Source: TaxDAO
Ethiopia has become the first African country to start Bitcoin mining. Despite still prohibiting cryptocurrency transactions, Ethiopia approved favorable mining laws in 2022, allowing for “high-performance computing” and “data mining.” According to data from Bitcoin mining service company Luxor Technologies, Ethiopia ranked fourth as a preferred destination for Bitcoin mining equipment in 2023, following the United States, Hong Kong, and Asia. It is estimated that Ethiopia has become one of the largest recipients of Bitcoin mining machines globally. This article analyzes Ethiopia’s cryptocurrency tax system, particularly examining the types of taxes and tax rates that mining companies may be involved in.
1. Taxation Issues Related to Mining
1.1 Concept of Mining
Mining is an activity to acquire digital currency. It involves solving complex mathematical problems through computer calculations to receive rewards. Mining is widely used in the field of cryptocurrencies like Bitcoin. In simple terms, mining is a computational process to obtain a certain digital currency.
1.2 Mining Income
Mining income refers to the rewards obtained by participating in the consensus mechanism of a cryptographic asset network through computer equipment, either by verifying transactions or creating new units of cryptographic assets. Mining income has two sources: fixed block rewards, where miners receive a certain amount of cryptographic assets whenever a new block is added to the blockchain, and variable transaction fees, where miners receive a certain percentage or amount of fees for verifying transactions. The calculation method for mining income depends on the consensus mechanism employed, mainly Proof of Work (PoW) and Proof of Stake (PoS).
1.3 Taxation Issues in Mining
The tax treatment of cryptocurrency mining businesses depends on the country or region’s definition and classification of cryptographic assets, as well as the recognition and measurement of mining income and expenses. Depending on the country or region, mining income may be subject to different types of taxes. The main types of taxes involved are as follows:
Firstly, direct taxes, which include income tax and capital gains tax on mining income. Most countries involved in mining businesses treat mining income as business income for individuals or corporations, subjecting it to corporate income tax or personal income tax. The income tax rate depends on factors such as the miner’s identity (individual or corporation), income level, and place of residence.
Secondly, indirect taxes, which include value-added tax (VAT) or goods and services tax (GST) on mining income. Currently, there is no unified opinion among countries or regions regarding VAT or GST on mining income. In the European Union, most countries do not apply VAT to mining operations. Israel, based on the 2017 tax guidelines for virtual currency activities, considers mining operations as services subject to a 17% VAT. New Zealand also considers mining operations as services subject to a 15% GST.
Some countries, considering industry resource adjustments, impose consumption taxes on mining companies. For example, the United States, according to a budget supplement document issued by the U.S. Treasury Department in March 2023, suggests a phased consumption tax based on the electricity costs used in cryptocurrency mining. These companies will be required to report their electricity consumption and the type of electricity used.
2. Advantages of Mining in Ethiopia
Bitcoin miners are often attracted to countries with low electricity costs and governments friendly to the cryptocurrency industry, as they face challenges from political and economic downturns. Although Ethiopia still prohibits cryptocurrency transactions, it has allowed Bitcoin mining since 2022. For all cryptocurrency mining companies, Ethiopia has become a rare opportunity. The advantages of mining in Ethiopia are briefly analyzed as follows:
2.1 Resistance to Cryptocurrency Mining in Other Countries
Other countries and regions strongly resist cryptocurrency mining due to reasons such as climate change and scarce electricity. For example, a series of developing countries such as Kazakhstan and Iran initially accepted Bitcoin mining but shifted their policies to no longer support or resist it when their energy use caused domestic dissatisfaction. In 2021, the Chinese government also banned Bitcoin mining. Most countries prohibit cryptocurrency mining due to the potential exhaustion of available electricity, limiting expansion opportunities for miners. Additionally, miners may suddenly be considered unwelcome by governments and be forced to leave.
2.2 Cheap Electricity
Bitcoin mining requires a significant amount of electricity, with electricity accounting for up to 80% of mining operation costs. Therefore, obtaining cheap electricity is a key competitive advantage in mining. In 2023, Bitcoin mining consumed 1.21 trillion kilowatt-hours of electricity. Its reliance on electricity can lead to political resistance as it may squeeze the electricity usage of factories and households. Ethiopia offers low electricity prices, as shown in the graph (source: Statista Research Department). The Ethiopian Electric Power Corporation has announced power supply agreements with 21 Bitcoin miners, with 19 of them coming from China.
2.3 Ideal Resources and Climate Conditions
In the context of global climate change, Bitcoin mining is increasingly seen as a factor contributing to global warming, despite claims by miners that they are increasingly using clean energy. A study by the United Nations revealed that two-thirds of the electricity used for Bitcoin mining in 2020 and 2021 was generated from fossil fuels.
Ethiopia can utilize its abundant surplus of green and renewable energy for Bitcoin mining to provide electricity to its citizens. Ethiopia’s capacity to provide power for Bitcoin mining could rival that of Texas within a few years. The completion of the Grand Ethiopian Renaissance Dam (GERD) project will increase Ethiopia’s power generation capacity to 5.3 gigawatts, doubling its power generation capacity. Ethiopia’s advantages go beyond cheap renewable energy. Its climate conditions are also ideal, with temperatures ranging from 5 to 25 degrees Celsius, which aligns well with Ethiopia’s average temperature.
2.4 Attitude of the Ethiopian Government
The Ethiopian government allows Bitcoin mining primarily because these mining companies pay for their electricity consumption in foreign currency. The electricity company charges Bitcoin miners a fixed rate of 3.14 cents per kilowatt-hour, providing a lucrative source of foreign exchange income. Expanding foreign exchange inflows can alleviate economic challenges, and the mining industry is seen as an attractive investment opportunity to achieve this goal. According to data from the Project Mano, integrating Bitcoin mining into the Ethiopian economy could contribute $2 to $4 billion to its GDP. Accepting Bitcoin mining can effectively block the mining industry from bypassing foreign exchange controls. It can also increase employment, tax revenue, and reduce the waste of water resources during the flood season of hydropower plants.
3. Tax Analysis of Ethiopian Mining Companies
3.1 Tax System in Ethiopia
3.1.1 Tax Structure
Ethiopia implements a system of shared taxes between the federal government and regional governments. Each region contributes a certain percentage of taxes to the federal government, and the federal government allocates funds to the regions based on population, economic conditions, and tax contributions.
Central taxes include customs duties and other import and export taxes on goods; personal income tax for individuals employed by the central government or international employers; profit taxes, personal income taxes, and value-added taxes for enterprises owned by the central government; taxes on national lottery income and other lottery winnings; taxes on aviation, railway, and maritime activities; taxes on rental income from properties owned by the central government; taxes on licenses issued or permitted by the central government and service fees.
Shared taxes between the central government and local governments include corporate profit tax, personal income tax, value-added tax, franchise fees, and land rental taxes on large-scale exploitation of oil, natural gas, and forest resources.
3.1.2 Tax Types Possibly Involved for Ethiopian Mining Companies
(1) Enterprise Income Tax
Any enterprise that earns income within Ethiopia is required to pay income tax. Income taxpayers are classified into three categories: Class A, Class B, and Class C taxpayers. Enterprise income taxpayers fall under Class A. Based on the nature of income, the Income Tax Law divides it into five categories: Class A income, Class B income, Class C income, Class D income, and Class E income. For enterprise income taxpayers, the types of income involved are Class B income (30%), Class C income (30%), Class D income (10% or 5%), and Class E income (exempt).
(2) Value Added Tax (VAT)
The scope of value-added tax in Ethiopia includes the provision of goods and services, the importation of taxable goods, and specific imported services. VAT taxpayers are divided into compulsory registration and voluntary registration based on the total value of taxable transactions. VAT is calculated using the deduction method, and when the input tax exceeds the output tax, options such as retaining the excess input tax, VAT refund, or offsetting against other tax liabilities are available. The tax rates are divided into two tiers: a basic rate of 15% and a zero rate. VAT is reported on a monthly basis. Mining companies in Ethiopia, especially those involved in the transmission or provision of electricity, heat, gas, or water, will be subject to VAT.
(3) Capital Gains Tax
Capital gains refer to the income realized from the transfer of operating assets. In Ethiopia, capital gains fall under Class D income as stipulated in the Income Tax Law and are subject to income tax (i.e., capital gains tax). Buildings used for commercial, industrial, or office purposes are subject to a tax rate of 15%, while company shares are subject to a tax rate of 30%.
(4) Royalty Tax
In Ethiopia, royalty tax refers to various payments made as compensation for using or having the right to use any literary, artistic, or scientific work, including copyrights for films, tapes used in radio or television broadcasting, patents, trademarks, designs or models, drawings, secret formulas or secret procedures, or payments made as compensation for information related to industrial, commercial, or scientific experiences. Royalty tax is imposed at a single tax rate of 5%.
3.2 Tax Analysis of Ethiopian Mining Companies
Cryptocurrency companies operating in Ethiopia need to register with the country’s cybersecurity agency, the Information Network Security Agency (INSA). Cryptocurrency companies that fail to comply with registration requirements may face legal measures. INSA also has the authority to regulate cryptocurrency products and related transactions. Furthermore, INSA is responsible for developing operational procedures and building cryptographic infrastructure.
Ethiopia applies a combination of the territorial principle and the residence principle in its tax collection system. Any enterprise earning income within Ethiopia is required to pay income tax, and Ethiopian resident enterprises are required to declare and pay corporate income tax on their global income. Mining companies operating in Ethiopia may be classified as Class C income, Class D income, or other types of income, subject to a tax rate of 30%. The specific classification of income types and the applicable tax liabilities for mining companies in Ethiopia have not been clearly defined in current government documents. The supply of electricity, heat, and other services in Ethiopia is subject to value-added tax, and since mining companies heavily rely on electricity, they effectively become the taxpayers of electricity value-added tax. Ultimately, electricity prices and taxes will affect the tax revenue of mining companies. Additionally, the classification of mining activities by the Ethiopian government is still unclear. If mining activities are classified as services or labor, it will also involve the direct payment of value-added tax.
Regarding the timing of recognizing mining income, many viewpoints suggest that cryptocurrency mining represents intangible assets developed internally by mining companies. The computers, usage, and employee costs invested by miners for construction and mining form internally developed intangible assets. Therefore, income or gains should be recognized when the cryptocurrency is subsequently sold. There is no specific regulatory framework indicating that Ethiopia currently has tax incentives specifically for mining companies. However, mining companies may be eligible for some existing tax incentives, such as those related to job creation. Additionally, if mining companies are involved in importing mining equipment, they will also be subject to customs duties. The specific regulations and tax rates need further clarification.
References:
[1] State Administration of Taxation. (2023). Tax Guide for Chinese Residents Investing in Ethiopia.
[2] TaxDAO. (2023). Hong Kong or Singapore: Which is a Better Fit for Cryptocurrency Mining Companies?
[3] Techub News. (2023). Chinese Bitcoin Miners Find a New Crypto Haven in Ethiopia.
[4] Zheng, M., Wang, K., Wang, Z., & Yan, H. (2021). Research on the Taxation Issues of Cryptocurrency in the Context of the Digital Economy: A Case Study of Bitcoin Mining Mechanism. World Economic Exploration, 10(1), 1-8.
