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Strengthen WASH Businesses in Ethiopia - foreign business owners

Published on: 17/12/2020

This second out of eight articles covers challenges related to repatriation of profit and royalty payments.

Women in Ethiopia at a WASH business

This article was written by Eline Bakker and Peter Feldman

According to the UNICEF/WHO Joint Monitoring Programme, only about seven percent of Ethiopians have access to basic sanitation services (JMP, 2019). Achieving universal access to basic WASH services in the country will require further development of the country’s private sector. The Government of Ethiopia recognises the importance of the private sector in generating demand and creating access to materials and services for construction of improved latrines, and leads market-based sanitation efforts (FMoH, 2016).  However, the scale of the challenge of providing access to adequate sanitation services to all is still relatively substantial compared to the amount and size of businesses currently offering such products and services. To gain more insights, the USAID Transform WASH team talked to more than twenty key informants in Ethiopia and the East Africa region to identify the main challenges facing WASH market development in Ethiopia.

To learn more, follow this link to the full Learning Note

Repatriation of profit

Repatriation of profit refers to the transfer of profit earned by a foreign-owned business in a country to the business’s home country. Such transfers require exchange of local earnings for 'hard currency,’ or the currency used for international business transactions (such as US dollars or euros). Under Ethiopian law (Investment Proclamation No. 1180/2020), foreign investors have the right to repatriate these earnings:

  • profits and dividends accruing from an (approved) investment;
  • principal and interest payments on external loans;
  • payments related to technology transfer or management agreements;
  • proceeds from sale or liquidation of an enterprise;
  • proceeds from sale or transfer of shares or of partial ownership of an enterprise to a domestic investor;
  • compensation paid to a foreign investor.

Officially, there are no restrictions on the amount of profit that can be repatriated, but in practical terms business owners expressed concerns with respect to restricted access to hard currency and the relatively low priority placed on this type of foreign exchange (“Forex”) allocation. Given that Forex is closely scrutinised, businesses also must carefully comply with regulations regarding registration, permitting, periodic auditing, payment of taxes and other obligations (Ibex Frontier, 2017).

Royalty payments

Royalties are payments made by one business to another in exchange for the right to use that business’s intellectual property (such as a copyrights, trademarks or patented designs). Ethiopian law permits royalty payments for the right to use a patent, invention, design, or a secret formula or process (Income Tax Proclamation No. 979/2016). A five percent tax is levied by the government on royalties paid by an Ethiopian entity as well as on the non-resident entity who is receiving them (Haile et. al., 2018).

Apart from the taxes levied, Ethiopian law does not seem to place any restrictions on royalty payments to foreign patent holders and allows for such payments to be made in Forex. Specifically, the National Bank considers royalty fees as “invisible payments” that are allowed on demand (Directive No. FXD/46/2017). In practice, however, foreign-owned businesses are likely to experience challenges receiving royalty payments due to the chronic Forex shortage in the country and low priority placed on such allocations. Businesses may wait for months, if not longer, to receive requested Forex allocations. 

Recommendations

While there are no restrictions on repatriation of profits and payment of royalty fees to foreign patent holders, the Forex shortage and related restrictions in Ethiopia pose a major obstacle to both local and foreign-owned businesses that wish to invest in offering a broader range of WASH products and services to their customers. The following actions might be taken (presented, as well, in the article “Access to Foreign Exchange”) to improve business conditions for such enterprises despite the scarcity of foreign currency in Ethiopia:

  • Review Forex operating guidelines and consider ways of making the application, queueing, and liquidation processes more accessible, accommodating and transparent.
  • Encourage policy reforms that raise the priority of Forex access for socially oriented businesses in emerging markets, such as for WASH products.
  • Advocate for WASH products to be added to the list of “essential or priority goods” so that Forex is more readily allocated to businesses importing or locally manufacturing WASH goods.

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