In April 2026, the Ministry of Revenues enacted VAT Refund Directive No. 1132/2016 (the “Directive”), re placing VAT Refund Directive No. 148/2011 (the “Previous Directive”). The Directive introduces new eligibil ity criteria and enhanced compliance requirements. It is intended to align the VAT refund regime with VAT Proclamation No. 1341/2024 and its implementing regulations, while also establishing clearer procedures for the administration of VAT refunds, including documentation requirements, processing timelines and special refund procedures.
Key Points
1. VAT Refund Eligibility, Withholding Mechanism and Pre-Registration Input VAT Refund Framework
1.1 VAT Refund Eligibility Threshold and Processing Period
The Directive seeks to align the refund regime with Article 49(1) of VAT Proclamation No. 1341/2024, which provides that a registered taxpayer is entitled to a refund where more than 50 per cent of the value of taxable supplies in an accounting period consists of zero-rated supplies, and that such refund is to be processed within one calendar month. In line with that framework, the Directive raises the eligibility threshold from the previous 25 per cent requirement and shortens the refund processing period from 45 days under the Previous Directive.
1.2 VAT Withholding and Two-Month Set-Off Mechanism
The Directive provides that, where VAT is withheld by withholding agents or by the buyer, the amount of VAT shown on the tax invoice or receipt must first be credited against VAT payable on taxable supplies for a period of two months. Where, after that set-off period, an excess credit remains, the taxpayer becomes entitled to claim a refund, which the tax authority must process within 45 days of submission of the refund request.
1.3 Pre-Registration Input VAT Refund Treatment
The Directive allows a taxpayer registered for VAT to claim input VAT incurred prior to registration in respect of trading goods acquired within six months before registration and capital goods acquired within three years before registration. Such input VAT must first be credited against VAT payable or collected on taxable supplies during the relevant accounting period. Where a credit balance remains after that set-off, the excess becomes refundable, and any refund arising from pre-registration input VAT must be processed by the tax authority within one month of submission of the refund request.
2. Rules on Input VAT Refund Based on Taxable Activity Ratios
The Directive introduces three classifications for determining the entitlement of a registered person engaged in both taxable and exempt activities to deduct or obtain a refund of input VAT incurred on the purchase of goods and services during an accounting period. Where input VAT is attributable to both taxable and exempt supplies, entitlement is determined by reference to the ratio of taxable supplies. Under the Previous Directive, input VAT was not refundable where the ratio of taxable supplies was below 0.90. Under the current Directive, where the ratio is 0.95 or above, the registered person is entitled to a full deduction and refund of input VAT, subject to confirmation in accordance with the Proclamation. Where the ratio is between 0.05 and 0.95, the registered person may be entitled to a partial de duction or refund, subject to verification and approval by the tax authority. Where the ratio is below 0.05, the input VAT incurred is neither deductible nor refundable.
3. Accelerated VAT Refund System
The Directive redefined the “Accelerated VAT Refund System” as a system under which a registered direct or indirect exporter selected by the Ministry of Industry is entitled to receive a refund of VAT incurred on locally purchased inputs used for export production even before the export of the goods. This differs from the Previous Directive, under which selection by the Ministry of Industry was not expressly stated as a requirement. Accordingly, the taxpayer must present an approval certificate issued by the Ministry of Industry, together with original VAT invoices for domestic input purchases, tax debit notes, credit notes and, where applicable, evidence of reverse VAT payments. In addition, the taxpayer must provide proof that the goods have been exported, including customs declarations, transport or shipping documents, bank payment records and evidence confirm ing receipt of foreign currency. The taxpayer is also required to maintain records demonstrating the linkage between the input VAT incurred and the exported goods, as well as the contract of sale with the foreign buyer. The Directive further provides that taxpayers benefiting from the accelerated refund system remain subject to audit and verification, including at least annual audits by the tax authority. Where it is determined that a refund was improperly granted, the taxpayer is required to repay the amount received.
4. Restrictions on Cash Transactions
The Directive restricts the availability of VAT refunds for transactions settled in cash. Accordingly, for trans
actions carried out on or after 8 July 2025, where the cash trading limit of ETB 50,000 (fifty thousand birr)
applies, tax refund claims exceeding that threshold must be supported by valid transaction receipts. Where a
refund is claimed in cash in breach of this requirement, the refund application will not be accepted.
5. Special privileged organisations
The category of privileged organisations has been expanded to include entities benefiting from VAT privileges
under international agreements, in addition to diplomatic missions, consular offices, foreign governments and
eligible international organisations previously recognised under the Previous Directive. Such entities are re
quired to pay VAT at the time of purchase and may subsequently apply for a refund. However, the Directive
introduces a minimum invoice threshold of ETB 100 and prescribes a one-month processing period for such
refund claims.
6. Refund Claims Following Tax Authority Decisions and Interest on Delayed VAT
Where a decision has been issued by tax audits, investigation audits, service audits or other relevant work units, the taxpayer must submit a formal refund request within six months of that decision. The tax authority must process and issue the refund within 45 days of submission of the refund request. The Directive further provides that a taxpayer is entitled to interest where the tax authority fails to process a refund within the prescribed time limit. The applicable interest rate is to be determined by reference to the highest commercial bank lending rate of the preceding quarter. However, such a claim is admissible only where it is supported by a court decision, and the taxpayer must submit the claim within six months of the date of that decision.
