Following the developments in the GCC region over the last year or so, it would be fair to state that the GCC has been ‘BEPS’ed! Oman, Qatar, Bahrain, Saudi Arabia, and the UAE have all signed the Base Erosion through Profit Shifting (BEPS) Inclusive Framework (IF). Thereby, they are committing to the implementation of minimum standards that include Action Plan 13 relating to transfer pricing documentation (TPD) and Country by Country Reporting (CbCR).
The UAE has issued Cabinet Resolution No. 32 of 2019 on CbCR on 30 April 2019. Subsequently, it also published FAQs on General CbC reporting considerations. Additionally, the UAE also passed a resolution requiring all license holders in the Country to fulfill certain substance-related requirements. For example, businesses shall perform core incomegenerating activities depending upon the type of businesses.
It may be recalled that the UAE was blacklisted until recently by the European Union i.e. the EU list of non-co-operative jurisdictions for tax purposes. However, given the steps that the UAE has been taking to improve the substance and transparency-related requirements, on 10 October 2019, the EU has removed the UAE from its blacklist. This article provides an overview of the above compliance requirements and how the companies in the UAE are impacted.
Country-by-Country-Reporting (CbCR) in the UAE
Threshold for applicability
Consolidated turnover of group >= AED 3.15 billion (approx. Euro 750 million) in preceding reporting fiscal year
Filing obligation including deadline
| Form to be submitted | Who needs to submit | Timeline to submit |
|---|---|---|
|
Detailed CbCR
|
Ultimate parent entity/Surrogate parent entity*
|
12 months from reporting fiscal year of Group
|
|
Notification
|
Ultimate parent entity/Surrogate parent entity/Constituent entity
|
Last day of the reporting fiscal year of Group
|
Contents of CbCR
Largely modeled on the BEPS Action Plan 13 format
Administrative Offences and Penalties
| Administrative Offences | Quantum of penalty |
|---|---|
|
Failure to maintain documents for less than 5 years
|
AED 100,000
|
|
Failure to provide information to Competent Authority
|
AED 100,000
|
|
Failure to report information or
failure to submit notification by
due date*
|
AED 1,000,000 + AED
10,000 per day of failure
(subject to maximum of
AED 250,000)
|
|
Failure to report information accurately
|
AED 50,000 to AED 500,000
|
What will the information provided on a CbC report be used for?
The BEPS Action 13 Report sets out three permitted uses for information contained in CbC Reports:
- To assess high-level transfer pricing risk;
- To assess other BEPS-related risks; and
- For economic and statistical analysis.
What sources of information should be used for the preparation of the CbC report?
The FAQ suggests that the sources should be consistent. Most common sources are:
- Consolidation reporting packages; or
- Separate entity statutory financial statements; or
- Internal management accounts.
It is further suggested that the CbC report must describe the source of information and in case of inconsistency, the reason for inconsistency may also be highlighted.
Economic Substance Regulations (ESR) in UAE
Applicability
ESR applies to all UAE entities who have obtained trade licenses or permits to carry out relevant business activity. Government companies are exempted.
Relevant business activity
- Shipping
- Holding Company/Headquarter
- Banking and Insurance
- Investment Fund Management
- Distribution and Service Centre
- Lease-Finance
- Intellectual Property (IP)
Further, there are illustrative core income-generating activities against each of the above business that are provided – Refer to our Tax Alert.
Economic substance test
- The Licensees must conduct core income-generating activities for the respective business lines referred to above.
- Managed and directed in UAE. Adequate frequency of Board of Directors meeting, knowledge and expertise of directors are certain key parameters under this test.
- Adequate number of employees
- Adequate assets to run the business activity.
Compliance requirement
Notification to be submitted: Whether or not it is carrying on Relevant Activity. If yes, details such as gross income, etc.
Report to be submitted: Annually within 12 months from the end of Financial Year, containing various operations related information.
Penal consequences for non-compliances
Failure to meet Economic Substance Test - AED 10,000 – AED 50,000 (First Year) thereafter, AED 50,000 to AED 3,00,000.
Failure to provide information or inaccurate information – AED 10,000 to AED 50,000.
Way forward
It is recommended for multinationals with their presence in the UAE to review their existing operating structure and also transfer pricing policy in order to mitigate/avoid risk emanating from the above substance and transparencyrelated regulations.
Given the penal consequences for non-compliances, it would be important to conduct an economic study and risk analysis in advance.