Perspective on Permanent Establishment: Appraisal of Artificial Avoidance of Permanent Establishment Status Under the Ethiopian Income Tax system

Abstract

The allocation of taxing rights between states concerning business profits of Multinational Enterprises (MNEs) is a very complex activity. The central notion of the allocation rules is that the host state is competent to impose an income tax on the profits of non-resident enterprises if and only if the concerned enterprises have the Permanent Establishment (PE). However, owing to the gaps in the definition of PE as envisaged under bilateral double taxation agreements and national tax laws, the artificial avoidance of PE status has become an international agenda. In response to this, the OECD and G-20 countries have adopted 15 points action plans to address Base Erosion and Profit Shifting (BEPS) and Action Plan 7 has laid out a path to prevent the artificial avoidance of PE status. Coming to Ethiopia, the way the definition of PE is articulated has room for MNEs to artificially avoid PE status, which results in the loss of revenue for the government. The aim of this article is to examine the room for artificial avoidance of PE status under the Ethiopian income tax system and explores opportunities for further regulation. To this end, it employed doctrinal research methodology to investigate the pertinent provisions of the Income Tax law and double taxation agreements. Accordingly, the paper's finding shows that Ethiopian income tax law has not adequately tackled artificial avoidance of PE status through commissionaire arrangement and splitting up of the contract. Concerning double taxation agreements of Ethiopia, saving for artificial avoidance of PE status through the independent agent that incidentally tackled, no countermeasures has taken against artificial avoidance of PE status through specific activity exemption, splitting up of the contract, and dependent agency commissionaire arrangement. Hence, it is recommended for Ethiopia to integrate countermeasures for artificial avoidance of PE status into domestic law and double taxation agreements.