Quarterly Advance Tax Misapplied, Viable Businesses at Risk

Feb 28 , 2026
By Dadimos Haile (PhD)

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Advance tax systems in other jurisdictions are generally built around recent assessments, reasonable estimates of current-year income, and a clear distinction between timing and substance. The Ethiopian experience raises questions about alignment between statute and administrative practice, and about how far a modern tax administration can stretch the concept of “advance” without losing its connection to current economic reality. writes, A former judge, Dadimos Haile (PhD) - dadimos.haile@dadimoshaile.com - is a managing partner at Dadimos & Partners LLP (D&P).

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Advance or provisional tax systems are now standard in modern tax administration. They are meant to provide governments with a steady flow of revenue while allowing taxpayers to meet their obligations gradually and predictably throughout the year.

The authorities' recent move to a quarterly advance income tax payment, introduced under last year's amendment to the income tax law, follows this logic and, on paper, appears both orthodox and sensible. The law requires companies to make quarterly advance payments equal to 25pc of the income tax assessed for the immediately preceding tax year. The idea espouses that the last tax year is usually the best available indicator of what a taxpayer is likely to owe in the near term.

This mirrors international practice, where advance payments typically use the most recent assessment as the anchor. In practice, however, the way the system is being applied is moving away from what the law actually says.

Administrative practice now shows tax authorities assessing advance tax payments based on any tax year within the last 10 years, rather than merely the immediately preceding year specified in the amended law. This approach rests on an explanatory circular issued by the Ministry of Finance on August 27, 2025. There are reports that tax offices are refusing to receive notices of objection or to issue written decisions rejecting them, despite the law giving taxpayers a clear right to both.

This should raise serious questions about legality and administrative overreach. It also changes the nature of the advance tax system in ways that are hard to reconcile with business reality or the economic logic behind such regimes.

A simple example shows how distorted the outcome can become. Consider a company that paid 10,000 Br in income tax in the immediately preceding year, and 10 million Br two years earlier, when it was much more profitable. Under the law, the company’s quarterly advance payment would be 2,500 Br. This is consistent with the idea that advance payments should follow current or near-current performance.

Now imagine the same company incurred a loss in the immediately preceding year and paid no income tax. Under the circular-based interpretation, the authorities could reach back to the profitable year and require it to pay 2.5 million Br in advance tax. This would apply even though the company is currently loss-making.

The inversion is striking. A company with modest recent taxable income faces a small and manageable advance payment. The same company, solely because it incurred a loss in the latest year, suddenly faces an advance payment a thousand times larger, with little connection to its present financial capacity. Advance tax, designed as a timing tool, risks becoming a pressure point that can push struggling but viable businesses closer to failure.

This is not how advanced tax systems are supposed to work elsewhere. These systems are meant to be forward-looking and to approximate likely current-year liability. International experience shows they are usually anchored to recent performance, with room for taxpayers to adjust when circumstances change.

In Kenya, the income tax system requires quarterly instalment payments, but taxpayers may choose to base those payments either on the previous year’s tax or on a reasonable estimate of the current year’s liability. Businesses that incur losses are not forced to rely on distant profitable years. They may submit estimates that reflect their current performance.

In India, the advance tax system is explicitly estimate-based. Taxpayers should project their current-year income and pay advance tax accordingly. Tax authorities may use the most recently assessed year as a reference point, but the system is anchored in current-year expectations rather than historic peaks. South Africa follows a similar logic. Provisional tax payments are built around taxpayer-submitted estimates of taxable income. The system accepts that business conditions change and requires advance payments to follow those changes, even when that means reduced or nil payments in loss-making years.

The United States also requires quarterly estimated tax payments. Taxpayers can meet their obligations either by paying a percentage of the current-year expected liability or a percentage of the immediately preceding year’s tax. Again, the emphasis is on recency and proportionality. In the United Kingdom, quarterly advance payments apply only to large and very large companies, those with profits above 1.5 million and 20 million sterling pounds, respectively, under the Quarterly Instalment Payments regime. Even in this narrower setting, payments are calculated on reasonable estimates of current-year profits, with adjustments as circumstances change.

The common thread in these systems is that advance taxes look forward, not backwards. They rely on the most recent and realistic information, not on the most lucrative period in a taxpayer’s history. When the reference point shifts to any of the last decade, particularly to periods of exceptional profitability, the system stops functioning as a fair approximation of current liability.

This international practice reflects the basic principles that justify advance tax regimes in the first place.

Advance payments help smooth government cash flows and reduce dependence on large year-end collections. Advance tax is not supposed to be exact, but it should reasonably reflect what a taxpayer is likely to owe for the current year, based on recent performance or credible estimates. Businesses go through losses, downturns and recoveries. Advance tax systems are designed to adapt to these cycles, with later corrections if estimates prove wrong.

Lastly, advance tax is a timing mechanism, not a way to expand tax liability in substance. It should not distort business viability or punish temporary losses.

Once advance payments drift away from these principles, they no longer serve their intended role. The issue in Ethiopia is not the policy choice to introduce advance tax payments. That choice is consistent with modern tax administration. The problem lies in the misalignment between the law and its current application through administrative guidance. The tax framework already has tools to protect the revenue base, including the turnover-based minimum alternative tax, which applies regardless of profitability.

The law is plainly not designed to hasten the failure of companies that are temporarily loss-making but commercially viable. There is no obvious reason to assume that the Ministry intended such an outcome. Yet that is the path the current circular risks are setting in motion. By imposing advance tax obligations disconnected from current economic reality and by discouraging or blocking formal objections, it undermines confidence in the system's predictability and fairness.

The new advance tax payment system is an important step in modernising the tax administration. To work as intended, however, administrative circulars should remain within the boundaries of the statute they are meant to explain. Restoring alignment with the law, anchoring advance payments to the immediately preceding year and respecting taxpayers’ rights of objection would ensure certainty, fairness and trust in the tax system, without sacrificing the government’s legitimate need for a stable revenue stream.

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PUBLISHED ON Feb 28,2026 [ VOL 26 , NO 1348]

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