Ethiopia has become a mining hotspot Tax-related analysis of mining enterprises
Ethiopia became the first African country to start Bitcoin mining, although it still prohibits cryptocurrency trading. In 2022, it approved laws supporting mining, allowing for “high-performance computing” and “data mining”. According to Luxor Technologies, a Bitcoin mining service company, Ethiopia ranks fourth among the preferred destinations for Bitcoin mining equipment in 2023, second only to the United States, Hong Kong, and Asia. According to its estimation, Ethiopia has become one of the world’s largest recipients of Bitcoin mining machines. This article analyzes Ethiopia’s cryptocurrency tax system, with a particular focus on the types of taxes and tax rates that mining companies may be involved in.
1 Taxation issues related to mining
1.1 The concept of Mining
Mining is the act of acailing diotal currency,. t is a wav to sove complex mathemaiical problems in the network through computer operationsin order to ean rewards, in the field of crvptocurrencies such as Bitcoin, mining is widely used. To put it simpy, miing is a computalional accarried out in order to obtain a certain digital currency.
1.2 Mining Income
Mining revenue refers to the rewards earned by using computer equipment to participate in the consensus mechanism of the cryptoassetnetwork, validate transacions, or create new units of cryptoassets. There are two sources of mining revenue: a fixed block reward, where aminer receives a certain amount of cypto assets every time a new block is added to the blockchain, and a vaable ransaction fee. where apercentage or amount of each transaction is paid to the miner who verifies the transaction. The method of calculating mining revenue dependson the consensus mechanism used, and there are two main types: Proof of Work and Proof of Stake
1.3 Tax issues in mining
The tax treatment of cryptocurency mining business mainly depends on the definition, asset classification, and recognition and measurementof mining income and expenses in the country or region where it is located. The taxes involved in mining income vary from country to country,and the main taxes involved are as follows:
Firstly, direct tax, ., income tax and capital gains tax on mining income. in most countries where mining business is involved, mining incomeis treated as business income of enterprises or individuals and subject to corporate income tax or personal income tax. The tax rate isdetermined by the identity of the miner (individual or enterprise), income level, and place of residence, among other factors.
Secondly, indirect tax, ., value-added tax (VAT) or goods and services tax (GST) on mining income. Currently, there is no unified opinionamong countries or regions on whether to levy value-added tax (VAT) or goods and services tax(GST) on mining income. in the EuropearUnion, most countries believe that mining activiies are not subject to VAT. In lsrael, however, according to the taxation regulations issued in2017 on virtual curency activities, mining activiies are considered to be providing services and subject to 17% VAT. In New Zealand, miningactivities are also considered to be providing services and subject to 15% GST.
Some countries impose consumption tax on mining companies for reasons such as industry resource adiustment. For example. the Usaccording to the “Supplemental Budget linformation” issued by the US Treasury Deparment in March 2023, one of the clauses suggests levyingconsumption tax in stages based on the cost of electricily used in cryptocurency mining. These companies wil be required to report thei
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2.Advantages of Mining in Ethiopia
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2.2 cheap electricity
Bitcoin mining will use a lot of electricity, and electricity accounts for upto 80% of miners’ operating costs, so obtaining cheap electricity is a keycompetitive advantage for mining,In 2023, Bitcoin mining consumed1.21 trillion kWh of electricity, and the dependence on abundantelectricity is its main weakness, because the dependence on electricitymay squeeze power use for factories and households, thereby puttingmining enterprises under political opposition. Ethiopia has cheapelectricity, as shown in the figure (source: Statista Research Department)The Ethiopian National Electric Power Corporation stated that it hassigned power supply agreements with 21 Bitcoin miners, of which 19 arefrom China.
2.3 ldea resources and climate conditions
In the context of global warming, although miners claim that they areincreasingly using clean energy, bitcoin mining is increasingly being seenas a factor in global warming. A study published by the United Nationsshows that two-thirds of the electricity used for bitcoin mining in 2020and 2021 was generated from fossil fuels.
Ethiopia can take advantage of its abundant surplus green energy andrenewable energy to provide electricity to its citizens through bitcoinmining, Ethiopia’s ability to provide power for bitcoin mining could be onpar with Texas within a few years. The completion of the GERD projectwill increase Ethiopia’s generating capacity to 5.3 gigawatts, doubling itsgenerating capacity, Ethiopia’s advantage is not just in cheap renewableenergy, lts climate conditions are also ideal, with the ideal miningtemperature being between 5 and 25 degrees Celsius, which coincideswith Ethiopia’s average temperature.
2.4 Ethiopian government’s attitude
The Ethiopian government allows bitcoin mining mainly because thesemining companies pay for the electricity they consume in foreigncurrency, and the electricity company charges bitcoin miners a fixed rateof $3.14 per kilowatt-hour, which is a profitable source of foreignexchange income. Expanding foreign exchange inflows to alleviateeconomic challenges, and viewing the mining industry as an attractiveinvestment opportunity, According to Project Mano, integrating bitcoinmining into the Ethiopian economy could contribute $2 billion to $4billion to its GDP Accepting bitcoin mining can largely block the path ofmining breaking through foreign exchange controls. lt can also createemployment, increase tax revenue, and reduce the amount of waterreleased during the flood season at hydroelectric power stations.3.Taxation study of mining enterprises in Ethiopia
3.1.1 Tax structure
Ethiopia has a system of federal and state government sharing taxrevenue, Each state is required to pay a certain percentage of its taxrevenue to the federal government, The federal government distributesfunds to the states based on population, economic conditions, and theamount of taxes paid.
entral taxes include customs duties and other taxes on goods importedand exported; personal income tax for employees employed by thecentral government or international employers, corporate income taxpersonal income tax, and value-added tax on profits of enterprisesowned by the central government; taxes on national lottery income andother winnings, taxes on airplane, train, and sea transportation activities;taxes on rental income from houses and properties owned by the centragovernment; taxes on licenses and services issued or granted by thecentral government, The central government and local governmentsshare taxes, including corporate profit tax, personal income tax, valueadded tax, royalties, and land rent taxes for large-scale oil, gas, andiorest resource extraction.
3.1.2 Taxes that Ethiopian mining enterprises may be subject to:Any enterprise that obtains income within Ethiopia is required to payenterprise income tax, Taxpayers are divided into three categories: Aclass taxpayers, B-class taxpayers, and C-class taxpayers. Of which,enterprise income taxpayers are classified as A-class taxpayers, Based onthe nature of the income, the lncome Tax Law has divided it into fivecategories: A-category income,B-category income, C-category incomeD-category income, and E-category income. Of which, the enterpriseincome taxpayers are involved in the following types of income: B-categoryincome (30%),C-category income (30%),D-category income(10%6 or 5%),and E-category income (exempt).
(2) Value Added Tax (VAT)
The scope of value-added tax (VAT) in Ethiopia is the provision of goodsand services,importation of taxable goods, and certain importedservices. VAT taxpayers are divided into obligatory registrants andvoluntary registrants based on the total value of taxable transactions.Value-added tax is calculated on a net basis, and when input tax exceedsoutput tax, the taxpayer may choose to carry forward the excess, claim arefund of VAT, or offset it against other taxes, The tax rate is divided intotwo tiers, a basic rate of 15% and a zero rate. Value-added tax is reporteomonthly, Mining companies that involve the transmission or provision ofpower, including electricity, in the production of heat, power gas orwater, will be subject to value-added tax.
apital gains are the profits realized from the transfer of business assets.In Ethiopia, capital gains are classified as D-type income under theincome tax law and are subject to income tax (i.e. capital gains tax). Thetax rate for buildings used for commercial, factory, or office purposes is15%6; the tax rate for company shares is 30%.
[1] State Taxation Administration, (2023). China Resident Investment TaxGuide in Ethiopia
[2] TaxDA0. (2023). Which is More Suitable for Cryptocurrency MiningCompanies: Hong Kong or Singapore[3]Techub News.(2023).Chinese Bitcoin Miners Find a New Crypto Havenin Ethiopia