UAE ESR Update: ESR Audit — What Process?
With the issuance of the new Cabinet Resolution No. 57 of 2020 concerning Economic Substance Requirements (“Regulations”) on 10 August 2020, the Federal Tax Authority (“the FTA”) was appointed as the National Assessing Authority.
The FTA’s functions include, without limitation: (i) undertaking assessments to determine whether a Licensee has met the Economic Substance Test; (ii) imposing administrative penalties where applicable; and (iii) hearing and deciding on appeals. The FTA has recently begun audits of UAE businesses to verify compliance with ESR regulations.
There are a number of actions that relevant Licensees must be undertaking to ensure compliance – from clarifying their entity classification to the structuring of contractual and delegation arrangements, the review and organization of their internal governance, their employment and premises arrangements, and the capturing of relevant business information which will be required for the preparation and filing of reporting information to the Regulatory Authority.
How does FTA inform about the Audit?
The FTA notifies the selected Licensees about the audit via email and provides the initial list of documents required for such audits.
What is the timeline for providing the information requested?
As per the ESR audit process, a five-day deadline is usually allotted for providing all the requested information, which poses challenges to the Licensees due to the short timeframe.
Licensees that do not cooperate with the FTA during the audit and do not provide required documents and/or information within the specified deadline would be subject to penalties.
What information is requested?
The FTA audit aims to assess whether the Licensee reported the applicable Relevant Activity and meets the economic substance requirements for each Relevant Activity. Hence, the documents required for the audit depend on the Relevant Activity reported in ESR submittals.
However, irrespective of the Relevant Activity, FTA requests some standard set of information during the audit process. The information requested is aimed to review operational, financial, tax, transfer pricing, legal, and governance matters, including but not limited to:
- A detailed and comprehensive explanation of the nature of operations and transactions, along with supporting documents (i.e. invoices, agreements, purchase orders, etc.);
- Working papers for the calculation of the financial figures reported in the ES report (e.g., relevant Income, accounting profit/loss, etc.);
- Board meeting minutes, resolutions, and agenda for board meetings;
- Evidence that non-resident directors that formed the quorum were present in the UAE for board meetings (e.g., flight tickets, hotel expenses, etc.);
- CVs of full-time employees or outsourcing agreements in case the Relevant Activity is outsourced;
- Timesheets/biometric logs of full-time employees;
- Working papers for calculation of full-time employees;
- Details of physical assets in the UAE (including the cost of physical assets, accumulated depreciation, and accumulated impairment).
- Floor plans for office/premises in the UAE;
How to be prepared?
Since the request made by FTA are detailed and with a challenging deadline of five days, the following measures should be put in place by all UAE Licensees:
- Carefully reviewing the Licensees’ factual situation vis-à-vis the provisions of the new ESR;
- Identifying the ongoing economic substance obligations applicable to the Licensee and maintaining supporting documents to prove the same;
- Providing accurate information in annual notifications and reports that are supported by the documents (e.g., number of board meetings, number of full-time employees and physical assets, etc.);
- Providing financial figures as per the finalized working papers, preferable audited financial statements. In the absence of them, the provisional financial statements might suffice;
- Appointing directors who can be physically present in the UAE when attending board meetings and making strategic decisions.
HOW CAN WE HELP?
We strongly recommend that all UAE companies falling within the scope of ESR review their governance arrangement and put in place all necessary measures to comply with the ESR requirements. Non-compliant practices should be remediated.
Our team is here to guide you through the ESR requirements and ensure full compliance therewith. Our ESR assessment/ diagnostic analysis assists you in understanding the compliance requirements as applicable to your company and the gaps identified. In case of an ESR audit, our team can support you in understanding the technicalities involved in the information requested by the FTA and guide you throughout the audit.
WHO ARE WE?
Re/think is a boutique outsource and advisory company providing client-focused services in tax advisory, accounting, human resources and business advisory.
We specialize in assisting clients with cost-effective, high-quality services and solutions. We create value by investing in highly qualified and motivated people and working closely with leading industry partners to provide our clients with a one-stop shop for all their business support needs which is tailored to suit your individual requirements.
Associate Director – Tax