Tax Avoidance and the General Anti-Avoidance Rule under Ethiopian Income Tax Law: A Tax Policy Review

Abstract

 The Income Tax Proclamation No. 979/2016 introduces the General AntiAvoidance Rule (GAAR) as a fundamental mechanism to address tax avoidance
practices that undermine the objectives and principles of the tax system.
Generally, this article aims to examine the implications of tax avoidance for
Ethiopian tax policy and to evaluate the policy design of GAAR under the Income
Tax Proclamation (ITP). Specifically, it investigates the legislative structure of
GAAR, focusing on its scope of application and alignment with the fundamental
principles of the Ethiopian tax system. Using a doctrinal research approach, it
analyses pertinent statutory provisions and scholarly literature to elucidate the
meaning, purpose, and operational framework of GAAR within the income tax
regime. The article contends that, as tax avoidance practices increasingly threaten
the goals and principles of the Ethiopian tax system, the GAAR holds the potential
to increase government revenue by enabling the tax authority to disregard
arrangements whose primary purpose is to secure a tax benefit. Nevertheless, the
provision currently lacks explicit guidelines and exceptions to differentiate
between abusive avoidance and legitimate tax planning. This deficiency grants the
tax authority extensive discretion, thereby engendering uncertainty in
interpretation and enforcement and undermining core principles of taxation such
as equity, certainty, simplicity, and neutrality. The article highlights the need to
amend the GAAR by introducing interpretive guidelines or subordinate legislation
to clarify its application. Such measures would ensure consistent enforcement
aligned with tax principles, thereby limiting discretionary power and better
balancing anti-avoidance objectives with the integrity of the tax system.