Virtual Permanent Establishment and Country-by-Country Reporting
Virtual Permanent Establishment and
Presented by: Mustapha Ndajiwo
African Tax Administrators Research
19th October, 2017
Since the Industrial Revolution of the late 18th and early 19th Century, technology
has been largely responsible for the growth and transformation of economies
In recent years, one phenomenon that has attracted great attention is electronic
commerce: this is largely due to the enhancement of business processes and the
increased efficiency brought along by this technology.
According to the International Trade Centre (2015), the African e-commerce
market is projected to reach $50 billion in 2018 from US$8 billion in 2013.
The profits of an enterprise of a Contracting State shall be taxable only in that
state unless the enterprise carries on business in the other Contracting State
through a permanent establishment situated therein.
The term `permanent establishment´ means a fixed place of business through
which the business of the enterprise is wholly or partly carried on
The term “permanent establishment” includes especially: (a) a place of
management, (b) a branch, (c) an office, (d) a factory, (e) a workshop, (f) a
mine, an oil or gas well, a quarry or any other place of extraction of natural
MUSTAPHA NDAJIWO 3
The inability to define PE successfully under the
e-commerce economy exposes African countries
to BEPS and other harmful tax practices.
Secondly, it makes the country-by-country
reporting proposed by the OECD deficient, in
that e-commerce MNEs may not report their
activities in some jurisdictions due to the absence
of a robust definition of PE under e-commerce
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Explore the option of Virtual Permanent
Establishment as a solution for the challenges
of defining PE under e-commerce
Analyse Country-by-country reporting vis-à-
vis e-commerce in sub-Saharan Africa
Is Virtual PE the best option for defining
PE under e-commerce?
Can Virtual PE enhance the
implementation of the country-by-country
reporting with regards to e-commerce in
OPTIONS FOR VIRTUAL PE
Virtual Fixed Place of Business
Virtual Agency PE
On-site Business Presence
VIRTUAL PE AND PRINCIPLES OF TAXATION
On Neutrality: the options are the same; however, with the server option for
Virtual PE, it is possible that the server is moved to a low or no tax
jurisdiction to shift profits and avoid paying taxes.
Efficiency: The compliance and administrative requirements are the same.
However, with the website option of Virtual PE, it is possible that a website
may be unaware that the site is being hosted in a different country. There may
also be difficulties in operating bank accounts for separate jurisdictions, which
will make reporting difficult.
Certainty and Simplicity: if source country taxation is conditional on a
threshold, e-commerce companies may be unaware if their economic presence
in a certain jurisdiction will exceed the threshold, thereby qualifying for a PE
in the jurisdiction.
VIRTUAL PE AND PRINCIPLES OF TAXATION
Compliance cost would be high because e-commerce companies may not have a physical
presence and will be operating in a different jurisdiction without offices and personnel.
In respect of digitized products, where shipping documents are absent, there may not be
an existing and reliable means of establishing the jurisdiction of the e-commerce
E-commerce companies may spread their activities to other jurisdictions to avoid
MUSTAPHA NDAJIWO 9
THE EU SHORT TERM ALTERNATIVE
• Equalisation tax on turnover of digitalised companies - A tax on all untaxed or insufficiently
taxed income generated from all internet-based business activities, including business-
tobusiness and business-to-consumer, creditable against the corporate income tax or as a
• Withholding tax on digital transactions - A standalone gross-basis final withholding tax on
certain payments made to non-resident providers of goods and services ordered online.
• Levy on revenues generated from the provision of digital services or advertising activity - A
separate levy could be applied to all transactions concluded remotely with in-country
customers where a non-resident entity has a significant economic presence.
• The effective average tax rate in the EU of companies with a digital domestic business model
was 8.5 percent. By comparison, the effective average tax rate of companies with a
traditional domestic business model was 20.9 percent.
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Jumia Group, formerly known as African Internet Group was founded
in Nigeria in 2012.
It has Germany’s Rocket Internet as its parent company situated in
Germany, and also has Goldman Sachs and South African telecoms
group MTN among its shareholders.
The Group owns a number of technology-based firms across 22 African
Countries, and in 2016, it was valued at 1 billion US dollars.
The most notable of the group’s companies is the Jumia.com, which is
often referred to as the Amazon.com of Africa.
The CBCR should contain certain information relating to the
global allocation of the group's income and taxes, together with
indicators of the location of economic activity within the group.
CBCR should be filed by the Ultimate Parent Entity on behalf
of the group to its local tax authority
As a criteria for qualifying as a constituent entity,
the entity must be resident for tax purposes in the
Country of business.
The current definition of Permanent Establishment remains
premised on physical presence (fixed base)
The definition of the Excluded MNE Groups by the
OECD is premised on a group turnover threshold
of less than 750 million euros.
• There is strong evidence that e-commerce is growing in Africa
• There is a spread of the activities of e-commerce MNEs in Africa, as well as a
growing investment appetite from foreign based MNEs.
• There are still uncertainties with regards to the policies to check the disruptions
caused by e-commerce
• The negative externalities birthed by e-commerce technology with regards to
tax policy may require more investment in technological based solutions
• The 750 million euros threshold is not representative of African countries that
mostly bear the brunt of the harmful tax practices of MNEs
The way forward
The use of technology to determine PE by an economic presence threshold
through sales or value created in a jurisdiction.
The use of high tech real-time exchange of information on transactions conducted
The use of Software to identify location of parties to transaction
Integration of software for AEOI
Agreed standards for software solutions
A lower threshold for country-by-country reporting (mult-ilateral)
A multi-lateral approach based on the use of technology to ensure compliance
The use of blockchain technology:
• to determine threshold for e-commerce businesses operating in
• to address challenges of monitoring, compliance, efficiency
and transparency amongst others.
The allocation of profits under the digital economy
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The Virtual Permanent Establishment is currently the best option for defining PE
under e-commerce. The use of technology and economic presence to determine nexus
will go a long way in achieving this.
A lower threshold for country-by-country reporting will ensure a fair consideration for
the implications of BEPS and other harmful tax practices in Africa. However, it should
not be done in a unilateral manner.
To achieve the aforementioned, it is necessary to engage in further international
collaboration and consensus on how to use technology to address the impasse caused by