiscal year figure), the tax-to-GDP ratio is still below the continental average,” said the State Minister, emphasizing the need to work toward achieving this plan.
In the government’s 10-year Perspective Plan, tax revenue is projected to rise more than tenfold from 317.9 billion Birr to 3.5 trillion Birr, raising the tax revenue to GDP ratio from 9.2 percent to 18.2 percent.
According to the explanation accompanying the income tax amendment issued in July 2025, the change was initiated to support the government’s goal of raising the tax-to-GDP ratio by one percent each year, ultimately reaching 11 percent within the next four budget years.
The administration has recently established a body it terms the “Domestic Revenue Mobilization Task Force.” Its direct reporting line is to the Prime Minister, indicating the significant weight it has been accorded.
In recent years, the Ethiopian government’s two primary sources for budget support—grants and loans from international partners—have significantly diminished. The IMF review also acknowledged a further reduction in ODA (Official Development Assistance) for Ethiopia in 2025.
Taxed to the Brink, Bleeding Dry
In the span of just seven months, following the tightening of excise tax laws, Ethiopia introduced an unprecedented property tax, which was swiftly followed by a controversial income tax amendment. Adding to this, the IMF’s Staff Report indicates that Ethiopian officials are preparing to levy taxes on inheritance and donations (at a flat rate for bequests or donations exceeding 1 million Birr per legatee).
Amidst this barrage of new fiscal measures, serious concerns are being raised by various societal groups. Businesses are no longer the sole voice of frustration; even taxation experts appear surprised by these introductions, deeming them highly problematic.
Henok Tadesse, a certified auditor, expressed his misgivings about the government’s relentless tax drive.
“I doubt policymakers fully grasp whether the current economy can actually generate that kind of tax revenue,” he told The Reporter Magazine. “As an auditor, I have an intimate understanding of both large and medium-sized companies, and I clearly see their frustration. Foreign companies, in particular, are feeling the shockwave. The taxation system has lost all predictability, with one tax after another, some even contradicting each other.”
Henok brought up the property tax law legislated this year.
“They’re declaring it’s not even deductible. We traditionally call it property tax, but it’s actually a municipality tax. How on earth can it not be deductible?” he questioned. “You won’t find it in Proclamation No. 979/2016. It was simply enacted via a letter from the Ministry of Finance, which is insane.”
The auditor, referencing his clients’ apprehensions, cautioned that foreign direct investment would be discouraged. He explained that potential investors meticulously employ the PESTLE analysis model (an acronym for Political, Economic, Social, Technological, Legal, and Environmental factors) to assess the viability of investing in the country.
“Many are curious about these conditions,” he said,
A prime example of the inconsistencies in tax laws was on display during a parliamentary debate on the draft income tax bill, where the Kenyan telecom giant Safaricom highlighted that, given the long-term nature of its business, profitability would take years, making it challenging to pay taxes on “imaginary profit.”
Tadesse Lencho (PhD), a prominent senior expert on Ethiopian tax and insolvency laws, shares Henok’s concern. He cautions that these tax hikes will stifle entrepreneurship, ultimately hurting revenue mobilization. He believes making such measures harsher is akin to “slaughtering the hen that lays the golden eggs.”
Dawit Tadesse (Assistant Professor) is a private consultant on investment and taxation. He characterizes ambitions to boost the tax-to-GDP ratio in such a short timeframe as “farfetched.”
“Over 40 percent of the GDP comes from the agriculture sector, which is largely subsistence and yields insignificant tax revenue. As far as I am concerned, the sector’s contribution to government tax revenue remains at a mere 2 percent. That tells you how farfetched the idea is,” said the consultant.
Dawit is concerned that failing to meet this target might prompt tax officials to draw incorrect conclusions.
“Failure to achieve the plan may lead them to conclude that businesses are not paying enough tax, which in turn leads to tax manipulations by these officials,” he told The Reporter Magazine.
Drawing from his own experience as a taxpayer, Dawit highlights the burden of the new tax regulations.
“With a 30 percent corporate tax, a dividend tax that’s risen to 15 percent, and a 15 percent VAT, businesses are facing unprecedented difficulties,” he said.
The Ethiopian government has drastically raised various taxes. Dividend tax has climbed by 50 percent, from 10 to 15 percent, while royalty taxes have tripled, soaring from 5 percent to 15 percent. Notably, taxes on lottery and similar earnings have seen a fourfold increase, jumping from 5 percent to 20 percent.
Others also blame the new tax regime for shifting the adjustment burden disproportionately to the private sector, especially SMEs, without creating the conditions for higher productivity.
Kasahun Follo, the longtime president of the Confederation of Ethiopian Trade Unions (CETU), known for his energetic but often ineffectual advocacy for Ethiopian workers’ interests in various legislations, sought to amend the newly revised Income Tax Proclamation by asking the House to reconsider the tax-exempt threshold.
He proposed aligning it with international standards, specifically USD 64 per month (equivalent to a daily earning of USD 2.15), which is currently about 8,324 Birr. However, the proclamation directly rejected this proposal.
A memo from State Minister Eyob justifying the law stated that such a change would “significantly hinder revenue mobilization efforts.”
“This marks one of the most significant tax hikes in Ethiopian history, to my knowledge,” observed Senior Taxation Expert Tadesse (PhD). He recalls a past “crazy time” when corporate taxes peaked at an astonishing 85 percent and customs duties climbed to 230 percent in the aftermath of the Dergue regime assuming power in 1974. While acknowledging differing motivations, Tadesse draws comparisons between that era and the current exhaustive tax policies.
“The Dergue’s approach to taxation originated from its disdain for private sector wealth accumulation. In the present, the government is facing a severe funding crisis, with its traditional sources exhausted. Moreover, the IMF exerts considerable pressure, offering ‘strong recommendations,’ to phrase it diplomatically,” he told the Reporter Magazine.
To Kebour Genna, executive director of the Pan African Chamber of Commerce and Industry (PACCI), the overall message of the laws is loud and clear: “Small business owner, you shall carry the burden. You shall pay the state before you pay yourself. And you shall thank us for the opportunity.”
Henok predicts a difficult tax season ahead.
“When October and November roll around, and it’s time to pay the first quarter’s taxes, I foresee a lot of anguish,” he remarked.
Anguish or no, the government is intent on financing close to half of its record 1.93 trillion Birr budget for 2025/26 through domestic revenue mobilization.
Experts like Dawit and Henok contend that assessing the productivity of taxation should precede concerns about improving the tax-to-GDP ratio.
“Internationally, a productivity of taxation assessment is standard practice before setting such goals,” Dawit explained, “but this rarely occurs in our context.”
Mussie Delelegn (PhD), a development economist at the Special Programmes at United Nations Conference on Trade and Development (UNCTAD), emphasizes that the presence of an acceptable economic justification is a crucial point when discussing the government’s successive tax implementations.
Mussie poses a thought-provoking question, leaving it unanswered: “Acceptable economic justifications include sustained economic growth, improved living standards, expanded employment, macroeconomic stability, low budget and trade deficits, a vibrant private sector, and a consistent development-friendly environment with sustained peace and stability. Do we currently have these preconditions in Ethiopia?”
The Government’s Thirst for Funds
The recent amendment to Ethiopia’s income tax proclamation has redefined the tax payment landscape for businesses. What was once an annual payment at the close of the budget year has now become a quarterly requirement. This means the significant stress associated with tax season, previously experienced once a year, will now recur every three months for businesses. Adding to this pressure, the quarterly tax amount is assessed as 25 percent of the previous year’s total tax, regardless of current sales or profitability.
An architect, who spoke to The Reporter Magazine anonymously, decried the burden imposed by the new tax procedures.
“Financial reporting will now be one of my core activities; it’s just another hassle,” he said. “Hiring a permanent accountant isn’t something I can normally afford, so I rely on a contractor when tax time rolls around. But now, it’s becoming a real problem. I handed over my files three weeks ago, and he still hasn’t even begun. With this new system, my life is a mess.”
The architect sees other problems with the new tax schedule as well.
“My earnings aren’t consistently quarterly or monthly,” he explained. “For instance, I might work on a project for six months before I even see a payment. Under the current system, I’d be forced to use my advance payment—which is meant to fund the project and help me meet my contractual obligations—just to cover these so-called quarterly tax requirements. That leaves me with nothing.”
Henok concurs.
“Consider access to finance,” he emphasized. “Securing a bank loan is virtually impossible, even with substantial collateral; it’s as if they want you to put up your kidneys. Manufacturers are constantly short on inputs and raw materials. So, businesses are just trying to operate with the cash they have. This new quarterly tax scheme is designed to seize that very money, leaving them in an impossible bind.”
Henok observes the lack of reliable data makes the practice of calculating taxation using the average of past sales unfair.
“Can we even perform a trend analysis for a business in the current Ethiopian context? No, we cannot,” Henok asserted. “A company that generated 100 million Birr three years ago might have zero projects the following year. Such fluctuations are too wild; taxation cannot be based on an average of past sales. Furthermore, how many private companies possess clear production targets? Very few.”
Kebour opted for pointed sarcasm to describe his sentiments about the new procedures.
“Your business may be bleeding this year, but if it bled less last year, you owe,” he said.
Based on past trends, the tax collector imposes a precondition for taxpayers to submit complaints: an upfront payment of 25 percent of the tax in question.
A serious assessment, argue experts Henock and Dawit, should precede tax policy enactment.
When Private Funds Become a Target for Government Suspicion
“We are at a point where we’re not permitted to spend our own money, even for dire necessities,” Henok observes. “Imagine registering a business with a million Birr capital, and it fails. If your family is starving and you take 100,000 Birr for their needs, the authorities will accuse you of siphoning it off for illicit trading. If the tax collector office believes I evaded tax, then the burden of proof should fall on them.”
Government officials have their own arguments.
Revenue Minister Aynalem Nigussie recently disclosed that around 2,000 taxpayers exited in the last fiscal year. She explained that some were “tired of dealing with bureaucracy,” while others “are unable to stay competent ahead of the competition in the market.”
However, the Minister also pointed out that “others, after exploiting each and every investment incentive the nation offers, exit.”
For the certified auditor, however, the responsibility lies with the tax collector to identify and close the loopholes they create in drafting policies, rather than blaming companies for legally utilizing them.
“For a company to grasp every detail of the tax system and successfully avoid taxes is a commendable trait—that’s tax planning, not to be mistaken for tax evasion, which is illegal,” he pointed out.
The Equity Equation: Benefit vs. Burden
It is an undeniable civic duty for citizens and businesses to pay taxes in any functioning state. However, a crucial reciprocal expectation is that the government secures its citizens and businesses from potential security threats, alongside providing essential services like infrastructure development. This balance is the core challenge Ethiopia faces today.
The Ethiopian government has been assertive in tax collection, even from vulnerable populations, yet it has repeatedly fallen short on its part of the social contract. The destruction of countless businesses across the country due to security issues is a stark example. Millions of citizens have been deprived of their right to move and work freely in various regions due to persistent security and political crises that the government has failed to resolve. This has led many to question the justification for paying taxes.
Haile Gebresilassie, the legendary marathon athlete and a prominent investor in Ethiopia, powerfully articulated this frustration after his resorts in Shashemene were extensively damaged during the unrest that followed the assassination of Oromo singer Hachalu Hundessa.
Expressing his dismay at the government’s failure to protect investments, he remarked, “When we’re a single day late for the tax payment deadline at the end of the year, they call us relentlessly. I wish they’d play the same active role in keeping taxpayers secure as well.”
Kebour suggests that the government could offer discounts, access to credit, and public recognition like incentives for early payment if it must collect ‘predictable revenue’.
Dawit adds another layer, noting, “It’s an open secret that employees are the highest loyal taxpayers in this country. An employee pays up to 35 percent from their salary, 7 percent for pension, and VAT everywhere they buy something. But for such contributing citizens, who stands by them if they suddenly lose their job? No one. There is no scheme to support you in any means.”
Tadesse raises the issue of fairness in the taxation system. “Our taxation system, regrettably, lets the elephants go while trapping the mice,” he contends. Tadesse advocates for taxing multinational behemoths like Google and Facebook operating in Ethiopia, though he admits this would be a difficult undertaking.
“In the absence of acceptable socioeconomic justifications and in a situation where poverty trends are increasing, the purchasing power of local currency is eroded, investment and employment opportunities are curtailed, taxable income is low against the rising cost of leaving, multiple taxation (income, excise taxes, value added taxes, investment, housing, capital etc taxes) can lead to over taxation,” Mussie warns.
“Yes, the tax collector’s public statements and social media posts are filled with stories of successful revenue collection. But, it’s crucial to remember the unseen tears caused by this draconian taxation,” Henok noted.
Ethiopian tax collectors, however, seem to be moving aggressively in the opposite direction. They are relentlessly pursuing revenue from businesses of all sizes, regardless of their capacity, employing methods that include forced “contributions,” government-led “initiatives,” and an ever-growing list of taxes, with further additions planned. This stringent domestic push is exacerbated by Bretton Woods institutions, which continue to advocate for increased taxation and deeper subsidy cuts.
