3.

Other Income Tax Accounting

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 Chapter contents
Legal provisions for other income taxes
Accounting for other income taxes
Royalty Income;
Technical Service Income;
Income from Game of Chance;
Dividend Income;
Income from Casual Rental of Property;
Interest Income; and
Capital Gains

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 Introduction to Other Income Tax

Taxable
 under Schedule “D” of Income Tax Proclamation No. 286/2002

and Income Tax Regulation No. 78/2002.

Residents:
 Pay on their world wide other income each separately

Non
 residents: on the income obtained in Ethiopia.

The
 Payer of any payment subject to tax under Schedule “D” shall

withhold the amount of tax required. If it is not subject to withholding

at source constituting a final tax, the tax payer shall declare the income

to the Tax Authority within two (2) months from the end of the

Ethiopian Fiscal Year.

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 1. Royalty Income (Article 31 )
Royalty income is any payment received for granting the

right to use:

any copy right (literary, artistic, or scientific works)

Any patent, trade mark, design or model, plan, secret formula

or process,
any industrial, commercial, or scientific equipment, or


for information concerning industrial, commercial or scientific

experience.
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 Royalty (Continued…)
Royalty income tax rate = 5% (is final tax in lieu of income
tax)
If payer is resident – it is the withholding agent
If payer is nonresident – the recipient of the money will be
the withholding agent.
Eg. Alpha Textiles Company, an Ethiopian resident, entered
into a technical collaboration agreement with Suiji Textile
Company, a Kenyan based company. The collaboration
involved exchange of trade secrets for Br 1,500,000.
Determine the royalty income tax and the relevant journal
entries assuming:
a) The Kenyan firm sold the secrets to the Ethiopian firm
b)
5 The Ethiopian firm sold the secrets to the Kenyan firm
 Royalty income tax – example
Assume that the Famous Ethiopian musician Tewderos

Kassahun (Teddy Afro) sold his album called “Tikur

Sew” at Birr 7,500,000 to Adika entertainment.
Required: Determine the amount of royalty income

tax and record the tax liability at the time of payment

to the artist and to the tax authority

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 2. Technical Service Income (Article 32)
Include income derived:

from expert advise or technological services (consultancy or advisory,

proposal evaluation, training of personnel on how to use a machine or

software)

By a person or organization residing outside Ethiopia to resident



persons in Ethiopia.

N.B. Incomes derived by an Ethiopian resident from rendering



technical services is taxable as per schedule “C”

subject to tax at the rate of 10%

the

7 payer is the withholding agent
 Technical Service Income tax:- example

Example : Hibir manufacturing Company has received

an expert advice on the manufacturing process of

sugar from the YBZ Inc., a UK based Company, and

paid a compensation of Br 180,000 net of tax.

Required:- How much is the tax to be paid to the Tax

Authority?
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 3. Income from Games of Chance (Article 33)
Include income derived from winning at games of chance.
Subject to tax at the rate of 15%.
the final tax in lieu of income tax.
NLA shall withhold and pay the amount to tax Authority
Shall be paid within two months from the end of the
Ethiopian Fiscal year.
Note:
up to Br 100 is exempted.
if in-kind, based on market price.
if the NLA authorizes other persons to carryout the
games of chance, the NLA shall collect a charge of
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15% from the intended total income
 Income from Games of Chance- example

Ato Bedlu has won a lottery prize of Br 500,000 from the

National Lottery Administration. W/ro Edlawit has also

won an automobile which was offered by Glorious PLC to

its customers in a game basis. NLA determined the price of

the automobile Br 120, 000.

Required:- How much tax on such games of chance the

NLA withholds and pays to the Tax Authority?

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 4. Dividend Income (Article 34)
Include income received in the form of dividend from a
share company, or withdrawals of profits from a PLC.
Subject to tax at the rate of 10%.
The final tax.
The payer (the company) is the withholding agent.
The tax shall be paid within 15 days starting the end of the
month.
Example Ato Bedru is a shareholder at Dashen Bank S.C. He
owned 100,000 shares of Br 1, 000 par value common shares
in the bank. Dashen Bank declared dividend of Br 3.6 per
share for the current year.
Required: How much is the tax to be withheld from Ato Bedru?
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 5. Income from Casual Rental of Property (Article 35)

Includes income derived from casual rental of

property not engaged in a regular activity of a
business.
Any rental of an ongoing business’s property is

regarded as a business transaction, and is regarded

as a business income.
The tax is 15% of the annual gross income is final.
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 Income from Rental of Property- example

Example : On Tikimt 1, 2006 Ato Alemu let out his

automobile for 9 months to Solomon Tour and Travel

for a fee of Br 81,000.

Required:-

How much is the tax to be paid to the Tax Authority ?

Who is liable to pay the tax to the Tax Authority?

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 6. Interest Income on Deposit (Article 36)

Include income derived on deposits.

 Subject to tax at the rate of 5%.
 the final tax.
 the bank is the withholding agent.
 The bank shall withhold the tax on interest income on
accrual basis and transfer it to the tax authority within two
months from the end of the Ethiopian Fiscal year.
Example 5.2. On March 1, 2013, Mary Company deposited
Br.500, 000 at Dashen Bank at the prevailing interest rate
of 5% for three months.
Required:-How much is the tax to be paid to the Tax
14 Authority?
 7. Capital Gain Tax (Article 37)
Gain obtained from the transfer of certain investment
property.
The rates are:
Buildings held for business, factory, and office: 15%
Shares of companies: 30%
Exempted Capital Gain
 Gains from the transfer of building which has been
fully used for residence at least for two years prior
to the date of transfer.
 Gains from transfer of building not found in Urban
(Municipality) areas.
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 Capital Gain Tax- cont'd
Loss on transfer of capital asset can be offset
only against gain on transfer of another capital
asset of similar nature.
Loss on transfer of capital asset not yet offset
can be carried forward for indefinite period of
time.
Loss on transfer of capital assets b/n related
persons can’t be recognized.
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 Calculating Capital Gain
As per regulation 78/2002, when calculating the gain realized
from the disposal of capital assets,
 the basis of calculation of the tax shall be the historical
cost of the building or the par value of the share, as
appropriate.
 inflation adjustment at a rate determined by the
appropriate authority shall be allowed as deduction
 In respect of buildings, taxes paid for the land and the
building shall be allowed as deduction.
The cost registered with the appropriate government body at
the time of issuance of permit for the construction of the
building shall be taken to the cost of constructing the
17 building.
 Capital gain tax – example
Consider the ff information for Nile Share Company for the
year 2006.
In 2003, acquired 10,000 shares of Br 100 par for a total
value of Br.1, 250,000.
in 2003, acquired two buildings with cost of Br 250,000
each. The buildings were acquired for business purpose.
During the year 2006, 500 shares were sold at a total value
of Br 75,000. One building which was acquired in 2003
was also sold at a consideration of Br 370,000.
Property tax paid for the building sold was Br.10,000.
For the last three years, the average inflation rate declared
by the NBE is 10% for the three years period.
Required:-Compute
18 the Capital Gain tax for the year ended Sene 30,
 End of the unit!

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