Economic Substance Regulation and Country by Country Reporting Purpose in the UAE

Economic Substance Regulation and Country by Country Reporting Purpose in the UAE

Economic Substance Regulation (ESR) and Country by Country Reporting (CbCR) in UAE are the two new regulations introduced in the United Arab Emirates in the year 2019. These two regulations are in effect in UAE from 2019 as per BEPS (Base Erosion & Profit Shifting) 15 Action Plan. BEPS has developed the 15 Action plan project in order to address the concerns on tax avoidance.

UAE being one of the members of the BEPS inclusive framework also commits to implementing BEPS minimum standards. The Economic Substance Regulation (ESR) is part of BEPS Action 5- Harmful Tax Practices whereas Country by Country Reporting (CbCR)  is BEPS Action 13.

In this blog, we will clarify the differences between these two regulations, namely Economic Substance Regulation (ESR) and Country by Country Reporting (CbCR) in terms of filing of notification, reporting, due date and much more.

What is the purpose of the Economic Substance Regulation Law in the UAE?

  • Economic Substance Regulations vide Cabinet of Ministers Resolution No 31 of 2019 is in effect from 30th April 2019.
  • The country is expected to move a step ahead in providing a basis to support that investment in UAE was not driven only to benefit from a privileged tax regime.
  • It will ensure the pro-active measures to address concerns of the EU on shifting of profits.
  • The aim is to improve the international competency of the Country.

What is the Purpose of Country by Country Reporting Law in UAE?

The purpose of CbC Reporting is to eliminate any gap in information between the taxpayers and tax administrations with regards to information on where the economic value is generated within the MNE Group and whether it matches where profits are allocated and taxes are paid on a global level.

 

Particulars Economic Substance Regulation Country by Country Reporting
Regulation No. Cabinet of Ministers Resolution 31 of 2019 Cabinet of Ministers Resolution 32 of 2019
BEPS Action Plan Action 5 Action 13
Purpose To prove the substance over form To eliminate the gaps (if any) in information between Taxpayers and Tax Authorities with regards to information on economic value generated by MNE Groups.
Applicable to: Licensee carrying out any of the following Relevant Activities:

1.       Banking Business

2.       Insurance Business

3.       Investment Fund Management Business

4.       Lease-Finance Business

5.       Headquarters Business

6.       Shipping Business

7.       Holding Company Business

8.       Intellectual Property Business

9.       Distribution and Service Centre Business

MNE Group

-includes 2 or more enterprises the tax residence for which is indifferent jurisdictions/country, or includes an enterprise that is resident in one country and is subject to tax with respect to business carried through a permanent establishment in another country)

-having total consolidated group revenue equal to or more than 3.15 Billion Dirhams (equal to 750 Million Euro) during Fiscal year as reflected in Consolidated Financial Statements for such preceding Fiscal Year.

To whom Notify/Report Relevant Authority

(i.e. Licensing Authorities for Relevant Activities)

Competent Authority

(i.e. Ministry of Finance)

Notification/ Reporting The Information Notification is to be filed with the Relevant Authorities within the Due date

The Notification is to be filed by all the Constituent Entities with Competent Authorities in the State.

 

The report is to be filed by the Ultimate Parent Entity in the State or in its Registered Jurisdiction (wherever applicable).

 

Particulars Economic Substance Regulation Country by Country Reporting
Due Date To be filed no later than 12 months after the last day of the end of each Financial Year of the Licensee. For Notification:

to be filed no later than the last day of the Reporting Fiscal Year of such MNE Group.

 

For Report:

To be filed no later than 12 months after the last day of Reporting Fiscal Year of such MNE Group.

 

Filing Obligation by: Licensee Carrying out Relevant Activities and is required to satisfy the Economic Substance Test. Constituent Entity of the MNE Group, Ultimate Parent Entity or Surrogate Parent Entity
What is to Notify/Report? The following information in respect to the Licensee:

a)      Type of Relevant Activity

b)      Amount and type of relevant income from Relevant Activity

c)       Amount and type of Operating expenditure & Assets in respect of Relevant Activity

d)      Location of Business

e)      Total number of full-time employees, their qualifications

f)       Information showing State Core Income-Generating Activity

g)      Declaration whether Economic Substance test is met or not

Notification:

a)      Name of the Group

b)      The jurisdiction where the group is tax resident

c)       Whether the UPE is reporting entity

d)      List of Constituent Entities under the MNE Group

e)      Name of UAE Entity filing CbCR notification

 

Report:

a)      Amount of revenue, profit(loss) before Income-tax, Income-tax paid, Income-tax accrued, stated capital, accumulated earnings

b)      Number of Employees

c)       Tangible Assets are other than Cash & Cash Equivalent with regard to each Jurisdiction in which MNE Group operates.

d)      Identification of each constituent entity of MNE Group and its Jurisdiction

Maintenance of Books/ Records/ Documents/ Information 6 years from the end of Financial Year in which the Information Notification is Filed. 5 years after the date of reporting to the Competent Authority
Nature of Offences Failure to provide the Information

Failure to furnish inaccurate information or knowingly furnishing inaccurate information

Failure to retain the required documents & information

Failure to provide the information to Competent Authority

Failure to notify or report (as applicable) to the Competent Authority

Failure to provide details inaccurate and complete manner

Penalties AED 10,000/- to AED 300,000/- AED 50,000/- to AED 1,000,000/-

(in case of delay in filing the Notification or Report within the due date the additional penalty amounting to AED 10,000 for every day during which the failure continues to a maximum of AED 250,000)

In case of any further concerns and queries on Economic Substance Regulation & Country by Country Reporting you can contact us as mentioned below:

Contact Person: CA. Manu, CEO & Partner
Email: manu@emiratesca.com
Mobile: +971 50 282 8727
Phone: +971 4 2500290
Contact Person: CA. Dhara, Asst. Manager
Email:dhara@emiratesca.com
Mobile:+971 565956836
Phone:+971 4 2500290

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