PERMANENT ESTABLISHMENT RULES UNDER ETHIOPIAN INCOME TAX LAW: ANALYSIS OF ARTIFICIAL AVOIDANCE OF PERMANENT ESTABLISHMENT STATUS

Abstract

The PE concept is arguably one of the most fundamental concepts in international tax law. It is used in the tax treaty, among the other things, as a mechanism of allocating tax base between contracting states concerning non-resident enterprises business profits. The recent OECD BEPS Action Plan called for a review of PE definition to prevent the use of certain common tax avoidance strategies that are currently used to circumvent the existing PE definition; such as commissionaire arrangements and similar strategies, specific activity exemptions, splitting up of contracts, and strategies for selling insurance in a state without having a PE therein. The purpose of this study is to examine and review the current Ethiopia‟s PE rules and standards and determine its adequacy in curbing the artificial avoidance of PE status. To properly meet study purpose, the research used doctrinal and analytical methods. Both secondary and primary sources have been used to deal with the questions of the study. Semi-structured depth interviews, conducted in person with purposively selected relevant individuals and officials working in the relevant institutions is also another tool used for obtaining detail information which will help to the deeper and more profound understanding of the existing legal underpinnings on prevention of artificial avoidance of PE in Ethiopia. The findings of this study have demonstrated that, both Income Tax Proclamation and Regulation contain no the definition of important terminologies, which are necessary for determining whether a non-resident‟s activities in Ethiopia are sufficient to create a PE. In particular, Ethiopia‟s income tax law does not define what constitutes “same or connected project”, as well as the “elements of the definition of PE concept”. Besides, incompatibility of service PE to properly establish the taxable presence of service business, Ethiopia‟s tax law, contains no contextualised specific provision on the insurance PE. On point of this, “the same or connected project” requirement that has been adopted in the Proclamation and Regulation, to address artificial avoidance of PE through splitting-up of contracts also contributes towards making the Project and Service PE threshold high. Based on the findings, the study recommends that the definition of important terminologies should be revamped to ensure that they adequately enable revenue authority as well as taxpayers to determine when a PE exists. Ethiopia should also adopt the contextualized standard for the taxation of insurance business, and for the determination of 183 days in case of project and service PE to effectively curb artificial avoidance of PE. To ensure that non-resident enterprise„s operation in Ethiopia would be viewed as a whole and not merely on an individual project level; the application of „the same or connected project‟ requirement should be limited only to determine the activities performed by related persons. To make service PE more effective Ethiopia should also consider, reducing the service PE threshold or impose withholding tax for the taxation of service business, through the re-negotiation of older treaties or signing of additional protocols, to effectively address tax avoidance strategies of furnishing service in a source state without having a PE.