Expert comment on how VAT fees coming in 2018 will affect cost of living in Dubai
Decades of tax-free living are set to come to an end across the GCC when the respective countries, including the UAE, introduce value-added tax (VAT) next year. The announcement caused ripples of anxiety among the Dubai population.
But set at five percent, the new levy seems a small figure when compared to the 150 countries already implementing VAT or a similar method of taxation (in the UK, for example, VAT is 20 percent).
Yes, we might see a general rise in our cost of living, but with the GCC members having already agreed to exempt 94 food products, as well as school fees and healthcare bills, from the new taxation, there’s no need to pack your bags just yet.
The new levy will, according to professional services company PricewaterhouseCoopers, help governments in the region “deliver on long-standing plans for economic diversification away from oil, while still being able to deliver social and economic programmes”. For the UAE, “VAT is expected to yield Dhs12 billion in the first year of its implementation and up to Dhs20 billion during the second year,” Sultan Al Mansouri, minister of economy, told The National earlier this year. But what will the knock-on effect for the public be in the UAE? We ask experts Jason Cook, aka The Financial guru (www.financial-advice.ae), Martin Amison, a partner at international law firm Trowers & Hamlins (www.trowers.com), and Martin Kubler, CEO of business consultancy sps:affinity (www.spsaffinity.com) for their views and advice.
What are the upsides to introducing VAT in the UAE? Cook: “VAT will provide the UAE with a new source of income, which will contribute to the quality of our public services now and into the future, which is great news for us all. It will also help the government move towards its vision of reducing dependence on oil and other hydrocarbons as a source of revenue, creating a more stable economy for us all to enjoy and prosper. Even at a low rate, VAT has the potential to raise huge amounts of revenue. And as the UAE is one of the most globally ambitious countries, with trillions of dirhams of infrastructure projects scheduled in the next ten to 25 years, creation of a stable revenue stream is good practise by the government.”
Amison: “As Cook says, VAT will be source of income that will help fund projects and services for the benefit of the people and will also help the government diversify away from oil and gas revenues as sources of income. I believe it won’t discourage business, as it is a consumer tax, and overall VAT is relatively simple in concept and politically far less controversial than direct taxes such as income tax.”
What could be the downsides? Amison: “Unfortunately, I think it’s going to be an unwelcome surprise increase in cost for many consumers. Also, VAT does not discriminate between wealthy or poor. The end purchaser of goods or services will pay unless the goods or services are in a special category – exempt or zero-rated [see explanation above]. However, prices of goods or services that are exempt are likely to increase, too, because the suppliers of these cannot offset the increase in the costs they have that include VAT. A simple example to illustrate the point is: imagine a shop that primarily sells goods that are exempt from VAT. The shop cannot charge VAT on the exempt items but will still have to pay VAT on many of its costs, such as power, water, cleaning contractors, equipment purchases etc. The position changes, however, if the goods are zero-rated rather than exempt. We wait to see what will be exempt and what will be zero-rated.”
Cook: “What’s perhaps most worrying for some is that VAT will make things more expensive here. An often-voiced concern, thinking that the introduction of the tax may set in motion a spiral in which tax, prices and wages feed on each other, is that VAT would be inflationary. It may comfort you to know this is conceptually misguided. There are a number of factors influencing price change, so without getting too complicated, in reality, any immediate rise in price will be insignificant and hard to attribute to VAT alone.”
So how will the new tax affect the cost of living in the UAE? Cook: “Dubai is an expensive place to live. Apart from high living and education costs, there are so many great things to see and do here that your salary can be burned away very easily. VAT, however, is not going to break your bank. Various studies and surveys over the years in multiple countries have concluded that there was no acceleration in the rate of price rises attributable to VAT.”
Amison: “The bulk of consumer spending is going to face a cost increase of five percent next year. We have been told that essentials (health, education, basic foodstuffs) will not increase but most things will.”
How are the city’s hotels and restaurants preparing for VAT? Kubler: “Our clients seem somewhat divided in this regard. Those who have operations in other countries, where VAT already exist, have already drawn up an implementation strategy and timetable and are only waiting for the full details to be released before going ahead. Those who have so far only operated in the UAE or other VAT-free countries are still busy gathering information on how the introduction of VAT will affect them.
How feasible is it that some companies might raise prices early, to avoid scaring consumers off in January? Kubler: “It’s feasible, of course. Having said that, I think it’s somewhat unlikely. I think it’s going to be a bit like when the euro was introduced as currency in the Eurozone. We just woke up, went to the shop and, voila, everything was in euros. Did things get more expensive? Some did, some didn’t, but the point is that it was a level playing field – everyone knew what was going on and when things would come into effect.
What measures might hotels and restaurants take to offset the price increase and keep customers? Kubler: “We’re not looking at a tax that only applies to a few hotels, but not to others. Everyone is in the same boat. Consumers will understand that VAT applies to virtually all businesses and services, so I question whether there’s a need to offset anything. What some of our F&B clients do in Europe is to run ‘Tax-free Mondays’ or similar promotions, where they discount food and drink by the tax amount, giving the illusion that items are actually tax-free. But it’s just another discount, of course. If businesses feel the need to save costs or maintain their customer base, they would probably face the same issues without VAT.”
So how will VAT impact our friends that run businesses here? Amison: “While the consumer pays the final VAT bill, businesses will incur cost, management time and risk. Businesses with an annual turnover of more than Dhs375,000 will have to register for VAT, administer and account for it, as well as understand how the whole system works. They will have to take advice, amend their accounting systems and, in many cases, add more staff to deal with VAT. They will charge and collect VAT, as well as paying and reclaiming VAT. Even though the major cost of the tax is ultimately passed on to the consumer, businesses will likely have increased costs of administration and potentially cash-flow costs. They also carry the risk of penalties for getting it wrong.”
Cook: “That’s all very true. Companies will need to budget for the event and consider the impact on all aspects of their business: IT, human resources, procurement, finance, legal and marketing. VAT will be applied on goods and services at each stage of the supply chain with the final payment, in theory, being borne by the consumer. For example, when you go to a retailer to buy a new pair of jeans, you pay VAT on your purchase. The retailer you bought the jeans from paid VAT, too, to the factory they bought the jeans from, and the factory paid VAT to the farmer who delivered the cotton to make the jeans. Businesses are able to claim VAT back, so in essence, they become a collector of tax for the government. Also, all businesses should be reviewing their current contracts to make sure VAT has been appropriately addressed.”
What creative approaches are you seeing to offset any downturns? Kubler: “Those clients that have already made plans are still keeping them under wraps. Others decided to generally focus on the basics and ensure that they are all as good as can be: service, product, location. In theory, you could do any number of promotions, but in the end, most of them will just be discounts.”
Cook: “A recent survey by [recruitment and HR firm] Hays says that 52 percent of businesses do not even have a VAT implementation strategy in place for the 2018 deadline, and 60 percent don’t even have a budget assigned for the change. Larger organisations, typically multinationals, seem to be more prepared, being well versed in the processes and practises around VAT, having similar operations elsewhere. Smaller organisations are perhaps relying on the fact that the Ministry of Finance has announced that some small businesses will be safeguarded from VAT for the initial phase. What is clear is that a re-organisation cannot be achieved within a short time frame and should be analysed immediately. Furthermore, organisations that also operate in other GCC countries have more complex cross-border transactions to examine, considering that VAT is also being considered as a region-wide system.”
Amison: “What some businesses are doing is watching for news; taking advice on how VAT will affect their business; reviewing their existing and future contracts to ensure that they can add VAT to their base price; preparing to have an accounting system in place that will enable them to charge, account for and record VAT; ensuring that they are sufficiently staffed and that relevant staff will be sufficiently trained to support the VAT accounting regime. Many are doing that but my guess is that many are not and will be unready when the time comes.”
Which companies or sectors will be most affected by the arrival of VAT in the UAE? Kubler: “It’s difficult to say. I think the top and bottom ends of the hospitality industry will continue to do fine, but the problem lies in the middle. That’s probably true for most industries. Consumers who go for top-of-the-range options (hotels, cars, fashion, etc.) will continue to do so as they have the necessary income. The same is true for bottom-of-the-range options. The battle will be fought in the middle, e.g., do I really want to spend Dhs400 plus VAT on a Friday Brunch every week or do I go to a place that only charges Dhs140 plus VAT. Or do I not go to brunch every week and instead go only once a month, but then spend Dhs800 plus VAT. The same applies, I believe, toother industries.
Do you see this as the first step towards a wider range of taxation in the UAE? Amison: “Yes and it is already clear that there will be some additional taxes on tobacco and sugary drinks. We are hearing there’ll be 100 percent duty on tobacco, for example. In the longer term, it seems inevitable that the government will raise more revenue from direct or indirect taxation, if only to maintain the growth of public facilities and services for an increasing population.”
Cook: “Apart from duty rises here and there, no, certainly not in the near future. Not because taxation is a bad thing – some of the best places to live in the world have the highest rates of tax – but because the UAE has a huge population of expats who are here to boost their wealth and avoid taxation. The moment those privileges appear to be in question it would jeopardise the confidence of these individuals who contribute heavily to the UAE’s economy. If the residency laws were to change and you were able to become a citizen of the UAE, I expect many people would gladly pay taxes in order to benefit society. No doubt that’s a long way off and many an expat’s dream. We do however live in hope!”
The information in this feature is provided for information purposes only. The information is not intended to be and does not consitute financial advice, is general in nature and not specific to you. Before making financial decisions, you should seek the advice of a number of experts and undertake your own due diligence. You are responsible for your own financial research and financial decisions.
Electronic goods will still be cheaper here than in the UK. For example, based on current prices, a Samsung Galaxy S8 64GB phone will cost you Dhs2,613 with VAT, instead of Dhs3,275 from Currys PC World.
Air travel is likely to be zero-rated under the new laws. This mean flights to see your friends around the world won’t be subject to VAT.
There’s likely to be a mini consumer boom before the end of 2017. It’s expected that people will rush to buy the latest TV, car or fridge before January 1. Don’t get left at the back of the queue.
It is likely the UAE will bring in VAT before its GCC neighbours. That means you could perhaps make savings by buying goods elsewhere in the region.
Staycations might not ending up costing you five percent more. As Radisson Blu’s David Allan recently told our friends at Hotelier Middle East, some hotels may “absorb” VAT.
Value deals across Dubai
It seems prices are set to rise, but right now, the city is bursting with great deals if you’re on a budget. To put a smile back on your dial (and some excitement back into your diary), we’ve rounded up some of the best offers in Dubai
Bargain bites at Le Petit Belge As well as ladies getting for free drinks all night and get 50 percent off food on Wednesdays, the new Belgian restaurant in JLT offers a two-for-one happy hour for all every day between 4pm and 8pm. Daily 4pm-8pm. Ongoing. Pullman Dubai Jumeirah Lakes Towers Hotel And Residence, Cluster T, JLT (04 567 1100).
Beach, pool, spa and lunch at Jumeirah Zabeel Saray This bundle features beach and pool access, a 45-minute Turkish hammam experience or sultan’s massage treatment and a set lunch in the Sultan’s Lounge Private Dining Room. Dhs590 per person. Until Aug 31. Jumeirah Zabeel Saray, Palm Jumeirah (04 453 0000).
Daycation at The Dek on 8 In need of a refresh but not enough holiday? Media One Hotel is here to help. Every day (yes, even weekends), The Dek on 8 is offering up a daycation pass for just Dhs75. It includes pool access and a towel, and that Dhs75 can be redeemed for food and drinks. Dhs75. Daily 7am-7pm. Ongoing. Media One Hotel, Dubai Media City (04 427 1000).
Dhs175 for drinks and bites at Rüya Head to Time Out Dubai’s Best Fine Dining Newcomer of 2017 for a special summer offer. Guests get three mixed drinks plus three bites handpicked by the chef for Dhs175 per person, daily from 6pm to 8pm. From 11pm onwards, it’s mixed drinks for Dhs25 each. Daily from 6pm. Ongoing throughout summer. Grosvenor House Dubai, Dubai Marina (04 399 9123).
Mini golf, pool and brunch for Dhs255 Dubai Creek Golf & Yacht Club’s summer offer includes a round of mini golf, a pool day and brunch at Legends restaurant – pool access and golf can be enjoyed before or afterwards. Dhs175 (soft drinks), Dhs255 (house beverages). Fri noon-3.30pm, 7pm-10.30pm; Sat noon-3.30pm. Ongoing throughout summer. Deira (04 295 6000).
Discounted stays at the Burj Al Arab This is absolutely one for the bucket list. Until the end of this year, UAE nationals and residents get 25 percent off best available suite rates, complimentary breakfast daily, access to the luxurious Burj Al Arab terrace, which includes two swimming pools, dedicated butler-serviced cabanas and a beach area with luxury daybeds and sunbeds, free evening hors d’oeuvres and drinks, unlimited access to Wild Wadi Waterpark, Talise Spa facilities and the private beach at Summersalt Beach Club. From Dhs3,375 per room per night. Until Dec 31. Burj Al Arab, Umm Suqeim (04 301 7400).
Exempt vs zero-rated: What’s the difference? Almost all countries that implement VAT apply preferential rates to some goods and services. In the case of those that are “zero-rated” the retail sale is not taxed and the supplier can reclaim the VAT costs of supplying the product. Exempt goods are either not registered for VAT, or, if they are, the VAT costs cannot be reclaimed on them.