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 E-Commerce, 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.