Major Problems Associated with Rules on Permanent Establishment under Ethiopian Income Tax Law

Abstract

The allocation of taxing rights between the states with respect of business
profits is a very complex activity. The central notion of the allocation
rules is the Permanent Establishment (PE). However, owing to the gaps
or mismatches that attributed to the definition of PE as envisaged under
tax treaties and national laws, base erosion and profit shifting became an
international agenda. This article examines the concept of PE as defined
under the Ethiopian income tax law, identifies its shortcomings and
explores opportunities for proper regulation. To this end, it employed
doctrinal legal research method to investigate the pertinent provision of
income tax law. Accordingly, the finding of the paper shows several
pitfalls of Ethiopian income tax regime concerning permanent
establishment. Absence of definition for the elements of a permanent
establishment, total disregard of permanent establishment concerning ECommerce, and its failure to manage artificial avoidance of permanent
establishment status are among the major problems. Furthermore,
absence of any clarification concerning a place of management and
effective place of management, which is provided as a requirement for
determining whether a foreign enterprise has a permanent establishment
or a resident respectively, and absence of exceptions for the interruption
of activities via force majeure in relation to construction or building and
service permanent establishment are other problems of Ethiopian income
tax law. Accordingly, multinational corporations may resort to base
erosion and profit shifting by using the gaps that are left by Ethiopian tax
regime. Hence, Ethiopian income tax law should be amended in a way
that solves the aforementioned lacunas.