In late February 2016, the government of the UAE revealed plans to introduce value added tax (VAT), effective from January 1, 2018. According to initial reports, VAT will be implemented at 5%, and is expected to be added to services, as well as luxury, non-essential goods, including a list of 150 food items.
It is expected that the UAE government will release more details in June 2016 regarding what VAT will be levied on, and the intricacies of how it is expected to be implemented. Businesses will be expected to implement and report VAT from January 1, 2018, but will have 12 months to have their VAT systems in full and efficient working order — by December 31, 2018.
“So far, there hasn’t been any clarity on what VAT will be used for. In my personal opinion, the notion that this is just closing a gap or hole in the deficit does not make sense because the returns of this are just 2-3% of GDP if that,” said Hisham Farouk, CEO of accounting and consultancy firm Grant Thornton.
“I look at this more as institutionalising a government structure for the long term. I don’t think short-term gains are the aim. All in all, if you look at some of the other markets, and what VAT has done for them, yes, it is additional income for the authorities, but it also allows for a greater level of transparency in business. From one perspective, you will suddenly have to have policies and systems in place to report these numbers, which then strengthens the financial operational infrastructure of the business,” Farouk said.
The initial impression from talking to hospitality professionals in the country is that they feel the new tax legislation will certainly make a difference to their business, its pricing and operations. However, at 5% as an introductory rate (as opposed to countries such as the UK, where VAT is charged at 20%), the impression seems to be a relatively positive one from hoteliers, who are not convinced it will affect their business negatively, and are concerned with better understanding how VAT will operate in the UAE.
Speaking to Hotelier Middle East, Taj Hotel Dubai GM Jason Harding shared a fairly positive outlook on how taxation will change operations: “As a British national, I’ve worked with VAT for many years. We know how it works, but we don’t know yet specifically how it is going to work in the UAE. It will take a while to bed in, as any new initiatives do, but hopefully, we’ve got a long enough run in to make it happen.”
During that run up to January 2018, Harding explained some measures he anticipated Taj Dubai will implement in order to be VAT ready: “We’ll have to set up the system to incorporate VAT, we’ll have to make sure that our property management system charges it, make sure our suppliers are VAT-registered, get all the certification. There will be a lot of training and it’s much more complex than just adding 5% to your bill.”
According to Farouk, businesses will typically need between 12-18 months to become VAT ready. “We are advising clients that as soon as we hear more details in June, start preparing for VAT,” Farouk said.
“The way VAT works is, you purchase shampoo for AED10, so you are going to record that you brought the shampoo, and you paid 5 fils to the government for shampoo. Then you sell the shampoo for AED11 and you get your 5 fils back. So, in your final books you report, I paid the 5 fils, but I got it back. That balancing has to happen internally and then you report it to the government,” Farouk explained.
“Within the organisation, you have to have a whole new mind-set. One, the notion that with VAT comes additional costing and income generation. Two, there is now a regulatory requirement that we all have to abide by inside the organisation.
“There are a lot of things that companies need to do to get ready. First, they need look internally at their processes to capture data. Secondly, they are going to have to look at their procurement, the contracts that are in place, the payment, the agreement terms. If you have contracts that roll over to 2018, you are going to have to amend them. Finally, they have to look at their IT system, and completely update it to take on the VAT element. When the 10% sales tax came in hotels, there was a portal that everyone had to learn and get used to.”
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Jun 29, 2016 , Nigeria
VAT is a normal charge for Hotel operations & users and will not be anything new should the government of UAE introduce it come 2018. It is paid by guests and suppliers not the hotel. The main issue if I understand it, is that there are already too many additions to the guest's bills that will ...