Ethiopia becomes a hot spot for mining, tax analysis of mining companies

Written by: TaxDAO

Ethiopia Becomes First African Country to Start Bitcoin Mining, Despite Still Banning ItcryptocurrencyHowever, in 2022, it approved a law favorable to mining, allowing "high-performance computing" and "data mining". According to data from Luxor Technologies, a Bitcoin mining service company, in 2023, Ethiopia ranked fourth among the preferred destinations for Bitcoin mining equipment, second only to the United States, Hong Kong and Asia. And according to its estimates, Ethiopia has become one of the world's largest recipients of Bitcoin mining machines. This article analyzes Ethiopia's crypto tax system, especially the types and rates of taxes that mining companies may be involved in.

1 Tax issues related to mining

1.1 The concept of mining

Mining is the act of obtaining digital currency. It is a way to obtain rewards by solving complex mathematical problems in the network through computer calculations.cryptocurrencyIn the field of mining, mining is widely used. Simply put, mining is a kind of computing behavior to obtain a certain digital currency.

1.2 Mining Income

Mining income refers to the rewards obtained by using computer equipment to participate in the consensus mechanism of the crypto asset network, verify transactions or create new crypto asset units. The sources of mining income can be divided into two types: one is a fixed block reward, that is, every time a new block is added to theBlockchainThe other is a variable transaction fee, that is, each transaction will pay a certain percentage or amount of fees to the miner who verifies the transaction. The calculation method of mining income depends on the consensus mechanism adopted, and there are two main types: Proof of Work (PoW) and Proof of Stake (PoS).

1.3 Tax issues in mining

The tax treatment of crypto-asset mining business mainly depends on the definition of crypto-assets, asset classification, and recognition and measurement of mining income and expenses in the country or region. The main types of taxes involved in mining income vary from country to country or region. The main types of taxes involved are listed below for analysis.

The first is direct taxation, which is income tax and capital gains tax on mining income. Most countries involved in mining business will treat mining income as business income of enterprises or individuals and impose corporate income tax or personal income tax. The income tax rate is determined based on the identity of the miner (individual or enterprise), income level, place of residence and other factors.

The second is indirect tax, which imposes VAT or GST on mining income. At present, there is no unified opinion on the collection of VAT or GST on mining income in various countries or regions. In the EU, most countries believe that mining business is not subject to VAT. Israel, based on the documents on taxation of virtual currency activities issued in 2017, regards mining business as providing services and imposes VAT of 17%. New Zealand also regards mining business as a service and imposes GST of 15%.

还有一部分国家出于行业资源调整等的考虑，会对挖矿企业征收消费税。例如美国，根据美国财政部 2023 年 3 月发布的「预算补充说明文件」，其中一项条款建议根据加密货币挖矿中使用的电力成本分阶段征收消费税，这些公司将被要求报告其用电量以及使用的电力类型。

2 Advantages of Mining in Ethiopia

Hit by political and economic headwinds, Bitcoin miners are often attracted to some governments with low electricity costs and friendly attitudes towards the cryptocurrency industry. Although Ethiopia still bans cryptocurrency trading, it will allow Bitcoin mining from 2022. For all companies engaged in cryptocurrency mining, Ethiopia has become a rare opportunity. Here is a brief analysis of the advantages of mining in Ethiopia.

2.1 Other countries’ resistance to cryptocurrency mining

Climate change and power scarcity have led to strong resistance to cryptocurrency mining in other countries and regions. For example, a series of developing countries such as Kazakhstan and Iran initially accepted Bitcoin mining, but when its energy use caused domestic dissatisfaction, policies began to shift to non-support and resistance. In 2021, the Chinese government also banned Bitcoin mining. Most countries ban cryptocurrency mining. Because countries may run out of available electricity, leaving miners with no room to expand. Secondly, miners may suddenly be regarded as unwelcome by the government and forced to leave.

2.2 Cheap Electricity

Bitcoin miners use a lot of electricity, accounting for up to 80% of miners' operating costs, so access to cheap electricity is a key competitive advantage in mining. Bitcoin mining consumed 121 trillion watt-hours of electricity in 2023, and its reliance on abundant electricity is its main weakness, as it can squeeze out factory and household electricity use, exposing mining companies to political resistance. Ethiopia has low electricity prices, as shown in the figure (source: Statista Research Department). The Ethiopian National Electricity Corporation said it has reached power supply agreements with 21 Bitcoin miners, 19 of which are from China.

2.3 Ideal resource and climate conditions

Against the backdrop of global warming, Bitcoin mining is increasingly seen as a factor in global warming, despite miners claiming they are increasingly using clean energy. A study released by the United Nations showed that two-thirds of the electricity used for Bitcoin mining in 2020 and 2021 was generated from fossil fuels.

Ethiopia can use its abundant excess green energy, renewable energy, to power its citizens through Bitcoin mining. Ethiopia's ability to power Bitcoin mining could rival that of Texas in a few years. The completion of the GERD project will double Ethiopia's power generation capacity to 5.3 GW. Ethiopia's advantage is not just cheap renewable energy. Its climate conditions are also very suitable, with the ideal temperature for mining being 5 to 25 degrees Celsius, which coincides with the average temperature in Ethiopia.

2.4 The Ethiopian government’s attitude

The Ethiopian government allows Bitcoin mining mainly because these mining companies pay for the electricity they consume in foreign currency, and power companies charge Bitcoin miners a fixed rate of 3.14 cents per kilowatt-hour, which is a lucrative source of foreign exchange income. Expand foreign exchange inflows to ease economic challenges and see the mining industry as an attractive investment opportunity to achieve this goal. According to Project Mano, incorporating Bitcoin mining into the Ethiopian economy could contribute $2 billion to $4 billion to its GDP. The government's acceptance of Bitcoin mining can roughly block the path of mining to break through foreign exchange controls. It can also increase employment, increase tax sources, and reduce water abandonment at hydropower stations during flood season.

3. Taxation research on mining companies in Ethiopia

3.1 Ethiopia’s tax system

3.1.1 Tax structure

Ethiopia implements a tax-sharing system between the federal government and state governments. Each state pays a certain percentage of taxes to the federal government. The federal government allocates funds to each state based on the population, economic conditions and tax payments of each region.

Central taxes include customs duties and other taxes on the import and export of goods; personal income tax on people employed by the central government and international employers; profit tax, personal income tax and value-added tax on enterprises owned by the central government; taxes on national lottery income and other winnings; taxes on aircraft, train and shipping activities; taxes on rental income from houses and properties owned by the central government; and taxes on licenses and service fees issued or permitted by the central government.

Taxes shared by the central and local governments include corporate profit taxes, personal income taxes, value-added taxes, royalties, and land rent taxes on large-scale exploitation of oil, natural gas, and forest resources.

3.1.2 Taxes that may be imposed on mining companies in Ethiopia

(1) Enterprise Income Tax

Any enterprise that earns income in Ethiopia must pay income tax. Income tax taxpayers are divided into three categories, namely, A taxpayers, B taxpayers, and C taxpayers. Among them, corporate income tax taxpayers are A taxpayers. According to the nature of income, the Income Tax Law divides it into five categories, namely, A income, B income, C income, D income, and E income. Among them, the types of income involved in corporate income tax taxpayers are B income (30%), C income (30%), D income (10% or 5%) and E income (tax-free).

(2) Value Added Tax (VAT)

The scope of VAT in Ethiopia is the provision of goods and services, imported taxable goods and certain imported services. VAT taxpayers who are required to register or voluntarily register are divided according to the total value of taxable transactions. VAT is calculated according to the deduction method. When the input tax is greater than the output tax, you can choose to retain, refund VAT or offset other taxes. The tax rate is divided into two tiers, the basic tax rate 15% and the zero tax rate. VAT is declared monthly. Mining companies that involve the transmission or provision of heat, electricity, gas or water will be subject to VAT.

(3) Capital Gains Tax

Capital gains are income realized when transferring operating assets. In Ethiopia, capital gains are classified as Class D income as stipulated in the Income Tax Law and are subject to income tax (also known as capital gains tax). The tax rate for buildings owned for business, factories, and offices is 15%; the tax rate for company shares is 30%.

(4) Royalties Tax

In Ethiopia, royalties are payments of any kind paid as consideration for the use of, or the right to use, any literary, artistic or scientific work, including copyright in cinematograph films, films or tapes for radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or any industrial, commercial or scientific equipment; or for information concerning industrial, commercial or scientific experience. Royalties are taxed at a flat rate of 5%.

3.2 Tax Analysis of Mining Companies in Ethiopia

Cryptocurrency businesses operating in Ethiopia need to register with the country’s networkSafetyInstitutional Information NetworkSafetyCrypto companies that fail to comply with the registration requirements will be subject to legal action. At the same time, INSA has the power to regulate crypto products and related transactions. In addition, INSA will also be responsible for developing operating procedures and the construction of crypto infrastructure.

Ethiopia implements a collection principle that combines the territorial principle and the personal principle. Any enterprise that obtains income in Ethiopia must pay income tax, and Ethiopian resident enterprises should declare and pay corporate income tax on their global income. The income obtained by mining enterprises in Ethiopia is more likely to be identified as Class C income or Class D income, with a tax rate of 30%. Whether to pay income tax or profit tax is determined based on the type of income. The relevant provisions of Ethiopian government documents have not yet been clarified. The supply of electricity, heat, etc. is subject to value-added tax in Ethiopia, and mining enterprises are extremely dependent on electricity. In fact, they are the actual taxpayers of electricity value-added tax. In the final analysis, electricity price tax will affect the tax revenue of mining enterprises. And it is not yet clear how Ethiopia will characterize the mining behavior of enterprises. If it is characterized as providing services or labor, it will also involve direct payment of value-added tax.

Regarding the timing of recognizing mining revenue, many people believe that cryptocurrency mining represents an intangible asset developed internally by the mining company. The computers, usage, and various employee costs invested by miners in construction and mining form an internally developed intangible asset, so the revenue should be recognized when the cryptocurrency is subsequently sold.Xiaobai NavigationThere are no clear rules and regulations to indicate that Ethiopia currently has a tax incentive system for mining companies, but mining companies may be subject to some existing tax incentives, such as tax incentives for solving employment problems. And if mining companies are involved in the import of mining machines, they will also be subject to the payment of tariffs. The specific regulations and relevant tax rates need to be further clarified.

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