The Ministry of Finance, UAE has introduced the Economic Substance Regulation (ESR) effective 2019. This is in response to UAEs commitment to its membership to the Organisation for Economic Co-operation and Development (OECD) Inclusive Framework on BEPS.
Base Erosion and Profit Shifting (BEPS) refers to the tax planning strategies used by multinational enterprises. These tax planning strategies effectively reduce the tax base in higher tax jurisdictions and shifts them to lower tax jurisdictions. Such a shift reduces the amount of profits in the place where their income is earned. The Organisation for Economic Co-operation and Development (OECD) defines BEPS strategies as “exploiting gaps and mismatches in tax rules”.
As per OECD, BEPS practises cost countries $ 100-240Bn in lost revenue annually. Over 135 countries and jurisdictions are under the OECD/G20 Inclusive Framework and are collaborating on the implementation of 15 Actions that will help tackle the uneven international tax practices, bring transparency in the tax environment and address tax avoidance.
UAE has introduced the ESR towards its commitment to implementing the following four actions under BEPS minimum standards:
The Economic Substance Regulations in UAE apply to financial years commencing on or from 1 January 2019. Businesses are expected to file an ESR notification with the Regulatory Authorities as per the timelines advised by the respective Regulatory Authorities. This will be an annual notification.
Apart from the ESR annual notification, businesses that have a relevant activity as per the Regulations are expected to review their operations for income generated through such relevant activity in the respective financial year. A licensee that is carrying on a Relevant Activity from which they earn income during a financial period, will be further required to provide the following no later than twelve months after the last day of each financial period:
Economic Substance Test requires that :
With the introduction of the ESR, businesses in UAE need to review their operations in light of the existence of adequate economic substance.
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