Addis Abeba Tests the Limits of Legal Tax Reform

Jul 1 , 2023
By Yohannes Woldegebriel

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Navigating the murky waters of the property tax system is a challenge that calls for careful balancing of interests: the need to fund public projects and services, ensure tax equity, and maintain public acceptance of tax measures. Yet, the recent attempt by the Addis Ababa City Administration to skirt the customary legal procedures for tax amendments appears to tip this delicate balance unfavourably, writes Yohannes Woldegebriel (yohannes.woldegebriel1967@gmail.com), a legal expert, former public prosecutor and the director of Arbitration Institute under the Addis Abeba Chamber of Commerce & Sectoral Association (AACCSA).

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A storm of contention is brewing in Addis Abeba where the city’s administration has caused an uproar with the release of a confounding document from the temporary Property Tax Implementation Project Office. The missive calls for a seismic shift in property-tax calculation, fuelling taxpayers’ fears and stretching legal elasticity.

The murky document — which arrived under the heading “Outcome & Decision of the Study” — offers a counterintuitive proposal for an amended system of building-tax assessment, without legal substantiation. The study further observes that a tax amendment proposal has been proffered, which considers taxpayers’ capacity to pay, infrastructural demands, and the scourge of inflation eroding the currency’s purchasing power.

Wrapped in the trappings of bureaucratic language, the document argues that both short- and long-term research efforts are needed to identify necessary adjustments in tax assessment — underscoring the urgency for bolstering the city’s revenue stream. The audacious assertion that such measures could be implemented without legislative amendments has caused a furore among property owners.

The real curveball, however, is that the study unilaterally proposes an amended assessment of building tax, which has already been set into motion within the city administration’s jurisdiction. This initiative lacks the required legal backing under the prevailing legal system — an ironic twist, considering that the study assured that no changes would be made to the extant building tax law.

The document, signed by Abdulkadir Redwan, the city’s Finance Bureau Head, has been circulated to various city administration offices, sparking confusion and uproar among tax-paying residents. The Bureau Head has conceded that the Project Office has conducted a cursory study on amending the annual building tax and has received “direction” for its immediate enforcement.

Purportedly, the amended tax assessment operates on a new, three-tier structure based on the prevailing rental rates across different city zones. However, taxpayers are baffled and frustrated by the sudden imposition of these tax changes. The looming spectre of penalties and interest for non-compliance has exacerbated the anxiety, coupled with the disquieting suggestion of retroactively applying the amended assessment.

The city’s taxpayers are not taking this lying down, raising a cacophony of complaints and voicing their grievances at the lack of transparency and apparent violations of procedural norms. One must delve into the legal history of Ethiopia’s land and building taxes to better grasp the controversy.

The first incarnation of this tax emerged during Ethiopia’s imperial era, encapsulated in General Notice No. 86/1945, 111/1947, and 118/1948. A subsequent law in 1964 consolidated and replaced these three laws. This legislation imposed on land and property owners liabilities to pay an annual tax based on assessed rental value. The tax would be payable only on rented buildings.

However, the political turmoil of 1974 led to the repeal and replacement of this legislation, introducing a law that transferred ownership of urban lands and extra houses to public ownership. Leasing of houses for residential or business purposes by private entities was outlawed, vesting all such rights solely with the state and cooperatives.

A proclamation issued in 1976 (No. 80), under the Urban Land Rent & Urban Home Tax, reinvented land and building taxes according to the government’s collectivist ethos. The law fixed lease amounts for houses, which became the prevailing rate for determining the home tax.

Against this complex backdrop, the Addis Abeba City Administration’s attempt to modify building tax assessments has flouted time-honoured legal procedures and conventions. The notion that taxes can be imposed, assessed, and collected through studies or office memos is a bold defiance of Ethiopia’s legal traditions and principles. It pushes the envelope of universally accepted tax law canons and runs afoul of the long-standing principle of Ethiopia’s law. Changes to taxes, duties, imports, or excises must be enacted only by law.

Indeed, the City Administration is grappling with the Herculean task of funding high-value infrastructure projects and other public services, a process that has evidently strained its coffers. However, resorting to unconventional and legally questionable methods of squeezing funds out of the public purse without clear, set tax laws is unlikely to win favour with taxpayers.

One commentator has argued that under existing building tax laws, the annual rental value of buildings is set without appreciating rent as a potential return on investment. This approach, a relic from the socialist mindset that considers rent exploitative, has resulted in assessed rental values significantly lower than the prevailing market rate. While this predicament arguably requires reform, the City Administration’s attempted solution — grafting prevailing market rates onto a communist-era tax law — risks eroding public trust and opening the door to potential corruption and unaccountable tax collection.

On the one hand, the urgency to find additional revenue streams for the City Administration is undeniable. The strain on public resources is palpable, with demands for infrastructure development and other large-scale projects putting a severe dent in the administration’s financial wherewithal. However, the answer to these pressing needs should not be sought in hastily drafted ‘study papers’ or ‘office memos.’ Instead, it requires comprehensive legislative reform, carried out in full transparency and adherence to due process, and with a firm grasp of the socio-economic realities of the city.

The controversy surrounding the proposed tax amendments is a testament to the intricate dance between economics and governance. It underlines the importance of establishing a robust, equitable property tax system that identifies and links taxpayers and taxable property, produces accurate tax assessments, and collects taxes efficiently. Failures in these functions risk damaging tax equity, curbing revenue generation, and undermining public acceptance.

The Addis Abeba City Administration, and indeed Ethiopia as a whole, is at a crossroads.

Navigating these choppy waters will require careful, considered policymaking, transparency, and a commitment to uphold the rule of law. The tumultuous reaction to the building tax assessment changes should serve as a bellwether to Ethiopian authorities. The road ahead promises to be a challenging one, but with judicious handling, it could lead to a more fair and prosperous city for all its residents.

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PUBLISHED ON Jul 01,2023 [ VOL 24 , NO 1209]

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