Federal Tax Drive That Punishes Firms Playing by the Rules

Aug 8 , 2026
By Yehualashet Tamiru

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A while back, I advised an international client that had set aside about 45 million dollars for Ethiopia, then received a tax assessment on their initial 10 million dollars investment. Although the company is complying with its tax obligation for the time being, it has suspended its remaining investment and began looking at other countries. Confidence had been shaken, writes Yehualashet T. Tegegn (yehualashet.t@ethioalliancelaw.com), who is a partner at Ethio Alliance Advocates LLP.

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Not long ago, I advised an international client that had earmarked approximately 45 million dollars for investment in Ethiopia. After making an initial investment of about 10 million dollars, the company was subjected to unfair tax assessment. Although it is currently complying with its tax obligations while pursuing the available legal remedies, the assessment fundamentally undermined its confidence in the investment climate. As a result, the company suspended its planned investment of the remaining 35 million dollars and began exploring opportunities in other jurisdictions

Whether the assessment was legally sound is a question for the legal process. The message, though, was not in doubt. Confidence had been shaken, and capital does not wait to have it restored.

That case points to a paradox in the ongoing and aggressive tax drive by federal tax authorities. Under the Home-Grown Economic Reform Agenda (HGER), and with the support of the International Monetary Fund (IMF), policymakers have launched an ambitious push to raise revenue, narrow the deficit, and steady public finances.

New taxes, wider bases and higher rates have followed. Much of this could be defensible from a macroeconomic policy perspective. However, upon closer look, the way an aggressive revenue regime interacts with corruption inside the tax administration, a risk that has gone largely unexamined.

Tax reform is not only about collecting more. It should be about a system that is fair, transparent and predictable enough to retain investors, while ensuring compliance. A regime that raises revenue but erodes investor confidence defeats its own purpose. That is the test the reforms should meet, and it is harder than the collection figures suggest.

Understandably, the tax authorities have been pushed to bring more into the federal coffers. The government has committed to lifting the tax-to-GDP ratio, historically among the lowest in sub-Saharan Africa. It has driven ambitious targets down through the system, from senior officials to individual auditors.

Targets are not the problem in themselves. Measurable goals can sharpen efficiency and accountability. The trouble begins when officials are judged mainly on the revenue they collect, because the pressure to hit an ever-rising number pulls against fairness and the rule of law. The target starts to stand in for the thing it was meant to serve.

Tax assessment, in practice, involves a good deal of judgment. Deciding deductible expenses, valuing transactions, estimating taxable income, and reading complex provisions are rarely mechanical. That discretion is necessary, and it also opens the door to abuse where oversight is weak.

The sharpest risk is that some auditors exploit it for private gain. A business is handed an inflated or questionable assessment, then finds the figure can be cut sharply through unofficial "negotiation."

Granted, not every official working in the tax system behaves this way. But even isolated cases hollow out trust, because taxpayers cannot easily tell the honest assessment from the improper one.

The damage does not fall evenly, as investors respond according to their corporate governance standards and home-country laws. Many multinationals, especially those based in Europe and North America, run strict compliance regimes. Their staff are barred from making improper payments to officials by laws such as the UK Bribery Act and the United States Foreign Corrupt Practices Act (FCPA).

These firms keep zero-tolerance policies and heavy controls. When they meet an excessive assessment shadowed by an expected unofficial payment, their options are narrow. They cannot settle through improper means, even where that looks locally like the fastest way out. They have to grind through appeals, pay for litigation, or absorb the charge.

Investors from places where anti-corruption rules are enforced more loosely may be readier to reach an unofficial settlement. Whether from business culture or weak enforcement, they resolve disputes by means law-abiding firms will not touch, and a troubling imbalance follows.

When corrupt practice exists within the tax administration, the firms unwilling or unable to take part become the easiest targets. An auditor chasing a target may reason that a compliant company has no real choice but to contest in court or pay in full, while one willing to settle improperly pays far less than the law requires.

The most compliant investors carry the heaviest load, and equality before the law, one of taxation's foundations, quietly gives way. A tax system should reward compliance, not punish it. Firms that respect the law, keep proper books and hold to ethical standards ought to count on consistent treatment. When they cannot, the signal travels fast.

The longer-term stakes are higher still. Foreign direct investment is acutely sensitive to regulatory certainty. Investors will accept relatively high rates as long as they are applied transparently, consistently and predictably. What frightens capital is not the size of the tax so much as doubt about how the law will be administered. Once investors suspect assessments are arbitrary, or that corruption shapes enforcement, they reprice the risk of operating here.

Future capital is steered toward jurisdictions that offer more certainty. Such decisions are mostly invisible, taken in boardrooms rather than announced, yet their weight is large.

The experience by the foreign firm I mentioned here is not unusual. Similar accounts pass quietly around the business community.

Firms may not walk away outright. They postpone expansion, slow hiring, trim production, or redirect the next round of investment elsewhere. None of it makes headlines, yet over time it drains growth, jobs, technology transfer and the very revenue the reforms were meant to lift.

The purpose of tax reform should not be to collect more this year. It is to build a fiscal system that can sustain growth over the long run, framed exactly that way by the IMF-supported agenda, around durable revenue rather than a one-off haul. Sustainable revenue cannot come from higher rates and broader bases alone. It rests as much on an environment that invites investment, innovation and voluntary compliance.

Tax paid willingly, year after year, by firms that trust the system is worth more than a large assessment extracted once from a firm that then leaves.

This should not be taken as an argument against the reform, but as a question of how to judge it. The programme with the IMF is a genuine opportunity to modernise Ethiopia's fiscal machinery. Raising a historically low tax take is a real need. But a reform measured only by the revenue it books is measuring the wrong thing. It should also be judged by the confidence it earns from those who live under it, because confidence is what turns a good collection year into a durable one.

The missing piece could be the fight against corruption inside the tax administration itself. If that does not advance in step with the widening of the tax base, the country risks undercutting the investment it is trying to attract. Stronger oversight of assessment, real accountability for auditors, clearer rules on discretion, and a credible route of appeal that does not depend on a firm's willingness to pay would do more for sustainable revenue than another turn of the rate screw.

This Administration should hope to be remembered not for collecting more tax, but for building a tax system transparent, accountable and trusted by everyone who deals with it. The alternative is quieter and more costly. Once the immediate fiscal pressure has passed, the country may find that the investment it let slip is far harder to win back than the revenue it briefly gained.

A bond of trust, once broken between a state and the firms it taxes, is not refunded on demand.

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PUBLISHED ON Aug 08,2026 [ VOL 27 , NO 1371]

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