The Tax Bill Begins to Arrive Before the Profit Does

Mar 14 , 2026. By NAHOM AYELE ( FORTUNE STAFF WRITER )

A packed Ministry of Finance meeting on the amended income tax law and its draft regulation, held last week at the Ministry's headquarters on George VI St., more than 200 participants wanted to speak, a rare turnout for such consultations, with room for about 500 and participants arriving with notes and marked-up drafts. For many, a policy meant to secure revenue intersects with a moment when firms face security risks, transport disruptions and working-capital shortages. reports NAHOM AYELE, FORTUNE STAFF WRITER

A flour mill in Debre Marqos has become a measure of the strain on Ethiopia’s formal private sector. Built on 40,000Sqm of land in Menkorerie District and designed to process 1,000Qtls of wheat into flour a day, Abate & Mehari Agro Processing Industry Plc is operating at only three percent of capacity. Its founding shareholder and General Manager, Mehari Adane, is no longer speaking of recovery. He is speaking openly about closure.

"If I had started import and export trade with the capital I had at that time, I might have been much richer today," he told Fortune. "But because I established this factory, my situation is very different."

That sense of unravelling framed the mood inside the Ministry of Finance on King George VI St., where officials held a public discussion on a draft regulation linked to the amended income tax law. More than 200 participants wanted to speak. The turnout showed that many businesses are experiencing the tax changes as an immediate threat to cash flow and continuity.

Few accounts captured that tension more sharply than Mehari’s. His business, which once ran at about 60pc of capacity, supplied flour to consumer unions and cake and bakery businesses in Addis Abeba, employed around 100 workers and paid nearly 10 million Br a year in profit tax, and is now surviving on what it already has.

"We had big plans," Mehari said. "But the situation has changed."

Transport has become more difficult. Some providers no longer want to move goods from the area because of security concerns. Input shortages, rising wheat prices and scarce working capital have intensified the pressure.

"We're surviving on what we already have," Mehari said.

His frustration is not only with the market or the security situation. It is with a tax burden that now arrives even when the business is no longer making money. Last year, the company reported a loss and paid no profit tax. Business has not improved over the past seven months. Yet the company was still required to make quarterly advance tax payments based on earlier turnover. It paid, but Mehari says the payment drained the remaining cash, leaving the company struggling to cover staff salaries. He now says he is waiting either for the bank to auction the factory or for the factory to close.

"I ask myself whether this really is the government’s decision," Mehari said.

The company paid, but the payment drained what little cash was left.

"Now we've very limited cash," said Mehari. "We even struggle to cover some of our expenses, including staff salaries. I've lost the remaining hope I had. I'm now waiting to see whether the bank will sell the factory through auction or the factory will close."

This was one of the frustrations surfaced last Tuesday, March 10, 2026, inside the Ministry of Finance, on King George VI St., where officials held a public meeting on a draft regulation tied to the recently amended income tax law. Usually, such invitations draw only a small number of people. The Ministry’s conference hall, with room for about 500, was full last week. Business owners, lawyers and sector representatives filled the hall. Many had come carrying notes and marked-up drafts.

Tewedaj Mohammed, head of the Legal Affairs Department at the Finance Ministry and the man leading the meeting, had not expected so many to turn up, demonstrating the intensity of the issue. Opening the floor for discussion, the mood shifted. More than 200 participants wanted to speak. One after another, they poured frustration, worry and urgency, blaming the newly amended law and regulations for making it harder to stay in business.

Some were being forced to keep formal accounting books even though they had not previously been required to do so. Others found the Minimum Alternative Tax (MAT) pushing them toward bankruptcy. Many complained that quarterly advance tax payments were draining cash and making it harder to keep operating.

Business profit tax, combining corporate and individual business income, accounted for around 21pc of total federal tax revenue in fiscal year 2020, while employment income tax contributed around 16pc. Direct taxes as a whole made up 37pc of tax receipts in 2015 and grew to 46pc by 2020. However, the broader tax-to-GDP ratio has weakened. It was about 8.5pc in 2019/20, and 7.3pc in 2023/24. The ratio peaked at 12.4pc in 2014/15 and has since fallen by 4.9 percentage points. In the eight years to 2022/23, the tax-to-GDP ratio fell from 12.4pc to 7.5pc despite average annual GDP growth of eight percent.

Several forces help explain the weak corporate income tax take. Federal tax officials blame lower compliance in the private sector, especially in corporate income tax, with construction, retail and wholesale often cited.

Against this backdrop, Parliament amended the income tax law last July, introducing new features from new taxpayer categories, revised monthly employment income tax rates and updated rental income tax rates to taxation for digital content creators, changes to dividend taxation, a Minimum Alternative Tax (MAT) and revised payment methods. Of these, the most contentious change is the quarterly advance payment system.

Both Category A and B taxpayers, such as Abate & Mehari Agro Processing Industry Plc, must pay quarterly instalments equal to 25pc of the previous year’s tax. Another is the minimum alternative tax, which requires taxpayers to pay 2.5pc of annual turnover if calculated income tax falls below that level. The payments are creditable against future income tax liabilities for up to five years. Business owners say the rules are hitting cash flow hard. For many, quarterly payments reduce working capital and add pressure to already strained businesses. The Minimum Alternative Tax has stirred sharper criticism because it applies even when a company like Abate & Mehari Agro Processing Industry Plc reports a loss.

The draft regulation tries to clarify how the new system will work. Companies that report losses during a tax year should still pay 2.5pc of turnover. Businesses that report neither profit nor loss should do the same. For companies reporting no activity, the tax authority may estimate tax under the tax administration law.

However, some exemptions, such as water and electricity service providers, are exempt because tariffs are set by the government. Income from rent is exempt, as are companies declared bankrupt by a court. Commission agents and wholesalers are treated differently, with tax based on income rather than the full value of transactions. Even so, sectors are lining up for exemptions.

Among the most vocal were leaders of the Ethiopian Millers' Association, who argued that their industry should be excluded because the prices of products such as bread are government-controlled.

"There is no price cap when we buy wheat to produce flour," said a representative from the Association. "But there is a cap when we sell the flour. If this continues, many of us could soon lose our businesses."

Leaders of the Ethiopian Transport Employers' Federation raised similar concerns. According to Enkutatash Fikadu, heavy truck drivers are now required to keep formal accounting records and, after being pushed to reorganise as share companies, are also being asked to pay an alternative tax on sales, even though their associations do not operate like normal businesses.

"Our association doesn't make sales," she said. "We only collect money from members who buy shares. Now the government is asking us to pay tax from the shareholders’ money."

Girma Habtemariam (PhD), vice president of the Construction Contractors’ Association, echoed the same concern. Contractors could post losses not because of inefficiency but because there is no work.

"Now we're being asked to pay tax even when we do not have projects."

UMC Building Construction Plc, which runs six sites, paid about 1.6 million Br in profit tax last year and recently paid around 400,000 Br in quarterly advance tax.

"We paid the amount with struggle," said Mehdin Mohammed, general manager.

If a project costs 100,000 Br, the government takes 2.5pc from that amount, pushing companies like his to add 2.5pc to their costs when bidding for projects.

"That increases the price and puts pressure on clients," he told Fortune.

Outside the hall, companies say the pain is real. Exporters, pharmaceutical manufacturers, legal professionals and limited liability partnerships echoed similar concerns. Even Safaricom Ethiopia, the country’s only private telecom operator, asked for an exemption. According to Dawit Asmelash, Safaricom should be treated differently because the Communications Authority regulates its operations.

"This law could affect a company that has not yet reached full profitability," he said.

Close to 20 participants were allowed to speak over nearly six hours. Ministry officials, including advisor Wasihun Abate, mostly listened and responded briefly, noting that some complaints concerned the proclamation rather than the draft regulation under discussion.

"Everyone says their sector is special and should be exempt," Wasihun said of the rush of exemption requests with a dry observation. "But if everyone is special, then no one is special."

For Dadimos Haile (PhD), a former judge and managing partner at Dadimos & Partners LLP, the newly introduced tax types are not unusual internationally. But he criticised how they are being applied. He argued that quarterly advance payments should primarily target large, financially stronger companies rather than all businesses. He cautioned that forcing companies to pay in advance when they are not making money can further weaken fragile institutions.

Dadimos also questioned the way payments are calculated when a company reports losses.

"If a company reports a loss in the most recent year and the tax authority goes back many years to find a highly profitable period and then calculates 25pc of that amount, it raises serious questions about legality," he told Fortune. "Basically, if a company made a loss last year, there is a chance it could also make a loss this year. Advance payments should be calculated based on realistic expectations of the current year’s income."

On the Minimum Alternative Tax, he was more straightforward.

"If a company is already facing bankruptcy and you impose a 2.5pc tax on its sales without deducting expenses, you're effectively telling businesses to stop operating," he said.

However, officials at the Ministry defend their policy. According to Tewedaj, the measures were introduced partly because many businesses report losses or underreport their activities while continuing to operate, raising concerns about tax evasion.

Dadimos acknowledged tax evasion as a real problem, but argued that stronger oversight and direct action against fraud would be more effective than rules that pile more pressure on businesses already struggling to survive.

That is the policy dilemma confronting officials like Tewedaj. The federal government is trying to secure revenue in an economy where compliance is weak, and the tax base has underperformed. Businesses are warning that the chosen instruments can exhaust working capital, punish firms during downturns and turn temporary weakness into insolvency. The question is whether a tax regime designed to catch evaders can distinguish them from formal, visible businesses struggling to survive.

PUBLISHED ON Mar 14,2026 [ VOL 26 , NO 1350]