Ethiopia: Tax News Takes Wind Out of Bank Presidents’ Sails

Private Banks Gain
A little over 1.1 billion Br was collected by seven private banks from foreign currency transactions last year. The total profit made due to the devaluation of the Birr in August 2010 for this would have been 220 million Br. If the windfall tax of 75pc is to be applied to the profit, the government stands to gain 165 million Br from these banks.

Private Banks Gain
A little over 1.1 billion Br was collected by seven private banks from foreign currency transactions last year. The total profit made due to the devaluation of the Birr in August 2010 for this would have been 220 million Br. If the windfall tax of 75pc is to be applied to the profit, the government stands to gain 165 million Br from these banks.

Addis Fortune (Addis Ababa), Hailu Teklehaimanot

MoFED demands banks pay 75pc on windfall profits earned

The Ministry of Finance and Economic Development (MoFED) demanded commercial banks to pay 75pc of the profit they make from the devaluation of the Birr, sending shock waves through the banking industry.

Following Parliament’s passing of a proclamation amending the tax law on November 18, 2010, presidents of commercial banks were summoned to MoFED’s office on King George VI Street (in Amist Kilo Area) in the morning of Wednesday, December 1.

Sufian Ahmed, minister of MoFED, proposed the rate alongside Teklewold Atnafu, governor of the central bank, and Melaku Fenta, director general of the Ethiopian Revenues and Customs Authority (ERCA).

The central bank devalued the Birr against a basket of major currencies by 20pc in August 2010. Many of the commercial banks were believed to have made hundreds of millions of Birr in profit overnight from the policy adjustment.

At the end of October, bank presidents received letters from the director general of the ERCA, asking them to disclose the amount of their respective gains from the change in exchange of the Birr against the dollar.

“The intention was very clear,” said a chief of a private commercial bank at the time, who requested anonymity due to the sensitivity of the case. “They will take the money from us. What is not clear is how much.”

Last week, bank presidents were told how big a slice the government wants from them: 75pc of gains from the change. This move may earn the federal government a windfall income of up to 1.2 billion Br, according to industry sources.

While some other countries levy a tax of 100pc on windfall profits, the Ethiopian government is only going after three-quarters, Sufian told the presidents, according to sources. The remaining 25pc will be added to the banks’ overall profit and subjected to corporate tax. He told the bankers that while some benefited enormously from policy induced changes, others have been at a loss, thus it is the duty of his government to correct such imbalances in the government, according to sources.

The amended tax proclamation introduced windfall tax, which is new to the country. It is to be levied on financial gains made by institutions as a result of changes in the international market outside of their control. The affected organisations include financial institutions, oil refineries, and mining companies. The country and people where the profit is made should also benefit from the earnings, the proclamation states.

Bankers left the meeting in disappointment and despair, according to a banker who later briefed his board of directors.

Although the preamble to the proclamation states that this was a practice adopted from the experiences of other countries, windfall tax had not been levied on financial institutions but rather on mines and refineries, according to those in the industry.

“There is no precedence of such cases in the global financial industry,” said a banker working for an international bank.

Beyond precedence, many in the industry raise an issue of retroactivity of the law Parliament passed in November. The law would not be enforced retroactively, Melaku said during his press conference on Wednesday only a few hours after the meeting with the banks.

His view is shared by one of the tax experts at the authority who requested anonymity as she is not authorised to comment.

“It would be against the constitution to apply the windfall tax on a devaluation which occurred over three months ago,” she told Fortune.

Although Melaku repeated what Sufian had said in comparing the tax rate with other countries, he declined to confirm the rate of what the government demands.

The rationale behind the introduction of the tax is elusive to many bankers who have not yet digested the news and declined to comment on the issue publicly.

They consider the dollarisation of the money they mobilise as assets the same as they would have if they had invested in property whose value was affected by the devaluation but not subjected to the windfall tax.

However, some bankers are not disturbed by the news.

“Since we had little to do with the gains made through the devaluation, we do not mind the tax,” Amerga Kassa, president of Nib International Bank (NIB), told Fortune.

This is the same view echoed by Araya G. Egziyabher, president of Wegagen Bank.

“We understand where the government comes from,” he told Fortune. “It is a national agenda.”

Others in the industry do not agree with this view, although they are not comfortable speaking about it in public.

“This is nothing but a show of power by the state,” said one person close to the industry. “What would the authorities have done had the value of the Birr appreciated against the dollar? Would they have compensated the banks?”

Others will be severely affected, according to industry sources. Dashen Bank will have to handover the lion’s share, while Zemen Bank, although small but with a business model depending much on serving those in the foreign trade, will have a lot to lose, according to industry sources.