Opinion: How VAT in UAE Will Affect Tourism, Hospitality Sectors

Published October 30th, 2017 - 11:54 GMT
VAT is likely to bring notable changes in the way business is carried out by hospitality firms in the UAE. Here are some of these changes. (File photo)
VAT is likely to bring notable changes in the way business is carried out by hospitality firms in the UAE. Here are some of these changes. (File photo)

As the GCC is ready to embrace a new tax regime in the form of a value-added tax (VAT) starting from January 1, 2018, it is critical at this point to decode what is in store for one of the most promising sectors of the economy: tourism and hospitality, from a VAT perspective.

This article explores the likely impact of VAT for businesses and individuals in the UAE hospitality and tourism industry.

VAT is likely to bring notable changes in the way business is currently being carried out by hospitality firms. It will make them rearrange their supply chain and marketing strategy. It is a known fact that this sector contributes a significant amount to the GDP of the UAE. According to media reports available in the public domain, hospitality revenue in the UAE is forecast to increase to $9.8 billion by 2020. For this reason, the impact of VAT on this sector needs to be closely monitored. The industry is expecting that the government will strike a balance and will not saddle the hospitality and tourism industry with too many extra costs in order to avoid a large impact on the consumer which may lead to decline in demand.

As the famous saying goes, there are no free lunches - and the same applies to the concept of VAT as well. From January 1, meals in restaurants will be levied with a five per cent VAT. In general, VAT will mean an increase in prices for individual consumers but the increase will be marginal because of the basic nature of VAT and the way it works in the form of credits and basic exclusions.

VAT-registered businesses in the UAE will also be able to claim VAT credit for travel-related costs incurred for business purposes, thus negating the overall impact on price increases. For example, if an employee takes a business client out to a hotel for a meal and expenses the cost to their employer, the VAT cost of that meal can be claimed back by the employer from the government as credit.

The UAE is known as a popular location for destination weddings, shopping festivals and sports events. Considering this, it is expected that a VAT refund scheme for tourists would be introduced to continue to maintain the charm of the UAE as a favoured destination.

Globally, from a VAT perspective tax on the hospitality and tourism sector has been carefully designed and the GCC region is not an exception. Most hotels and restaurants often have multiple sources of revenue, each with a different tax treatment such as the supply of food and beverages, spas and salons, banquet and business centres, room rates, tour packages, etc. There will be a need for robust information technology support to consolidate all such revenue streams and determine VAT liability in a comprehensive manner.

When it comes to tours and travel, there are a number of things to look at when determining VAT liability. Specifically for air travel, there are several charges ranging from excess baggage charges, cancellation charges, no-show charges, to on-board food and beverage charges each of which have different tax treatments.

The jurisdiction for the taxability of Soto tickets (sold outside, ticketed outside) for flights originating from the GCC could also possibly result in subject matter interpretation and different tax treatments. The challenges surrounding the value of supply for tickets sold in terms of the inclusion or exclusion of various fees and taxes collected by airlines as agents of the airport authorities, and discounts on redemption of loyalty air miles for ticket bookings will provide a range of new considerations for airlines.

It is widely observed that UAE businesses are now preparing to assess the impact of VAT and get used to the changes it will bring which is a welcome move. Awareness workshops conducted by the Federal Tax Authority are proving extremely useful and beneficial for the hospitality and tourism industry in terms of being more aware and taking informed business decisions. After examining the impact of VAT on the hospitality industry and others, we can see that VAT is not simply a tax or accounting change but an overall business change. A well planned VAT impact and implementation strategy will help companies be not only VAT ready and compliant on day one but also to ensure business as usual and even leverage certain tax optimisation strategies to improve their prices and gain a competitive edge.

By Pratik Shah, resident partner at WTS Dhruva Consultants. 


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