Just like any other country, in Ethiopia also, anyone who derives income from employment and employment related activities is expected to pay Employment Income tax. Today we will give you a brief explanation on the subject.

Employment income tax is a kind of tax on earnings- money that individuals, receive in different ways from the employer. It is paid either on PAYE (pay –As-you earn) system or PAYG (pay-As-you Go) system. PAYE (Pay –as-you-earn) is a payroll deduction system in which tax is deducted from a person’s income when paid by the employer. PAYG (pay-as-you-Go) is a system for businesses and individuals to pay installments of their expected tax liability on their income from employment, business or investment for the currents income year.

Income Exempt from Tax

The following payments in cash or benefits in kind shall be excluded from computation at income taxable under schedule “A” of the Ethiopian Income Tax Proclamation.

  1. Income from employment received by casual employees who are not regularly employed provided that they do not work for more than one month for the same employer in any twelve month,
  2. Pension contribution provident fund and all forms of retirement benefits contributed by employers in an amount that does not exceed 15 % of the monthly salary of the employee,
  3. Amount paid by employers to cover the actual cost of medical treatment of employees,
  4. Allowances in lieu of means of transportation granted to employees under contract of employment,
  5. Hardship allowance,
  6. Subject to reciprocity, income from employment, received for services rendered in the exercise of their duties by diplomatic and consular representatives and other persons employed in any embassy and who are national of that state and bearers of diplomatic passports. These exemptions are implemented through bilateral reciprocity and are based on international political relations,
  7. Desert allowance to the extent of 25% of basic salary,
  8. Amounts paid to employees in reimbursement of traveling expenses incurred on duty,
  9. Amount of traveling expense paid to employees recruited from else where than the place of employment on joining and completion of employment, Or in case of foreigners traveling expenses from or to their country, provided that such payments are made pursuant to specific provisions of the contract,

10.Allowance paid to members and secretaries of boards of public enterprises and public bodies as well as to members and secretaries of study groups set up by the federal or regional government,

11. Incomes of persons employed for domestic duties (home servant).

Transportation allowance

According to 3(h) of income tax proclamation N0 286/2002 and directive regulation No 78/2002,

  1. Transportation allowance exempted from tax payable for employee is only up to ¼th (one forth) of the total salary of the employee in any circumstances the amount of transportation allowance exempted from tax must not be more than birr 800,
  2. Transportation allowance exempted from tax payable for employee is only up to 15% of the basic salary of the employee and in any circumstance the amount of transportation allowance exempted from tax must not be more than 600 birr.

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Any pertinent information about investment in Ethiopia, tax in Ethiopia, can be available from an Ethiopian Investment Lawyer, Ethiopian Tax lawyer, Ethiopian, Ethiopian Employment Layer, Ethiopian Labour Relationships Lawyer, Ethiopian Immigration lawyer.