A Concept to Familiarise!
Despite the fact that most of the countries are having full-fledged tax authorities, tax profile and tax treaties, annual tax revenues are being leaked through loopholes, or call it “creative tax planning”.
In order to combat harmful tax practices including unlawful avoidance or tax evasion and to comply with initiatives introduced by the Organization for Economic Co-operation and Development (OECD), Economic Substance Regulation was introduced.
The Organisation for Economic Co-operation and Development, (OECD), came up with 15 Action Plan to tackle tax avoidance caused by Base Erosion and Profit Shifting and G20 countries took joint action and developed these action plans.
Under the OECD/G20 Inclusive Framework on BEPS, over 135 countries are collaborating to put an end to tax avoidance strategies that exploit gaps and mismatches in tax rules to avoid paying tax.
Economic Substance Regulation (ESR) been introduced in countries with low or no corporate taxes. The Economic Substance Regulation is an act that requires specific legal entities (Such as free zones) to demonstrate that they carry out substantial economic activities in these jurisdictions.
Economic Substance Regulations were introduced as a part of action plan 5 to curb harmful tax practices and became effective in the UAE as of 1 January 2019.
As a member of the OECD Inclusive Framework, the UAE is committed to ensuring that the UAE’s legal and commercial framework is in line with global standards and is subject to review by the OECD to ensure that these standards are implemented.
The Regulations require UAE onshore and free zone companies and other UAE business forms that carry out any of the Relevant Activities listed below to maintain an adequate economic presence in the UAE relative to the activities they undertake.