The Legal and Policy Space for Taxation of Corporate Reorganization under Ethiopian Federal Tax Law: Comparative Study

Abstract

Corporate reorganizations may occur for different reasons. Corporate readjustment will normally result in transfer of business asset. Subjecting such readjustment in to income tax may discourage business readjustment triggered due to economic reasons. In this regard, Ethiopia has tried to provide differential tax treatment to corporate reorganization since the promulgation of the 2002 income tax proclamation. Hence the basic objective of the study is to analyze the policy and legal gap of corporate reorganization under Ethiopian tax law. To do so, the study involves qualitative type of methodology which relies on primary and secondary sources. In addition, experiences of some purposively selected countries based on their successes and relevance to Ethiopia have been used in the study. Based on this the research revealed that the relevant provisions of Federal Income Tax Proclamation are pierced with a number of gaps. The tax implications of all kinds of restructuring are not well addressed under the income tax law with respect to reorganization. Even though the income tax law provides for tax-free reorganization it does not have standards to determine the tax avoidance motive of taxpayers in advance. Other tax administration matters on reorganization are cumbersome and take a too long time to complete the transaction. These apparent gaps in the law makes the reorganization provisions inadequate in striking the balance between paving the way for tax avoidance and discouraging normal business adjustment. The researcher concluded that the law is lenient; the relevant provisions of the proclamation are vague and failed to meet the necessary requirements. Therefore, the researcher recommends for the amendments of the provisions and the inclusion of taxation of corporate reorganization in the taxation policy of the country. Furthermore, researcher call for the law to strike the right balance between the right of reorganization originated from the business purpose of the parties and the possible tax planning activities.