A comprehensive guide to Djibouti's tax laws

Djibouti’s GDP growth has exceeded 5% in recent years, rising to an estimated 6.8% in 2017, and projected to reach 6.9% in 2018 and 2019. This is driven by continued investment in infrastructure, especially ports, in order to facilitate the transit of goods to and from Ethiopia. The government’s long-term goal is to establish Djibouti as an emerging country by 2035, while short-term goals include accelerating growth and increasing employment. Challenges remain, however, with regard to structural constraints on energy and water supplies, with pressures on the former exacerbated by a joint electricity transmission line with Ethiopia.

The country is also banking on infrastructure development to promote rapid growth and reduce poverty. A programme focused on development in this area – concentrating on roads, hotels and ports – has been financed by the massive influx of foreign direct investment in recent years. The construction of new specialised ports, terminals and railways will consolidate the country’s regional integration and strengthen its role as a platform for trades and services in the region. Transport and related services are a key pillar of Djibouti’s overall growth and development model, which intends to capitalise on the country’s geostrategic position on the Gulf of Aden, the crossroads of key commercial shipping corridors for goods and oil transportation.

Reforms

In this context, the country has made several reforms in recent times to its tax and trade laws, as well as amendments to the mining sector and other innovative industries, in order to improve its business climate and, in turn, opportunities.

With regard to tax laws, targeted actions have been made to address the modernization of tax administration. Furthermore, a one-stop shop has been created to help attract investors and other relevant institutions to the country. This allows investors to register their business, and submitting work and residence permit requests all in one place, while also providing access to a range of other facilities. The country’s tax framework has thus been a key priority.

Business Licensing Tax

The contribution of business licensing tax for all persons in taxable occupations or activities is due in January of each year. The tax system works according to categories one to eight, depending on the related activity. In June 2017 several changes were introduced to the tax, including free patents for categories one to four during the first three years of activity and an exemption of proportional fees for categories five to eight.

Depreciation 

A ruling applying to businesses had previously stated that depreciation calculated based on the duration of use of an asset from the date of purchase using the straight-line method was allowed as a deduction. This has now been amended so that the declining depreciation method is also allowed as a deduction, with general rates applied. Excluded from the benefit of the digressive depreciation is secondhand goods, as well as those whose lifespan is less than five years. At the end of each financial year, the total of the decreasing depreciation applied dating back to the acquisition or manufacture of capital goods cannot be less than the cumulative amount of that carried out according to the linear mode and distributed over the normal period of use.

Deficit Reporting

Djibouti’s tax administration now includes regulations for deficit reporting. Losses arising in a particular year are deductible and can be carried forward for the next three subsequent years under the standard tax regime.

Non-Resident Renumeration

A measure withholding tax on payment to third parties is now applied on services rendered by local and international vendors. A rate of 15% is applied on any payment to foreign suppliers who do not have a Personal Tax Identification (PTI) number.

Goods & Services Tax

A new tax is being applied to goods and services at a rate of 7%. Only companies with a turnover of between DJF10m ($56,300) and DJF20m ($112,000) are subject to the tax. A specific rate of 5% is applied to sales of fruit and vegetables, red meat and fish, and catering services.

Youth Investment

A new incentive has been set up in an attempt to stimulate investment in the creation of companies by the country’s young people.

A synthetic tax of DJF80,000 ($450) is applied to companies opened by a person under the age of 25 as an annual compressive tax, included in the yearly income tax and business licence during the first three years of activity.

Integrated Management System

In June 2015 the sector’s administration began to establish a new integrated system for tax management. The main goal of the new framework is to automatise all processes, as well as provide digital reports sourced from receipts and cash registers.

To back this initiative, new electronic cash registers will be installed in all shops to allow for better tax and revenue controls.

VAT

Last updated in 2011, the General Tax Code (GTC) outlines the sector’s legal framework. The document states that transactions made in Djibouti by natural and legal persons engaging in economic activity, other than employees, are subject to value-added tax (VAT).

Any natural or legal person, including companies operating in the country’s free zone and those benefitting from exemption from the code, are subject to VAT. The country’s tax base consists of: Imports: including the value of goods as defined by Djibouti’s Customs code, such as Customs, tax and excise duties, excepting VAT itself, and any deposits liquidated by natural and legal persons.

Deliveries & trade in goods segment: for products made locally the selling price will be charged to the customer, or for any other amounts these will be attributed to the value of the goods or services received or receivable in return.

Real estate & construction: the amount of deals, bills, invoices and prepayment, including jobs outsourced to subcontractors.

Service delivery: applies to the price or customer or any other amounts, and the value of the goods or services received or receivable in return.

Self-supply: The tax base applies to the purchase price, minus VAT, of goods acquired. It also applies to the cost price of extracted, produced, manufactured or processed goods and services, including a fraction of expenses for overheads and business premises.

Assets: this applies to the full sale price without tax, relative to the sale of movable assets from capital expenditure, and applies to the persons who use it to meet their operations requirement if the asset has been fully or partially recovered.

Second-hand goods: for the purchase and resale of goods of this nature, VAT is charged on the sales margin (i.e., the difference between the selling price and the purchase price of all transactions made by taxable dealers).

Property resale: the resale of buildings carried out by property traders are taxable on the sales margin.

Travel & shipping agencies: similar to the former, but in this case sales margins are defined as the difference between incoming cash amounts and expenditures, which are made up of the invoice amounts of the client’s service providers.

All of the tax bases defined above are inclusive of all costs and taxes, except VAT and advance payments from natural and legal persons. In 2015 the Finance Law set the tax rate at 10%, compared to 7% previously.

Penalties

Non-declaration or late submission of taxes are covered by delayed payment interest and penalty increase schemes laid out in Article 246 of the GTC, applicable with a minimum penalty of DJF50,000 ($281). The submission process as described in Articles 247, 248 and 250 of the GTC states that delayed payments increase:

• By 10% for submission within 20 days after a formal notice; and

• By 40% for submission after 20 days following a formal notice.

Salaries & Remittances

Taxes on salaries and the treatment and remittance of taxes withheld from the authorities should be submitted on the 15th of each month and are calculated at the following rates:

• 18% for DJF50,000-DJF150,000 ($281-$844);

• 20% for DJF150,000-DJF600,000 ($844-$3380); and

• 30% for DJF600,000 ($3380) and above. A penalty rate of 0.5% is applied per month of delayed payment. The rate increases thereafter according to the previously stipulated penalty schedule. WITHHOLDING TAX ON PAYMENTS TO THIRD PARTIES: The tax base is the gross amount, excluding VAT, of all remunerations paid, to be deducted 15 days after completing the tax return, subject to the following:

• Any income lower than DJF1000 ($5.63) is not considered for the tax calculation; and

• The applicable rate thereafter is 15%. The amount is equal to the full amount of unpaid tax.

Vehicle Tax

The annual vehicle tax Vignette Automobile, or Vehicle Sticker, is applicable to all motorised vehicles for the transport of persons and goods throughout the country, with the exception of the two-wheeler. The rate of the motorised vehicle tax is set annually and the price will vary between DJF15,000 ($84.40) and DJF30,000 ($169) according to the engine power of the vehicle. It is payable on the first day of the taxable period after entry into service in Djiboutian territory, or following the termination of a tax exemption.

Land Tax

The land tax differs according to whether developed or undeveloped property is built on a site. For developed property the tax base is:

• The amount of annual rental revenue for rented property.

• The rental value for non-rental properties.

• The higher amount resulting from either or both of the previous assessment, in the case of rented property on a timeshare basis.

• A reduction of 20% is applicable on property, taking into consideration the costs of administration, insurance, depreciation, maintenance and repair. For the contribution for built-on property, the following rates will be applied according to the tax base:

• 10% until DJF1.12m ($6300);

• 18% above DJF1.12m ($6300) to DJF3.84m ($21,600); and

• 25% for DJF3.84m ($21,600) and above. For undeveloped property the tax base is:

• The amount of annual rental revenue for rented property.

• The rental value for non-rented property.

• The higher amount resulting from either or both of the previous assessments in the case of property rented on a timeshare basis. For undeveloped property the rate of 25% is applied to the tax base, payable by filing the tax return between January 1 and 31 each year.

Minimum Corporate Tax

Payment of the minimum corporate tax for the fiscal year is applicable to the following tax base:

• For any turnover excluding VAT achieved the previous year.

• If any accounting statement has been provided in a given year, the corporate tax due for the fiscal year is calculated on the turnover excluding VAT achieved during the previous taxable period, or for a new company from the start of operations until December 31 of the taxable year. Excluded from the tax base, however, are movable property incomes, other than those received by firms who operate in the trade of land titles and income from property rental registered on the balance sheet, since these abodes are enforced on the land tax on built or in-built properties.

In this case, a tax rate of 1% is applicable on turnover excluding VAT. The amount may not be less than DJF120,000 ($675), and should be deposited before February 1 of each year. The penalty schedule is identical to that applied to salaries.

Corporate Tax Return

Companies are required to file an annual tax return before March 1 for the previous fiscal year specifying:

• Identification of the firm and their accountant;

• Legal status of the tax base;

• The amount of taxable income or deficit;

• Assignment of private and passenger vehicles;

• Records of buildings rented by the company;

• Determination of profit and distribution to the shareholders;

• Imports;

• Amount of remuneration for the highest-paid employees; and

• Financial levies and contributions for sole proprietorships and partnerships. The tax return file needs to be made in duplicate and delivered to the Tax Authority before the 1st April of each year, and the minimum income tax amount is DJF120,000 ($675). The penalty schedule is as previously stipulated for corporate tax. However, the tax administration reserves the right to tax companies choosing an option to its advantage.

Company Categories

There are four main types of companies in Djibouti. Branch subsidiaries: International firms are increasingly opening branches in Djibouti, benefitting from the easy registration process that does not require articles of association. This in turn increases their reactivity , mainly with regard to tender submissions. Common law companies: within this category there are one-person limited firms, incorporated and private and public limited companies. Companies contracted with the US Army base: benefit from the special agreement signed between the US government and Djibouti in 2003 through a Status of Forces Agreement. Free zone firms: In addition, there are a number of tax incentives for companies operating in Djibouti’s free zones, outlined in the Free Zone Code:

• Corporate tax exemption for companies, with the duration of this exemption being 50 years from the creation of the free zone, which was established in 2004;

• Exemption from Customs duties, as business activity and equipment in the free zone are considered to be outside of Djibouti.

Obligations for Firms

In order to operate in Djibouti, companies are required to:

• Register with the relevant authorities;

• Implement the country’s accounting principles, with large international companies using International Financial Reporting Standards for internal purposes; and

• Submit financial statements through income tax return according to a specific tax format, stipulated by the country’s tax authorities. The four main company categories must also pay the following respective taxes. 1. Companies belonging to the subsidiaries and common law categories are subject to:

• Income tax;

• Minimum corporate tax;

• VAT;

• Payroll taxes;

• Patent tax, a specific business licence provided by the Djibouti Ports and Free Zone Authority;

• Dividends tax;

• Withholding tax (applied on foreign vendors and suppliers, which do not have a PTI number); and

• Social tax. 2. Those companies contracted with the US Army base are subject to taxes for:

• Patent tax (as above);

• Dividends; and

• Payroll and social taxes for local employees. These firms are, however, not subject to:

• Income tax;

• Minimum corporate tax;

• VAT;

• Withholding Tax;

• Dividends tax; and

• Payroll and social taxes for local employees. 3. Companies operating in the country’s free zone are subject to:

• VAT for sales made inside the zone;

• Payroll tax;

• Patent tax (as above);

• Dividends tax; and

• Social tax at a specific rate (with firms employing foreign workers able to opt out of this). The following do not apply to these firms:

• Income tax;

• Minimum corporate tax; and

• Withholding tax (as above).