The list of countries implementing the obligation for foreign providers of electronically supplied services to register when providing these services to local recipients also arrives in Ethiopia. This is a logical consequence of the significant growth of the digital economy phenomenon.
Based on the importance that VAT collection at the country level represents to the state coffers, the amendments of the VAT Act that introduce the provisions for non-resident providers of digital services or products to register for domestic VAT and follow the country’s local regulations are simply put a reasonable answer based on the shift of B2C and B2B transactions from offline to online channels.
To accommodate the growth and related influence of the digital economy within its boundaries, the Federal Government of Ethiopia approved a new VAT Proclamation. This tax Act repeals the previous one in various parts and introduces the VAT framework for taxing non-resident providers of remote services.
VAT Proclamation and Implementation
The VAT Proclamation was officially published in the State Gazette on August 21, 2024.
The implementation framework is still pending the adoption of the Implementing Decrees and related Regulations.
Foreign Providers of Digital Services
Impact
Adopting the VAT proclamation introduced some relevant amendments to the VAT regulatory framework, which is a necessary step towards embracing the tax collection model for digital service providers.
The registration threshold has been adjusted and increased from ETB 1 million to 2 million, and this change will also impact foreign digital service providers.
Foreign taxable persons in the scope of the amended tax collection framework can be categorically divided into digital suppliers or digital platforms. The definition of who is liable for accounting for the Ethiopian VAT is determined by how the supply is processed and whether the digital supplier is a tax-registered business.
When the digital platform operator facilitates the supply(determined by the precise rules indicated in the Proclamation), the underlying supplier is not accountable for tax collection.
In situations where the place of the supply is within Ethiopia, the standard VAT rate shall be imposed. At the moment, the standard VAT rate is 15%.
As mentioned above, the determination of tax accountability depends on the connectivity(if there is one) between the underlying supplier and platform operator. For B2C supplies, the non-resident person is liable to account for tax. For B2B supplies, the resident business is obliged to follow the reverse charge rules.
The space that the transactions within the online economy cover is very significant in Ethiopia. Based on this factual reality, the introduction of the collection system for foreign providers of digital services will unquestionably be diligently monitored by the State Tax Authorities.
Foreign providers of digital services to customers should familiarize themselves with the new VAT regulations and start preparing their compliance strategy for this mandate. The Ministry of Revenue and connected authorities are drafting Implementing Decrees to define how registration and collection will function.
The drafting period permits businesses, in terms of costs and strategy, to already start defining how they will approach these new requirements.
Aleksandar Delic
1stopVAT Senior Indirect Tax Researcher (Global Content)