VZCZCXRO5764
RR RUEHROV
DE RUEHDS #3323/01 3181057
ZNR UUUUU ZZH
R 141057Z NOV 07
FM AMEMBASSY ADDIS ABABA
TO RUEHC/SECSTATE WASHDC 8553
INFO RUCNIAD/IGAD COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC

UNCLAS SECTION 01 OF 02 ADDIS ABABA 003323 
 
SIPDIS 
 
TREASURY FOR OTA: STEFANIE FUGATE, ANN GREEN AND DO: VIRGINIA 
BRANDON 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EAID ET
SUBJECT: US TREASURY TAX PROGRAM TERMINATED - WORK STILL TO BE DONE 
 
 
¶1. SUMMARY: Since a U.S. Department of Treasury advisor began 
working with Ethiopia's Federal Inland Revenue Agency (FIRA) to 
improve its audit and collection programs in March 2004, FIRA has 
increased revenue collection by over 65 percent.  While the 
assistance has shown tremendous results - largely through training 
in audit programs, where Treasury advice has been implemented - 
including increasing revenue collection by billions of birr, 
budgetary constraints have required the Department of the Treasury 
to end the program. Ethiopia's tax system still requires work and 
technical guidance to increase the government's revenue collection 
capability. Post would strongly support the continuation of this 
program or the establishment of a successor program, if funding can 
be located and FIRA implements Business Process Re-engineering 
(BPR). END SUMMARY. 
 
------------------------------- 
SUCCESSFUL TECHNICAL ASSISTANCE 
-------------------------------- 
¶2. By all accounts, the technical assistance to FIRA has produced 
some notable successes.  The work plan was based on training FIRA 
personnel to become self-sufficient and able to teach others in the 
future.  At the beginning of the program there was a moratorium on 
audits.  Despite this, Treasury forged ahead in training FIRA's 
auditors and developed an audit manual.  The moratorium was lifted 
in December 2005, and auditors are now securing significant revenue 
to government coffers through their training in auditing methods, 
case file documentation, and basing audits in Ethiopia's tax law. 
Additionally, FIRA auditors have spread their knowledge by training 
all auditors in each of Ethiopia's nine regional tax 
administrations. 
 
¶3. The technical assistance has not been as successful in the 
collections department due to a lack of staff (there are only 20 
collectors for a country of over 70 million people) and resources 
(such as telephone and transportation). Nevertheless, training in 
collections has shown some modest results.  In the Ethiopian fiscal 
year 2005, FIRA collected 355.72 million birr (nearly 4 million USD) 
in delinquent taxes, and in FY 2006 collected over 2 billion birr 
(about 220 million USD) more in total revenues than in the year 
before.  While not all of the increase can be attributed to the 
Treasury technical assistance, clearly improved audit and collection 
practices have played a part.  (NOTE: The increases are particularly 
significant given Ethiopia's status as a low-income country heavily 
dependent on donor nations for budget support.  Any increase in tax 
revenue can be seen as a stimulus for economic development and 
offset dependence on foreign aid and transfers to fund public 
services.  END NOTE.) 
 
-------------------- 
A FLAW IN THE SYSTEM 
-------------------- 
¶4. Treasury representatives identified a feature of Ethiopia's 
decentralized tax collection system that allows significant amounts 
of tax to remain uncollected. FIRA is responsible for collecting 
value added tax (VAT) and corporate taxes.  Collection of taxes on 
individuals and sole proprietors falls to the 11 city and region tax 
entities in Ethiopia. FIRA and the other 11 tax collecting entities 
in Ethiopia are separate entities under the federal Constitution, 
and therefore a comprehensive audit including the corporate and 
individual entities cannot be made by FIRA.  Thus, if FIRA finds 
evidence in an audit of VAT or corporate returns that indicates tax 
is owed on individual or sole proprietor taxes, they can not pick up 
the returns for audit and make sure the tax is paid. Hence millions 
of birr are unreported and unpaid.  Because their chains of command 
are different, there is little cooperation between the tax 
administrations. 
 
---------------------- 
ADDITIONAL WORK NEEDED 
---------------------- 
 
¶5. While the Treasury program has achieved significant results, and 
met the 2007 objectives, additional work remains.  Treasury Advisor 
Ann Green has specifically highlighted needs in taxpayer service, 
internal audit, appeals, international matters and specialized 
auditing. Additionally the city and regional tax administrations 
need assistance to more thoroughly collect revenues due and reduce 
their dependence on transfers from the central government.  FIRA is 
undergoing Business Process Reengineering (BPR), which is expected 
to increase its operating efficiency.  The U.S. Treasury Department 
stated that a positive outcome of BPR may make FIRA better able to 
compete for limited Office of Technical Affairs funds. 
 
¶6. COMMENT: While tax collection in Ethiopia faces multiple 
challenges ranging from structure to staff to lack of basic 
resources, the impact of Treasury's training and assistance can be 
seen in the bottom line of increased collections.  The impact of 
this program will continue as trained personnel provide training to 
others. However, there is still important work to be done in 
 
ADDIS ABAB 00003323  002 OF 002 
 
 
improving FIRA's capacity.  While post does not have resources to 
fund continuation of the project, post would support continuation of 
the technical assistance if additional funds can be located from 
another source.  END COMMENT. 
 
YAMAMOTO