A European business lobby in Ethiopia issued a scathing review of the tax system last week, exposing a series of deficiencies that purportedly drive some of its members out of the country. The lobby group's report painted a grim picture of a tax environment plagued by a lack of transparency, unpredictability, and bureaucratic inefficiencies its leaders warn stifle business operations and investment.

Representing 180 European businesses, the European Chamber of Commerce in Ethiopia (ECCE) has sharply criticized the "unclear powers" granted to tax auditors and a cumbersome appeal process requiring a 50pc advance payment. According to the Chamber, the unpredictable nature of tax audits and inconsistencies between tax laws and directives have created an environment of uncertainty and frustration, discouraging investment and stunting business growth.

Its Chairman, Ben Depraetere, also country head of BASF's vegetable seeds business, attributed the departure of some European companies from Ethiopia to these tax-related issues.

"It's like killing the goose that lays the golden egg," Depraetere said, referring to the added strain from ongoing conflicts affecting some regional states. “Reason finds no ground.”

Tadesse Lencho (PhD), an expert in tax laws, disclosed instances where auditors rejected claims for political violence insurance deductions, arguing that the country's purported stability negated such expenses. He believes excessive discretion allowed to auditors leads to subjective judgments that compromise fairness. Tadesse criticized the legal framework, describing it as a "confusing cocktail" of proclamations, directives, and poorly drafted letters, often treated as de facto law.

“Officials should be extremely disciplined when they write these letters," he argued, suggesting they have the effect of signing laws into effect.

Tadesse noted that historically, incentives for compliant taxpayers have diminished over time. He also pointed out that the tax-to-GDP ratio has declined from 13.2pc to less than 10pc over the past decade, a trend he attributed to a poorly functioning tax administration system. The policy brief comes at a crucial time as the federal government seeks to raise nearly 60pc of its budget of 801.6 billion Br from domestic revenues, open the economy further to foreign investors, and introduce new taxes.

"The golden goose is being slaughtered," he said.

The Chamber's leaders proposed a range of reforms to enhance the tax system's efficiency and transparency during a policy brief to senior federal government officials at a meeting held at the Hyatt Regency on Africa Avenue (Bole Road). Attendees included Hanna Arayaselassie, commissioner of the Ethiopian Investment Commission (EIC); Nebiyu Samuel, advisor to the Minister of Revenues; and Roland Kobia, EU Ambassador to Ethiopia.

They urged to mandate at least 60 hours of annual training for tax auditors to improve their skills and understanding of complex transactions. The Chamber argued that such training is essential for auditors to handle the intricacies of the businesses they assess and ensure that their methods meet the standards for fairness and consistency. It also recommended establishing technical committees to review auditors' findings before they are challenged in appeals, a measure intended to ease the burden on businesses. It stresses the importance of clearly communicating new tax regulations throughout the assessment process.

Despite these calls for reform, the authorities were cautious about implementing immediate changes, particularly in sectors only recently opened to foreign capital. Commissioner Hanna voiced her optimism about ongoing efforts to improve the business climate, citing recent initiatives such as revising the commercial code, expanding e-government services, and overhauling the investment proclamation.

"We’ve got a joint committee for customs, taxes, and immigration issues concerning foreign companies," she told Fortune.