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Economic Substance Requirement ARTICLE

Logic and reason behind the regulation!

ESR (Economic Substance Requirement) under the Action #5 out of these 15 Actions
is a compliance requirement applicable to on BEPS
geographically mobile business activities of By virtue of ESR, business information of such
the multinational entities incorporated in the multinational entities (geographically mobile
Kingdom of Bahrain. businesses) would be disclosed and accessible
There has been a lot of discussion about through automatic information exchanges
ESR regulation since the year 2018 when between the countries. This information will
Ministry of Industry, Commerce and Tourism be made available to tax authorities wherever
(“MOICT”) issued the regulation through the a company has a presence. Companies
Ministerial Order number 106 of year 2018. would have to declare to the respective tax
Since then, much has been written about authorities- the need for their operational
‘how to file the report’ and ‘where to submit purpose, core income generating activities,
it’, however there is a very little insight into the any arrangements that might include
background and necessity of the ESR. This tax advantages, their tax identification
Article delves in the history for it’s esteemed details etc.
readers. BEPS Package if implemented properly
In recent times many multinational companies will equip governments with domestic and
across the world were employing tax international rules and instruments to address
avoidance strategies, they exploit gaps and tax avoidance, ensuring that profits are taxed
mismatches in tax rules to avoid tax. Biggest where economic activities generating the
culprit among these strategies is a tactic profits are performed and where value is
called ‘Base Erosion and Profit Shifting’. These created.
multinationals simply shift their income or Bahrain is following the BEPS initiative
profits to a ‘no tax or nominal tax’ country actively and has been pro-active in bringing
(tax heavens), these practices erode the tax the amendments into its domestic regulations
base. Due to these tactics; the country that and trying to make the reporting framework
generates revenue for these companies, in line with BEPS. In furtherance to this
unfairly suffer tax losses. initiative, now all entities required to file
The Organization for Economic Co-operation ESR report should complete the filing
and Development(OECD) is an intergovernmental requirements through the National Bureau
economic organization, founded in 1961 of Revenue (NBR) instead of MOICT. NBR
to stimulate economic progress and world has also launched a new International Tax
trade. In June 2016, OECD launched the Information Exchange System (ITIES) portal
Inclusive Framework on Base Erosion for this purpose.
and Profit Shifting (BEPS) which brings
together 141 countries and jurisdictions to Yogesh Patil, Director
collaborate on the implementation of the Boston Brooks Advisory WLL
OECD BEPS Package. Under this Package, Reference: https:// Bostonbrooks.com
15 Action plans were agreed. ESR declaration Responsibility for opinions expressed and the accuracy of
is the minimum standard requirement facts published in this article rests solely with the author.

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