Analysis: How will VAT in the UAE affect hotels?

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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Despite this, Farouk told us he is confident that hoteliers will not need to employ extra staff to cope with addition systems and administrations. “They will need to train their people. Training is very important. Whether the calibre of existing people will evolve with training is a different story. But I don’t think you will need to hire additional people,” he said, echoing Harding’s comments on training.

There have been concerns from some that the introduction of VAT will cause inflation, as well as a drop in demand in the hospitality sector. Farouk told us that he considered this a “short-term perspective”.

“You go to a restaurant, and normally pay AED 300 for a meal. But now, the bill comes to AED 315. Are you going to not go out tomorrow?” Farouk retorted.

“First of all, we are talking about something that is going to happen in 2018. There are a number of elements today that have started impacting the economy. You have oversupply in hotels. There is the geo-political situation. You have the election in the US. Global tourism is impacted. Regardless of if I increase or reduce room rates by 10%, it is not going to impact tourism. 5% is not going to make people change what they do.”

Farouk also suggested that, in order to avoid a drop in demand, hotels and restaurants will have to take some responsibility for their pricing structures. “So, you are eating at that restaurant, and instead of that restaurant charging you AED 315, they could charge AED 305, or AED 307, to ensure that guests still come in” he adds.

It is a sentiment echoed by Harding: “We’ll just have to be a little careful whether we absorb that in the current pricing or have it on top of the current pricing. We have municipality fee at 10%, service charge at 10%, tourism dirham at AED 20 per bed, so all these things start to add up.”

“We already know that the dirham is pegged to the dollar, and the dollar is very strong. The euro is extremely weak, as is the rouble. Already we’ve seen this year occupancies are flat on last year. But rates are 9-10% down. There are a couple of other things going on that we just have to be aware of, and particularly strategic about. We don’t want to out-price ourselves with what’s going on in the world.”

The VAT news has also been followed by some anxiety as to whether additional taxation measures such as income tax and corporate tax could follow. Farouk comments: “It was mentioned in June 2015 that corporate tax is coming. There’s a lot of discussion now on how the GCC should be completely aligned. One of the notions about VAT, and why they are giving this time frame, is that they want to align VAT across the GCC, so it doesn’t impact trade agreements,” he said.

“Now, if you look at the GCC, it is only the UAE and Bahrain that are tax-free. So, ultimately, if the majority has VAT and corporate tax, if you want to keep that notion of GCC alignment… Now, there is no income tax in any of those countries, so we don’t expect income tax to come in,” he concluded.