Few Points on the New Investment Incentive Regulation No. 517/2022

• Brief Background: Following the promulgation of new Investment Proclamation and Regulation in 2020, the Council of Ministers recently enacted a new Investment Incentive Regulation No. 517/2022 ("New Regulation") repealing the Investment Incentives and Investment Areas Reserved for Domestic Investors Council of Ministers Regulation No. 270/2012 and Investment Incentives and Investment Areas Reserved for Domestic Investors Council of Ministers (Amendment) Regulation No. 312/2014 (Old Regulations). This is just to mention the laws explicitly repealed by the new Council of Ministers Investment Incentive Regulation No. 517/2022. There are other laws implicitly repealed by this regulation.

• Eligible Sectors: The Old Regulations providing for investment incentives excluded sectors that have not been under the mandate of the Ethiopian Investment Commission (EIC). Incentives for these excluded sectors used to be regulated through laws enacted by the specific sector regulator. One such sector is #mining . For instance, the then Ministry of Mines and Energy (now Ministry of Mines) enacted a directive providing for duty-free importation of vehicles for licensees in the mining sector. The New Regulation includes sectors that were excluded in the Old Regulations, i.e., mining, petroleum, and geothermal energy. In addition, the New Regulation includes new sectors that will be eligible for incentive such as investments in software development, data center and cloud services, business outsourcing process, start-up development service, and research, innovation, enrichment and development works. Creating overseas employment opportunities for Ethiopians also makes the investor eligible for income tax exemption. The eligible sectors for investment incentives are those indicated under the "Investment Areas and Income Tax Incentives Schedule" ("Schedule") of the New Regulation. However, it should be noted that the Ministry of Finance (MoF) has a broad discretionary power (see the snippet below) to expand the eligible sectors for income tax exemption.

• Regulator: The major government organ implementing the New Regulation is the Ministry of Finance (MoF). Request for, and approval of, eligibility for investment incentives will be handled by MoF. However, other entities such as the Ministry of Revenues, EIC, Regional Investment Regulatory Bodies and the Ethiopian Customs Commission have complementary roles assigned to them in relation to the enforcement of the New Regulation.

• Types of Incentives: There is nothing new in this regard. The New Regulation maintains income tax exemptions and duty-free privileges as incentives available to investors. As indicated above, the income tax exemptions may be extended further based on export performance or place of the investment (investing in disadvantaged and remote areas from Addis Ababa will be rewarded with tax exemptions for additional years). It should be noted that investments in mining and #petroleum operations are not eligible for income tax exemption.

Some sectors are eligible for both customs duty exemption and income tax exemption while others are only eligible for customs duty exemption. The duration for which investors will be exempted from income tax is provided under the Schedule and it ranges from one year to 6 years for most of the eligible sectors. Investment in forestry and related activities and development and rental of industry parks (including ICT parks) enjoy a relatively longer period of income tax exemption, i.e., 8-9 years for the former and 10-15 years for the latter. If the investment is located in places which are disadvantaged in terms of infrastructure development and their distance from the center, there will be tax exemption for additional period. In addition, if the investor is exporting or supplying intermediate goods for an exporter, it will be entitled to additional one-off tax exemption for two years. The percentage of the goods that needs to be exported or supplied to exporter depends on whether the investor invests within (80%) or outside (60%) industrial parks. A directive will be issued by the Ministry of Finance (MoF) to provide details for investors that will be entitled to tax exemptions for additional periods. Investors investing in eligible sectors can import capital goods and construction material without being required to pay customs duties. Capital goods "include equipment and other similar tangible goods used to produce goods or render services for consideration" while construction material is defined as "a material or supply that is to be made part of a building or any other construction".

• Outstanding Issues: There are some important areas in the New Regulation which require the enactment of directives for their implementation.

a. Incentives determined by the Ethiopian Investment Board (EIB): In addition to the previous investment incentive regulations, there have been incentives made available for investors through various decisions of the Ethiopian Investment Board (EIB). The New Regulation mandates the Ministry of Finance (MoF) to decide on the applicability of these incentives through a directive. Given that most of the incentives provided through EIB's decisions relate to the #tourism sector (the other directive from EIB relates to duty-free importation of vehicles for various investments and duty-free importation of capital goods for the #tourism sector), the MoF will decide on the fate of these incentives by enacting a directive as mandated under Article 4 (2) (b) of the New Regulation.

b. Incentives for investment expansion or upgrading: Under the Investment Proclamation No. 1180/2020, expansion or upgrading is defined as "increasing in volume, by at least 50 percent of the attainable production or service rendering capacity of an existing enterprise, or increasing in variety by at least 100 percent by introducing new production or service rendering line of an existing enterprise, or increment by both." With respect to incentives to be availed for expansion or upgrading of existing investments, MoF will enact a directive using the Schedule as a basis. This entails that incentive will only be available for investments in the sectors indicated in the Schedule, subject to the possible expansion of the sectors by MoF as indicated under the second paragraph above.

c. Incentives for investors engaged in the #hospitality sector: As indicated in the Schedule, the general principle is that the hospitality sector is not eligible for income tax exemption. However, if the investments in star-designated hotels, lodges and resorts are "in new, atypical and selected tourist destination areas", they will be entitled to five years of income tax exemption. Details will be determined by a directive to be issued by MoF in consultation with relevant stakeholders.

• Grey Areas: Under Article 7 of the New Regulation, it is provided that the income tax incentive provided under the New Regulation may be replaced by a new type of tax incentive. It is not clear what kind of incentive is contemplated here and what kind of guidelines will be used by the Council of Ministers (COM) in exercising this power. For the sake of regulatory predictability and certainty, a certain principle within which the COM can exercise its mandate should be provided.
• Points to note for investors: The following precautions should be taken by investors:

i) Record Keeping: Eligibility for incentives requires the investors to keep books of accounts and report the same to the tax authority. If the investor engages in multiple sectors eligible for incentive, a separate record should be kept for each investment activity. Failure to keep books of accounts results in the denial of the incentives for that specific year affected. There must also be a separate record of income derived from investment expansion/upgrading.

ii) Refund is not available: Investors should present a letter showing their eligibility for tax incentive before paying income taxes. Once tax is paid, it is not possible to seek refund invoking eligibility for tax incentives.

iii) The eligibility periods for income tax exemption starts to run from the date the investor is issued a business license or an investment expansion/upgrading permit.

iv) Investors having existing investment (s) and granted investment incentives under the Old Regulations will continue to make use of the same.

v) Directives providing for investment incentives remain valid and applicable until replaced by new directives to be issued by MoF.

• Quick Reflection: For investors expanding/upgrading their existing investment, I don't think commencing the period of income tax exemption from the date the expansion permit is granted is a well thought out decision. It will take time for the upgraded/expanded investment to start producing goods or rendering services. Expanding/upgrading requires investors to allocate additional capital and/or import capital goods and undertake other preparatory works. Encouraging investment expansion/upgrade, therefore, requires starting the commencement date as of the date when they start producing goods or rendering services. If the expansion/upgrading is of such a nature that it is "increasing in variety by at least 100 percent by introducing new production or [new] service rendering line of an existing enterprise", it will provide a meaningful incentive if the tax exemption period starts to run from the date the investor gets the license for the new line of production of goods or new line of service rendering.

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