To create new sources of income, member countries of the Cooperation Council for the Arab States of the Gulf (GCC) have decided to introduce a minimum VAT in the nearest future. As for the UAE, it is going to implement VAT since January 1, 2018. What does it mean for the Emirates’ economy in general and its hospitality industry in particular?
All companies with annual revenues of Dh3.75M+ must be registered under the GCC VAT system. The VAT rate in the UAE will be only 5%. In comparison, in major advanced economies it amounts up to 20%.
The introduction of VAT should not have a strong negative impact on the social standard of living in the country. The UAE still remains tax-free in many regards – for example, it doesn’t collect tax on personal income. There are free zones in the country offering tax-free environment. Besides, such key areas as health, education, social services and basic foodstuff (over 100 items) will be exempted from taxation.
Special committees and working groups were established in all GCC countries to estimate the possible impact of the proposed changes on the regional economy and society as a whole. The introduction of VAT at a tax rate of 5 percent will make it one of the lowest in the world. Such low tax rates will have a minimal impact on the overall price level and won’t have a significant negative impact on the population's purchasing ability. At the same time, the indicated VAT rate is sufficient to raise the existing level of GDP by 4-5 percent, and further diversification of the national economy will raise the level of government revenues.
The introduction of VAT requires appropriate preparations. The GCC member countries, being tax-exempt jurisdictions, face the same problem – the lack of the necessary legislative framework and infrastructure. Each country needs to develop appropriate tax legislation. The governments need to create special tax services that will monitor the payment of taxes. In the case of the UAE, this tax service has already been established and basic laws governing the introduction of VAT have been adopted.
The introduction of VAT, despite possible difficulties, will refresh the economy of the region and will strengthen the international profile of the GCC countries. The lack of taxation in the UAE has often been criticised by various international organisations. The introduction of VAT at a minimum rate of 5% will not have a strong impact on business, but will make a step towards bringing the UAE legislation in line with the recommendations and standards of international organisations.
The forthcoming changes result in predictable price grow in the hospitality industry as well. The vast majority of hoteliers have already raised their tariffs. But this minor increase in tariffs is unlikely to play a significant role in demand fluctuations for such a popular destination as the UAE.
Besides, the growth of tariffs for hotels in the UAE is not always correlated with VAT. The rise of hotel prices mostly depends on the growing demand for the destination. Changes in prices due to VAT should be expected in next year's contracts. This will not be a fixed 5% rise, but a calculated sum of expenses related to the tax introduction: an increase in accountant staffing, the introduction of monitoring systems, the strengthening of marketing, and other related procedures.
Hoteliers and managers should aim at mitigating any potential negative effects and be ready to adjust their daily operations according to the changes. The primary measures may include updating all accounting methods and systems, staff training, the analysis of all existing contracts, internal and external transactions, creating clear refund procedures, etc. Taking into account all relevant elements of the business, hoteliers will be able to minimise the potential difficulties and get the best of VAT implementation.
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