Economic Substance Regulations or commonly known as ESR, introduced by the government of UAE in 2019, requires offshore and free zone businesses to show substantial economic sources from Relevant activities performed by their businesses with in the UAE. ESR is a taxation regulation in order to avoid unlawful tax practices by the businesses in the state In order to maintain a sustainable business environment that can foster exceptional performances and cooperate standing of businesses being operated inside the UAE.
All the businesses that fulfil the need to fill an ESR report and notification must comply with the ESR requirements and provide a proof in terms of ESR notification and ESR report within the said time frame or they can face certain penalties depending upon the nature of non-compliance. However, most business face difficulties in standing well with the compliance and fail to escape the penalties. There are certain challenges they may face that are listed below along with their solutions.
1. Insufficient ESR Requirements’ Understanding
A lot of businesses often fail to fully comprehend the ESR filling requirements specific to their relevant activity/is. As different businesses differ in their model hence their ESR criteria may also vary that they fail to understand or misinterpret the information essential for them. This can lead to dales reporting causing penalties. For that matter, the businesses are required to have deep understanding of Business Model i.e., how their business fit well in the ESR framework and Service Portfolios i.e., to understand whether the services provided fall under the domain of Relevant Activities.
- Solution: professional accreditation and getting services by firms who have experience and expertise in order to have assistance and guidance on ESR requirements is a must investment for businesses.
2. Falsified Information
Failure in providing correct information for ESR filling is a huge error which can be a result of insufficient service quality and customer support.
- Solution: prior submission in-depth review and verification and documentation is must. Getting consultation from local expertise in comprehensive payroll solutions allows keeping the data and verification processes in a streamline.
3. Unable to Meet Substance Requirement:
Businesses sometimes fail to show adequate economic substance. This is specifically prevalent in companies that exercise across various regions without a tangible presence at a specified location. Lacking global presence and connections or appropriate local expertise can cause non-compliance.
- Solution: getting global presence at a said location and ensuring adequate number of employees and showcasing that business is operated locally. Years of operations and client convenience utilization can be a good support as well.
4. Insufficient Documentation and Ignoring Professional Help
Keeping the records up to date, well organized and verified is a must otherwise the business can fail to justify their compliance with law. A lot of businesses due to financial reasons, avoid professional help and don’t take services from local consulting firms that can cost them a lot in the future.
- Solution: businesses should keep detailed records of their activities I.e., financial statements, employee contracts, and minutes of board meetings. Firms that have a proven experience and track record in ESR compliance with comprehensive service offering and regulatory compliance support can assist in maintaining thorough and organized documentation. Businesses should look for firms that have strong client base and industry reputation as their client centric services and client focused approach can genuinely meet the business needs.
5. Deadlines and ESR Updates:
ESR deadlines are absolute and can’t be changed and unable to meet the deadlines can bring serious penalties with them. Also, regulations may change over time and not able to keep yours business up to the mark can cause problems.
- Solution: businesses must develop a compliance calendar and have a team to keep an eye on updates. Joining with thought leadership of industry, leveraging client reviews and testimonials from companies being successful in navigating regulatory changes can allow in gaining useful strategies.
6. Ignoring Affordability and Transparency in Professional Services:
Escaping good consulting firms with the fear of cost and burden of economy can cause a big problem.
- Solution: Businesses should invest in searching for best consulting firms that can provide pricing transparency and have exercised the principle of value of money. For that case, businesses can compare services oak ages, services portfolios and industry reputation of firms and find the one that suits them the best. Those firms that have a reputation of competitive pricing can provide comprehensive services to the businesses.
Conclusion:
ESR compliance is mandatory for business that fulfill the ESR requirement and avoiding mistakes in reporting ESR needs a proactive plan and in depth understanding of regulations. Maintaining transparent and accurate records and seeking help from the experts allows better compliance. Consulting firms that have a reputation of specialization, local expertise and client focused approach allows the businesses in maintaining compliance and build up industry reputation. Although ESR compliance is a tough task to do with expert support and diligent strategies can make the tough process go seamlessly and enhance the value of the business.
Read More: How to File ESR Notification in the UAE
