Editorial | Mar 14,2020
June 15 , 2019
By FASIKA TADESSE ( FORTUNE STAFF WRITER )
Dividend taxes will only be applied to profits that are paid to shareholders but not on accumulated earnings, according to the latest ruling from the Cassation Bench of the Federal Supreme Court.
The ruling, which becomes a precedent law, was passed after a fierce, six-year battle between Total Ethiopia and the former Ethiopian Revenues & Customs Authority involving 41 million Br in dividend taxes.
The five justices of the Bench including Solomon Areda, vice president of the Federal Supreme Court, ruled in favour of Total Ethiopia, stating that the company is not liable for the dividend tax that was requested by the tax authority.
The case began in August 2013 when the former Authority sent a dividend tax request to Total compelling it to pay 10pc of the profit Mobile Oil East Africa Ltd, which merged with Total Ethiopia, accumulated over 11 years between 1992 and 2005.
Total Ethiopia, which believed the request by the Authority was not legitimate, filed an appeal to the Tax Appellate Commission in 2013 protesting the Authority’s request and asserting that dividends should not be paid on the profits that are transferred to the head office from the branch offices.
Total also claimed that the profit that was not transferred to the head office was contributed as shares when Mobile Oil was merged with Total Ethiopia so that the profit should not be subjected to dividend tax.
Total Ethiopia, established in the country in 1950 as a petroleum product distribution company, merged with Mobil Oil East Africa in 2006.
The Commission rejected Total’s appeal, stating that it has to pay the tax as Mobil Oil had already lost the privilege of dividend tax exemption on the profits transferred to the head office, since it previously merged with another company and formed a new one.
Displeased with the decision of the Commission, Total took the case to court. It filed a lawsuit with the Federal High Court, which upheld the ruling of the Commission in August 2015. The company again appealed to the Supreme Court, which returned the same ruling as the High Court in a majority vote in March 2018.
In its ruling, the Supreme Court explained that during the merger, Mobil Oil East Africa has only contributed 6.9 million Br out of the 21.6 million Br total profit it amassed. And the directive from the Ministry of Finance does not review profits that are invested as share contributions.
The dissenting opinion of the minority justices argued that the company is not liable for the dividend, stating that there is no legal ground that gives the Authority the power to request the dividend tax.
The case then went to the Cassation Bench following Total’s appeal filed in June 2018. In its application, Total argued that the directive from the Ministry of Finance stipulated that dividends are paid by the companies established locally. Total Ethiopia also argues that the directive exempted profits from dividend tax when it is used to recapitalise the company.
In responding to Total's claim, the Authority argued that the new income tax proclamation declares dividend taxes should be paid on the profits made by branch offices before they are transferred to the head office. Even though Mobil Oil claims that it has recapitalised the gain, the company is dissolved and non-existent, claimed the Ministry.
The five justices, after hearing both sides, ruled that dividend tax will be paid only on profits paid to shareholders. They also established that profits of branch offices are sent to the head offices, not directly to the shareholders making it challenging to account for dividends.
"Dividend tax is imposed on companies that are registered locally," reads the judgment.
If there are tax issues with Mobil Oil that are not cleared during the dissolution of the company, the head office should be held accountable, not Total Ethiopia, which is a separate company, according to the judges.
PUBLISHED ON Jun 15,2019 [ VOL 20 , NO 998]
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