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.