The GCC members having so far agreed to exempt 94 food products, as well as school fees and healthcare bills, from the new taxation.
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.
“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.”
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?
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.”
So how will VAT impact our friends that run businesses?
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?
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.
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?
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, to other industries.
Do you see this as the first step towards a wider range of taxation?
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!”
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.
source credit – Time Out Dubai
Full article – http://www.timeoutdubai.com/aroundtown/features/78017-how-you-will-be-affected-by-vat-in-the-uae