The Legal Framework of Multinational Corporation Taxation in Ethiopia: Legal and Institutional Challenges and Remedies

Abstract

The purpose of this study is to examine legal framework of taxation of MNC in Ethiopia, in order to identify the challenges and provide the possible solutions by comparing it with the experience of some selected developed nations MNC taxation legal framework. To this end, the study used doctrinal research approach and relied on secondary data like official documents and reports, literatures and internet sources. Comparative analysis also used in order to draw lesson from the tax jurisdictions of developed nations. Eventually, the data are analyzed by the researcher based on logic and reasoning; and eventually revealed the following findings. First, unlike the developed nation’s trend the Ethiopian income tax Proclamation has high tax rate without alternative minimum tax rate. The tax laws of developed has incorporated interest stripping rule, which is the most effective approach that directly restrict interest deduction. In Ethiopia, there is also no detailed rule provide (regulate) specific depreciation rates applicable for real estate, goodwill and intellectual property, which is a dominant trend in MNC tax rules of the developed nations. The Ethiopian ITR has no specific restrictive rules that define or limit the scope of head office expenses. Finally, unlike the developed nations the Ethiopian TP Directive does not contain administrative and/or penal clauses. In sum the study revealed the presence of limitation on the part of the legislator to enact an effective, specific and detailed rules concerning the issue of deprecation, alternative/ minimum tax rate formulation, provision on general interest deduction limitation, head office expense and loss compensation. Finally, the study suggests the enactment of specific and detailed rule on the abovementioned issues.