How Audit Firms Can Help You to File ESR Notification & Report In Such a Short Notice?
The companies operating in the UAE (mainland, free zone & offshore) are once again facing a compulsion to meet the Economic Substance (ESR) filing requirements as the deadline is around the corner. The UAE-based companies that conduct the relevant activities need to demonstrate adequate economic substance and file the notifications and submit the reports before 31st December 2020.
Companies that have already filed the ESR notification must submit the notification again to the relevant regulatory authorities in sync with the Cabinet Resolution 57 of 2020 which updated several clauses in the previous law. Since the deadline is approaching fast, many companies are floundering to get prepared. Seeking expert assistance of reputed audit firms in Dubai, UAE is the most reliable route to ensure your business entity is complying with the ESR filing requirements. You also need to ensure that your company is aware of the following requirements to be on the right side of the law.
ESR Filing Deadlines
In the updated ESR scenario, businesses that fall within the scope of the regulation must execute the ESR filings through an online portal operated by the UAE Ministry of Finance. The companies with the financial year commencing on or after 1st January 2019 and ending on or before 30th June 2020 must consider the deadline as 31st December 2020. The deadline is the same for those companies with the financial year starting on or after 1st January 2019 and ending on or before 31st December 2019. Your trusted audit firms in Dubai have more clarity on the reporting period, and deadlines and they will ensure that your business abides with the obligations.
Insights on Updated Definitions
A significant area where you need to focus before sending the ESR notifications or returns is the change in the definitions of key terms. For example, a Licensee now means any corporate entity incorporated inside or outside the UAE or an unincorporated partnership in the UAE that conducts a Relevant Activity. Natural persons, sole proprietors, trusts and foundations that were earlier considered as Licensees under the ESR no longer meet the scope of ESR.
Updated Notification & Reporting Requirements
Companies that file the ESR notifications now need to furnish additional details such as the jurisdiction of the Parent Company, Ultimate Parent Company, and Ultimate Beneficial Owner (UBO) who claim to be tax resident. Apart from that, the licensees that are required to file the ESR Report must submit a copy of financial statements. Audit firm in Dubai provides services related to the UBO mainly assistance in maintaining the Real Beneficiary Register. Such assistance gives great leeway to the companies as they can easily submit the UBO details in the ESR reports.
Eases the ESR Filing Requirement for Companies
Article 8 of the Cabinet Resolution 57 of 2020 sheds light on the notification and reporting requirements that the entities must meet to comply with the ESR. It states that every Licensee is now required to file annual ESR notification to the relevant Regulatory Authority. Audit firms in Dubai will assist you in filling the notification with the following mandatory details :
1. Whether the business entity has carried out a relevant activity or not
2. Whether the company has generated any income from the relevant activity
The notification will be filed through the Ministry of Finance’s dedicated online portal. The notification will be processed between the regulatory authorities and the Federal Tax Authority (FTA), which is the National Assessing Authority for the ESR.
The FTA, in its capacity as a National Assessing Authority, will oversee compliance and control of the Updated ESR. FTA, among other things, will also assess if the Licensee has met the Economic Substance Test. It will also decide the necessary course of action to follow if your entity fails to meet the ESR test.
A Helping Hand to Avoid Penalties
Incurring penalties for ESR non-compliance is an undesirable scenario for the smooth functioning of your companies in the UAE. Availing the bespoke services of the UAE audit firms would save the businesses from the hefty penalties.
Here is the list of penalties as per the Cabinet Resolution 57 of 2020 :
1. Companies that fail to submit the annual notifications, or any other mandatory documents/ information will have to pay a penalty of AED 20,000
2. Filing inaccurate information on the notification or ESR Return attracts an administrative fine of AED 50,000.
3. Companies would face a penalty of AED 50,000 if they fail to file Economic Substance Returns or fail to meet the Economic Substance Test.
Penalties of this range could hurt the reputation of the companies apart from hitting them financially. Repeated violations would also lead to license cancellations which makes it necessary for the companies to file the ESR notifications on time.
FTA to issue tax residency and commercial activities certificates
The authority will begin receiving applications for the issuance of Tax Residency and Commercial Activities Certificates via its e-services portal as of November 14, 2020.
The FTA explained that there are two categories of tax certificates which are issued to companies and individuals. The first category is for the ‘Tax Residency Certificate’, a certificate issued by the FTA upon request to enable applicants to benefit from Double Tax Avoidance Agreements (DTAA) signed between UAE and other countries.
The second is the Commercial Activities Certificate which is a certificate issued by the FTA to enable applicants to refund VAT paid in advance outside the UAE, whether or not DTAAs are applicable.
The authority emphasized that the new service provides advantages and ease for the issuance of certificates to those registered with the tax system, as all their data is available in the FTA database so they can apply for Tax Certificates through direct and quick digital procedures.
Khalid Ali Al Bustani, director-general of the FTA, confirmed that this step is part of an ongoing cooperation between the FTA and the Ministry of Finance as a strategic partner to the authority, noting that a joint working group from both entities have made the necessary arrangements to ensure a smooth transfer for the digital issuance of Tax Residency and Commercial Activities Certificates from the ministry to the authority.
“Both Tax Residency and Commercial Activities Certifi-cates allow investors in the UAE, including companies and individuals, to benefit from double taxation avoidance agreements to which the State is a party, with the aim of preventing duplication, in addition to recovering VAT imposed on Emirati businesses in various countries in the event they were registered with the Authority,” Khalid Al Bustani said.
The authority clarified that eligible individuals can easily issue Tax Residency and Commercial Activities Certificates through a simple registration process via the Federal Tax Authority’s official website. The process is completed by submitting the required supporting documents and paying the fees specified in the UAE Cabinet Decision No. 65 for 2020. These specified fees were set as a requirement to apply for the Tax Residency Certificate, as an application is reviewed for any normal or legal person that is not registered with the authority and providing a print copy of the digital Tax Residence Certificate.
The Cabinet Decision also set the fees required to apply for a Commercial Activi-ties Certificate for businesses registered with the Authority, and to review the ap-plication and issue a digital Commercial Activities Certificate and to provide a print copy for the certificate that was issued.
FTA clarifies VAT application for e-commerce
The UAE’s e-commerce has been growing exponentially over the last few years.
The UAE’s Federal Tax Authority (FTA) on Wednesday further clarified that though five per cent value-added tax (VAT) will be applicable to general e-commerce purchases however there are a number of special rules that apply specifically to e-commerce transactions.
It said the tax will also be applicable on digital services including supply of domain names, web hosting and remote maintenance programmes and equipment, software, images, text and information provided electronically such as pictures, screen savers, electronic books, documents and other digitised files such as music, movies and games on demand and online magazines.
Other services identified under the banner of “electronic services supplies” include the supply of advertising space on a website and the rights associated with that advertisement, and political, cultural, artistic, sports, scientific, educational or entertainment broadcasts, including broadcasts of events, live streaming via the internet, the supply of distance learning services, and services of any equivalent type that have a similar purpose and mission.
The growth of e-commerce sector picked up even further in the wake of coronavirus pandemic with UAE residents on average spending over Dh6,000 a year.
“In light of the increasing importance of the e-commerce sector, clear mechanisms for procedures have been identified. Value-added tax, as it relates to the supply of goods and services through electronic means, contributes to supporting the activities of this vital sector, which depends on a locally developed digital and technological infrastructure,” said Khalid Ali Al Bustani, director-general of FTA.
It added that taxable persons should charge VAT to customers when supplying taxable goods or services at the standards rate of 5 per cent or at a rate of zero per cent where law permits. If the supplies are exempt from tax, these supplies are not treated as a taxable supplies and therefore no VAT needs to be charged on these supplies.
Anurag Chaturvedi, CEO of Chartered House, said many international service providers, who do not have place of establishment in the UAE, are still unaware of the registration requirement for VAT in the UAE when they provide services to the UAE consumers.
As per the Article (18) of Decree Law, a non-resident shall register for tax and makes supplies of goods or services, there is no threshold limit applicable to the non-residents. “This means if a consumer in the UAE buys a service/product from an online platform (social media, e-commerce, education, games, arts, fashion, music or any other services), the non-resident shall register for the VAT within the stipulated time and comply with local tax legislation,” added Chaturvedi.
As per the UAE legislation, the place of supply of electronic services shall be UAE if the use and enjoyment of the supply is within the country. Pursuant to Article (31) of the Decree law, provision of electronic services are subject to tax.
“If Netflix is being used by an end-user in the UAE, the service is subject to tax in the UAE. Many international service providers, who do not have place of establishment in the UAE, are still unaware of the registration requirement for VAT in the UAE when they provide services to the UAE consumers,” added Charuvedi.
Combating coronavirus: UAE businesses seek VAT waiver for a year to stimulate demand
VAT relief will stimulate demand for consumer goods in the country.
Private and family owned businesses in the UAE have requested the government to waive off value-added tax (VAT) for six months to one year in order to help stimulate demand in the economy.
A letter sent by family-owned business groups to Dubai Supreme Fiscal Committee have suggested establishing a private-public sector committee, reducing VAT from five per cent to two per cent, eliminating licensing fee, accelerating payment to suppliers and contractors, freezing of 2.5 per cent market fee, 50 per cent reduction in customs fees and water and electricity in order to help them overcome Covid-19 impact.
Rizwan Sajan, chairman and founder of Danube Group, said demand is slow across all the sectors due to job losses and salary cuts, therefore, VAT relief will stimulate demand for consumer goods in the country.
“This, in turn, will help businesses and the overall economy. Importantly, many countries around the world have also offered tax sops to businesses and consumers. Since VAT is the only consumer tax applied here, and waiving off this tax can stimulate demand. We request government to consider it on a priority basis. We are quite confident that this step will expedite the recovery of the UAE economy as country reopens. Moreover, we also requested waiver on utility and telecom charges,” said Sajan.
On Monday, May 11, the UAE’s Ministry of Finance announced that it will not increase VAT after Saudi Arabia tripled it to 15 per cent.
Rajiv Raipancholia, CEO of Orient Exchange, said remittances have dropped by 30 to 40 per cent and there are job losses and reduced salaries due to Coronavirus impact.
“A waiver of VAT till year-end would support the end-consumer in terms of reduced expenses to make ends meet. At the same time, landlords need to give a rent free period of two to four months to retailers otherwise the brick-and-mortar model will face huge challenges of continuity,” said Raipancholia.
Suresh Kumar, Chairman of the Indian Business and Professional Council (IBPC), said it is good if the businesses start to do well as a result of these measures because the amount of VAT collection after 6 months will more than offset loss of revenues for the government when business activity picks up.
“It is certainly worthwhile as businesses are operating on thin margins and with social distance in place at workplace, the cost will go up. So any such relief that businesses will get is good. I think six months of VAT waiver is a good period. It will give businesses an opportunity to restart their operations in fulls swing,” he said.
He suggested that sector-specific should be taken that will have better and strong impact on those sectors. “We have been regularly communicating and authorities are also actively participating,” he added.