Monday, June 17, 2024

Experts peg incentivized driven taxation as vital for secondary market leeway


As preparations get underway to roll out the much anticipated secondary market in Ethiopia, various elements including that of ironing out the current tax laws, particularly on tax policy, are gearing to take shape in order to harbor a conducive market. To make this a reality, the capital market regulatory body is working in tandem with the Ministry of Finance (MoF) to create a conducive tax incentive for investors who would engage on the capital market.
Following the past two events that focused on the ongoing activity of the formation of the security exchange in Ethiopia organized by FSD Ethiopia and Addis Ababa Chamber of Commerce and Sectoral Association, early this week and last week, senior experts of the Ethiopian Capital Market Authority (ECMA) have expressed the efforts done thus far and those projected to materialize in the near future.
One of the issues raised at the event was the revisit of the tax policy that is on the hand of MoF.

(Photo: Anteneh Aklilu)

On her presentation Hanna Tedla, Senior Capital Market Legal Advisor at ECMA, said that some of the expected changes which eagerly need to be realized lie in the tax policy. She said that an incentive oriented tax is expected to take shape from the government’s side in the upcoming alternative financial market.
“If we look at basic policy considerations, let’s put a sharp focus on things such as tax policy. We need to have enabling tax policies in place to get some of the financial products from the mind to the ground. For example, the collective investment schemes that we expect; more so in the funds, in many other jurisdictions, often pass through taxation, thus keen efforts should be done to eliminate double taxation. So we need to extensively go through items such as source of revenue for example, for us, on securities that we want to undertake,” Hanna elaborated.
As Brook Taye, Director General of ECMA, indicates, the tax policy is mandated by MoF, “We need to have discussions on the issue with the relevant government body.”
“The market is very much new and if we need to hit the ground running, it is integral to have an accommodating policy. We are now organizing possible policy ideas that will be tabled to MoF,” Brook explained.
“If the policy inputs are accepted by the ministry, the market will no doubt operate properly,” he added whilst declining to give further information to the exact input details.
Nonetheless, experts indicate that the major concept needed to shift is that of the current income tax law which is not incentivized in the fund market like share sales or bond market. They expressed that if the government wants the security exchange market to be an alternative financial source it must consider the upcoming trading market with different incentives including taxes.
“Mostly the resources secured through secondary market will be invested directly or indirectly on economic development like new investments or expansions on existing businesses. So if the sector shall be backed by incentives potential investors shall participate on the capital market at the same time issuers shall generate funds for their possible investments,” they said while emphasizing that, “Incentives are crucial.”
They stated that one of the current de-incentives laws was the income tax proclamation and others like regulation and directives that indicated that the revenue secured from investment on shares and bonds have massive tax duties unlike the income generated from the transaction of fixed properties.
The income tax proclamation article 59.1 stated that a person who derives a gain on the disposal of immovable asset, a share, or bond shall be liable to pay income tax.
According to the proclamation there are two classes, class A and class B, of taxable asset with 15 percent and 30 percent levies respectively.
The class A taxable asset is stated as an immovable asset that may include buildings, while class B is bonds and shares as per the proclamation article 59.7.
“However if the capital market necessitated to mushroom and encourage players to invest on the business, revisiting the current proclamation is pivotal,” experts that Capital asked about the issue explained.

(Photo: Anteneh Aklilu)

They added that the rate should at least be equal to encourage players who want to invest through the capital market, “Otherwise potential investors would not be encouraged to invest on the secondary market with such extraordinary taxation levies against the investment when they put their money to secure fixed asset, which has very limited economic benefit for the country.”
Experts also expressed their expectation of government in reducing further tax from revenue secured at the bond and share markets against the rate for class A taxable assets.
“It has a double advantage, for starters it provides more attractive incentives for investors to invest on the capital market and on the other hand it will stabilize the extraordinary market that is observed in fixed asset business,” they argued.
Capital learnt that MoF is already looking at alternatives to support the upcoming market regarding tax policies.
It can be recalled that Capital reported that ECMA was in close communications with the National Bank of Ethiopia, the central bank, to consider the current retail banks to be part of the capital market as an investment bank. Of course to allow for this transition, a proclamation revision is required. A possible alternative of establishing a bank subsidiary fully separate from the current deposit mobilizing banking system is one avenue that is being heavily proposed.

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