What are ESR Penalties for Providing Inaccurate Information?

The United Arab Emirates (UAE) has implemented Economic Substance Regulations in 2019 to ensure that businesses operating within the UAE contribute to the country’s economy. Understanding and complying with Economic Substance Regulations is essential for businesses operating within the country. One fundamental aspect of compliance is to provide accurate information in ESR notifications and reports. The non-compliance with Economic Substance Regulations can result in penalties associated with providing inaccurate information, as outlined in Article 15, Offences and Penalties for providing inaccurate information, of Cabinet Resolution No. 57 of 2020.

Offences and Penalties for Providing Inaccurate Information

Economic Substance Regulations discourage businesses to provide inaccurate information to the Regulatory Authority or the National Assessing Authority by imposing penalties. These penalties are imposed on Licensee or Exempted Licensee who knows that the information provided is inaccurate but fails to rectify the inaccuracies once discovered. The penalties include:

1. Awareness of Inaccuracy: If a Licensee or Exempted Licensee provides inaccurate information to the Regulatory Authority or the National Assessing Authority and is aware of the inaccuracy at the time of provision and still submits inaccurate details, a penalty of 50,000 AED will be imposed by the Regulatory Authority or Federal Tax Authority.
2. Failure to Provide Required Information: If a Licensee or Exempted Licensee is unable to provide the required information shall face penalties ranging from 10,000 to 50,000 AED for the first time and 100,000 to 300,000 AED for a second successive failure. 

Role of the National Assessing Authority

The Federal Tax Authority is appointed as the National Assessing Authority to carry out assessment of the information provided by Licensees and Exempted Licensees to determine whether they have met the ESR test or not. For a comprehensive review of the business activities and compliance with the Economic Substance Regulations, the authority evaluates the information for up to six years, except in cases of fraud, misinterpretation, or gross oversight. If Licensees and Exempted Licensees continue to show non-compliance, the authority might suspend or even ban the entities from the relevant activities. When the National Assessing Authority determines that the Licensee or the Exempted Licensee has committed errors in the provided information during a specific financial year, the authority shall notify the entities about the penalties with following details:

• Inform the entity of its non-compliance with the Economic Substance Test for a particular financial year.
• Provide reasons for imposing administrative penalties.
• The total amount of the administrative penalty.
• A due date for payment, which must not be less than thirty days after the issuance of the notification.

Why Accuracy Matters

It is essential for the entities to understand the reasons behind ESR penalties associated with providing inaccurate information and take steps to avoid them by complying with the Economic Substance Regulations. Providing accurate information to the Regulatory Authority or the National Assessing Authority is essential for several reasons:

1. Compliance with Regulations: Compliance with the Economic Substance Regulations in the UAE is a critical part of ensuring fair business practices and preventing tax evasion. Failure to provide accurate and comprehensive information can result in legal and financial penalties. 
2. Business Reputation: The Company is required to provide accurate information to maintain sustainable business environment in the UAE. To avoid harm to company’s reputation, businesses engaged in Relevant Activities should prioritize transparency, accuracy, and compliance with ESR requirements when filing ESR notification and reports.
3. To Avoid Legal Penalties: Non-compliance with the Economic Substance Regulations can lead to legal penalties, investigations, and even ban on business activities in extreme cases. 
4. Tax Benefits: UAE offer tax benefits and other incentives to businesses that comply with ESR test requirements. Accurate provision of details in ESR notification and report ensures that a business can continue to enjoy these benefits.

Appealing ESR-Imposed Penalties for Providing Inaccurate Information

If Licensees and Exempted Licensees are imposed with penalties associated with providing inaccurate information under Economic Substance Regulations, entities have the option to appeal to the Federal Tax Authority. For Appealing ESR-Imposed Penalties, entity should follow these steps:

• Log in to the Ministry of Finance Portal and locate the “File Appeal” option.
• Provide a clear explanation for providing inaccurate information to appeal for the imposed penalties.
• Fill out all the necessary tabs and ensure that the attached documents and explanation are accurate.
• Ensure that all relevant supporting documents are attached to support your explanation for providing inaccurate information.
• Finally, click on the submit button to initiate the appeal.

The Role of ESR Consultants

To avoid penalties, businesses should hire expert ESR consultants and remain careful in complying with the Economic Substance Regulations and deadlines. These experts play an important role in ensuring compliance by verifying that the information provided in ESR notification and report is accurate, as well as provide assistance in meeting deadlines.