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Virtual Permanent Establishment and Country-by-Country Reporting

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Mustapha Ndajiwo, Federal Inland Revenue Service (FIRS), Nigeria

Published in: Economy & Finance
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Virtual Permanent Establishment and Country-by-Country Reporting

  1. 1. Virtual Permanent Establishment and Country-by-Country Reporting Presented by: Mustapha Ndajiwo FIRS Nigeria/UNISA African Tax Administrators Research Day 19th October, 2017 Entebbe, Uganda
  2. 2. Since the Industrial Revolution of the late 18th and early 19th Century, technology has been largely responsible for the growth and transformation of economies (Mckinsey 2013). 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. INTRODUCTION
  3. 3. INTRODUCTION Permanent Establishment 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 resources.” MUSTAPHA NDAJIWO 3
  4. 4. PROBLEM 4 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 MUSTAPHA NDAJIWO
  5. 5. OBJECTIVES MUSTAPHA NDAJIWO 5 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
  6. 6. Question 6 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 Africa? MUSTAPHA NDAJIWO
  7. 7. OPTIONS FOR VIRTUAL PE Virtual Fixed Place of Business Virtual Agency PE On-site Business Presence 7MUSTAPHA NDAJIWO
  8. 8. 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. 8MUSTAPHA NDAJIWO
  9. 9. 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 transaction. E-commerce companies may spread their activities to other jurisdictions to avoid threshold MUSTAPHA NDAJIWO 9
  10. 10. 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 separate tax. • 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. MUSTAPHA NDAJIWO 10
  11. 11. 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. 11MUSTAPHA NDAJIWO
  12. 12. 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. Country-by-Country Reporting
  13. 13. • 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 13MUSTAPHA NDAJIWO Issues
  14. 14. 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 via e-commerce; 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
  15. 15. FURTHER RESEARCH The use of blockchain technology: • to determine threshold for e-commerce businesses operating in other jurisdictions • to address challenges of monitoring, compliance, efficiency and transparency amongst others. The allocation of profits under the digital economy MUSTAPHA NDAJIWO 15
  16. 16. CONCLUSION 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 e-commerce. 16MUSTAPHA NDAJIWO
  17. 17. THANK YOU 17MUSTAPHA NDAJIWO Mustapha.Ndajiwo@Firs.gov.ng Mustapha.Ndajiwo@gmail.com Twitter: @mustaphandajiwo Blog: MustaphaNdajiwo.wordpress.com

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