Interview with Etsehiwot Simreab on Presumptive Taxation

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Taxes have been a topic of complaint since the concept was introduced to the world. Anyone that has been to a revenues bureau can attest to this fact. It is this understanding that drove us to try and get a small idea of the truthfulness of these complaints and the gravity of the situation. That is why we decided to interview Etsehiwot Simreab, a Senior Field Researcher in our Small Firm Diaries (SFD) project that focused on small businesses and how they recorded their finances. Though the project has concluded in Ethiopia, Etsehiwot plans to piggyback on the data gathered and conduct her own research on a specific part of the taxation system, presumptive taxation.

Below is a transcript of my interview with Etsehiwot.

Could you please explain presumptive taxation?

Ethiopia’s taxation system is classified into 3 categories; category A, category B, and category C. Businesses in the C category are small and micro enterprises that earn less than 500,000 ETB (about 10,000 USD) a year and are not required to have a receipt system to record their financial transactions. So they pay their taxes based on an assessment made by officials sent by the Ministry of Finance (MoR). These officials are tasked with observing the businesses and presuming how much money each of these businesses earns in a year. The taxes are then calculated based on these presumptions, hence Presumptive Taxation.

Now that you’ve explained what presumptive taxation is; could you please tell us what motivated you to do research on the topic?

I previously did similar research with some friends of mine on the fairness and equity of the tax system in Ethiopia. We specifically focused on the informal taxation of businesses. These were very small businesses, usually run by 1 or 2 people, that were acknowledged by the government but weren’t fully integrated into the tax system. Our research of these businesses showed that there was unfairness in the way they were taxed.

After my experience with these very small businesses, I started working with L-IFT on the SFD project. The project focused on small and micro enterprises that are under the formal taxation system and gathered data by having field teams record the participants’ finances with the aim of encouraging the participants to self-record their finances in the future. During this project, business owners complained that the yearly income that the MoR officials presumed they earned was much higher than their actual yearly earnings; and that the level of business they get fluctuates from year to year and that the presumptive taxation system doesn’t take this into account. So it was this experience that motivated me to look into the topic.

So you mentioned that business owners disagreed with presumptive taxation; do you believe that this is an attitude shared by most?

There are different attitudes when you talk to business owners. Some say that the tax was too much, some say that they weren’t taxed as much as they expected, and others say that their tax was fair but that they know other business owners that were over-taxed.

Though I said that there were different attitudes, the dominant voice from business owners is that they are being over-taxed.

What processes did you plan on following when planning this research?

The research is going to be done by the collaboration of L-IFT and an external team led by me. My initial plan was based on the fact that we have a full 12 months of income and expenses data from the SFD project, starting on the 15th of April 2021 and ending on the 15th of April 2022. Since the tax year in Ethiopia runs from July to July, we have a total of 10 months of data that can be used for this particular tax year (July 2021 – July 2022). Our plan is to use a monthly average to estimate the earnings on the missing months of May and June 2022. We are waiting for the approval of the different parties that were involved in the research as participants and data owners to use the data.

Now that the participants’ yearly earnings have been recorded and under the condition that the data owners (the participants) allow us to use the data, what is left is to ask the participants of the project how much presumptive tax was levied on them. Using these 2 sets of data, we can compare and see if the taxes were fair or not, and, in cases where they are unfair, by how much they missed the correct value. We will also be able to see the rate of the often overlooked case of taxes being lower than they should be.

Something that most small business owners don’t know is that they are allowed to choose between self-recording their finances and getting taxed on that or presumptive taxation. So in addition to comparing actual taxes to presumptive taxes, we also wanted to see if business owners preferred to keep records of their yearly finances themselves or to just wait for the MoR officials to assign them a value. What kind of record-keeping system they would choose is also of our interest. Would they use traditional bookkeeping or use the modern bookkeeping system we showed them, which is our FINBIT mobile financial app?

How sure are you of the accuracy of self-reported finances? How believable is the data?

We have planned for the fact that business owners might intentionally or unintentionally miscalculate their yearly earnings. We plan to address that by adding a 10% confidence interval. In addition to that, when gathering data, we observe their businesses on a weekly basis and ask them a lot of questions regularly. So while we acknowledge that the self-reported data may not be 100% accurate, we believe that it is as close as we can get to the real value.

What do you hope to find by the end of the research?

The main goal that my colleagues and I have is to publish our findings. We will use that to show our results and the data we have gathered to governing bodies and show them if there is a problem with presumptive taxation and let them know that self-recording may be a better alternative.

Our main concern is that only around 140 small businesses participated in the SFD project. We are afraid that the small size of the sample group may diminish the value of the data gathered by the research and won’t be large enough to effect policy changes. But there is no other data of this kind in Ethiopia so we are hoping that this would be a great starting point for larger-scale research projects in the future that can actually make an impact on policy and practice.

How would this research benefit business owners and Ethiopia as a whole?

It would benefit business owners greatly. We hear a lot of business owners complaining that the presumptive tax levied on them was too much, but they usually don’t have the data to back up their complaints. Data reported by the Initiative for Policy Dialogue (IPD) shows that 51% of taxpayers complain about the unfairness of taxes. So instead of going through this process, it would be so much better to have accurate data that leads to accurate taxation.

Category C taxpayers are one of the main ways in which the Ethiopian government plans to widen its tax base. But, as I mentioned before, this category has so many complaints and the government has been asking questions about how to clear up this confusion. So knowing the percentage difference between presumed taxes and actual taxes would help the government formulate a plan to address the issue.

Interview by Adonay Negash

Communications Officer