Last year, the UAE government revealed plans to introduce value added tax (VAT), effective from January 1, 2018. Preliminary reports suggested that 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. In February 2017, the states in the Gulf Cooperation Council (GCC) region agreed to implement VAT, which is forecast to generate US $25 billion (AED 91.8 billion) every year.
However, so far there has been very limited official information on the specifics of how the VAT system is to be introduced in the UAE.
According to Dukes Dubai GM Tristan de la Porte du Theil, hotels are still awaiting details on the nature of the charge, exemption list of goods and services, and all accounting procedures.
“This is vital as we assess the potential impact on our customers, owners’ return, profitability and the government reporting requirement. Clarity is still needed on whether the calculation basis will be from the net sales price, which is the most common practice in other jurisdictions with VAT, or whether the new VAT will be added on top of the other fees, for instance, service fees and municipality fees,” du Theil added.
Based on this, the Dukes GM said that hotels need to be prepared for the VAT implementation so that the systems are in place from a billing perspective. It will also be vital to ensure processes are in place for both internal and external stakeholders to have their timelines set before January 1, 2018.
Setting proper processes is essential because, as Alex Kyriakidis, president of Marriott International’s Middle East and Africa operations, said to sister publication Arabian Business, the implications of the fee, on top of existing municipality and service charges of 20% as well as the tourist dirham tax, could convince customers to change hotels.
Mövenpick COO MEA Andreas Mattmüller is in agreement with Kyriakidis. He said to Hotelier Middle East in a previous interview: “VAT makes things very expensive, Dubai is not a cheap destination. You [currently] have service charge, municipality tax, if you add another tax to that it all starts to add up.”
Mattmuller also hoped for further details as soon as possible. “Ideally we would like clarification about everything, [and not just a single part of the potential framework]. How do we impose it? What goods will have a VAT charge? Is it breads or meat? We don’t have too much of information yet. But we are watching it carefully,” he said.
The main issue will be whether UAE hotels absorb the 5% VAT or seek to pass it on to consumers. There will also be some technical questions that need to be determined, such as the VAT treatment of forfeited deposits and fraudulent use of credit cards. What will the impact of VAT be on the revenue sharing agreement between the owner and the operator? And what will the impact of VAT be on a particular hotel management agreement? Subtle, and often unintended, differences in wording may result in different parties bearing the cost of the VAT.
However Dukes Dubai’s du Theil remains optimistic. “The additional levy of VAT does not simply mean we will add 5% to the current selling price, collect it from the customer and pay it to the government. Before getting to that point, we will need to take a strategic decision on whether to raise or hold prices for a while and absorb some or all of the VAT in order to gain market share compared to our competition,” he added.
At the GM Debate Advisory Panel meeting, Palazzo Versace general manager Sandra Tikal said she was concerned about the implementation and how the country might be perceived when it comes to ADRs. She said: “We still are on an international scale, the highest rates in the world, from STR data. You take that plus tourism dirham plus municipality fee plus service charge plus VAT...”
Jumeirah Beach Hotel GM Sven Wiedenhaupt responded: “We keep getting costs added on — that inherently means we need to be more expensive. It becomes our problem on our Profit and Loss statments.”
However, Radisson Blu Hotels, Dubai Waterfront & Dubai Canal cluster GM David Allan took a practical viewpoint at the advisory panel meeting. He said: “Hotels are not going to add 5% on the price. We’d like to think we can, but we won’t. We’ll absorb it. If any of us have worked in a place where VAT has gone up, we haven’t just slapped the percentage on it. We’ve absorbed that.”
It will be important to strike a balance to make sure all additional levies do not pass too much extra costs onto the customer, otherwise it may impact choice and preference, which may lead to a drop in demand, according to Dukes' du Theil.
Rotana CEO and president Omer Kaddouri said to Arabian Business in May: “There are lot of discussions to be had about VAT as I don’t think there is complete and utter clarity yet on how the VAT issue is going to pan out. I think it should start soon because the fact is that it is just around the corner. We are talking with a lot of other hotel chains to try to discuss what we think the best way forward would be, though there is no answer to it yet.”
Impact of VAT on UAE's F&B outlets
However the implementation of VAT could have a negative impact on UAE's F&B sector. Naim Maadad, CEO of Gates Hospitality elaborated further, “I am 100% certain that VAT will negatively impact the food and beverage, and hospitality industries. I believe that this will, in turn, lead to an increase in cost of living which will be a huge concern for society at large. Ultimately, I believe this will lead to a downward trend for a period of around six months from it being implemented, wherein all those impacted will understandably feel angry. It will most likely remain a topic of debate for around a year, by which point people will get used to it.”
So how exactly are F&B outlets preparing for the introduction of VAT? Maadad said that the industry as a whole is engaging with specialists to get a firm understanding of what level the compliance impact will be. “We will work towards a smooth transition and ensure we are fully prepared when it is formally implemented,” he said.
When asked if UAE hotels and F&B outlets are prepared for VAT, Maadad added that there’s already a municipality fee at 10%, service charge at 10%, tourism dirham at AED 20 per bed, “so all these things start to add up”.
But there is reason for UAE hoteliers to remain optimistic. Squire Patton Boggs head of hospitality industry team and partner Elias Hayek, and lead partner on VAT in the GCC Jeremy Cape said to Hotelier Middle East: “There is a reasonable argument that at least some of the ‘taxes’ that are currently imposed on the hotels sector should be abolished to ensure that the sector is not overtaxed and remains competitive.”
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