Taxes on monthly salaries are calculated during the monthly payroll preparation and have to be paid to tax authorities within one month after having been deducted from the employee. The same applies also for the various provident funds and pension schemes. There are stiff penalties for late submission of tax returns and all other statutory deductions.
The directives for fringe benefits and other income from employment are sometimes difficult to apply due to inefficient distribution of directives to all stakeholders.
In Ethiopia, all income from employment like various allowances like fuel, representation, cash indemnities etc. are taxable.
The tax rates for payout for accrued, unutilized annual leave during termination processing are heavy: they are pro-rated over the period of months the income applies to and are subject to the maximum tax rate.
The tax rate for severance pay, however, is much lighter as it is taxed at a monthly salary rate to support the concept that the employee may not have financial difficulties whilst searching for his next employment. Employment contracts whether permanent or temporary are always copied to the private organization employees pension offices. The rates applied for provident fund & pension schemes sometimes confuse accountants and cause inaccuracies as the rates for provident fund varies from company to company.
Payments for outstanding performance or the award of cash prizes at times like marriage are not tax effective. They are taxed at the same rate as the normal monthly salaries.
Most allowances like fuel, representation & house allowances are taxed fully as long as the whole remuneration package is above a certain level.