The impact of the newly added VAT on the UAE hospitality sector
By Mariano Faz, Head of TFG Asset Management
Earlier this year it was announced that the GCC states would introduce a value added tax (VAT) rate of 5% to be levied anytime between 2018 and 2019. The UAE Ministry of Finance has announced that it will be implemented as early as the 1st of January 2018.
Given that the hospitality sector is not exempt from VAT, as asset managers at TFGAM, we need to be prepared to adapt and implement new guidelines. With Travel & Tourism being one the most important sectors in the UAE (comprising 12.1% of GDP in 2016 according to the World Travel & Tourism Council), it is important to understand the implications the introduction of VAT will have. The asset manager needs to ensure that performance is not affected and to prioritize the owner's returns, simultaneously ensuring that the transition process for our operating partners and team is carried out in the most efficient way possible.
From an owner's perspective we need to make sure we mitigate any negative effects on our bottom line. Some hotels might choose to absorb this cost, which would directly affect their profitability while others may decide to add the VAT to their final price. In any case, the asset manager needs to assess the implications and be able to understand the impact of VAT on revenue projections and how it is influenced by this increase in cost.
Asset managers function as the link between hotel operators and hotel owners. The asset management team needs to assist the hotel operator, providing the right support to analyse and understand the implications of VAT on their day-to-day internal operations.
The introduction of VAT will impact the hotel's standard operational procedures. It will require asset managers to regulate all procedural changes introduced in response to the implementation of VAT and prepare to react to conditions which are specific to their industry.
The primary measures and considerations that we will have to assess include the following:
- Update all accounting methods/systems to include VAT
Accounting systems need to be updated and the finance teams need to be properly trained to comply with the new standards. The introduction of a new tax requires documentation to be filed accurately and diligently. Complying with VAT is a time consuming task, as exemplified by a study conducted by PWC which discovered that on average, it takes 125 hours of work per year to comply with VAT standards and this timeframe can vary greatly per region.
- Confirm with Property Management System (PMS) that VAT is incorporated
The PMS shall be updated accordingly. Most of them are regulated by international companies that are familiar with VAT, which should ease the process.
- Analyze all existing contracts (VAT-registered suppliers)
In order to recover VAT, the procurement department shall ensure that all suppliers are registered and compliant with the VAT system. Also, we need to monitor the potential increase in the price of their goods.
- Staff training and awareness
Staff will have to be trained on new Standard Operating Procedures (SOP) in order to offer the right VAT treatment according to the situation. In particular, training the accounting and finance departments should be emphasized.
- Confirmation of any changes with external stakeholders
All reporting modifications need to be explained to stakeholders, especially as cash flows will be affected due to the time interval between a purchase and the VAT refund.
- Identify any internal transactions
Companies with subsidiaries or affiliates will have to verify new taxation policies as transactions occur between them.
- Create clear refund procedures for VAT
As explained before, the tax burden is always on the final consumer so intermediaries and suppliers need to ensure refund procedures are in place to claim any VAT previously paid. Receiving a VAT refund can take up to a year or more in some markets, as due diligence is put into practice by the government.
The hospitality sector is an area where certain specificities could lead to a more complex re-structuring, whereby the support from the asset management team is key. One of these conditions concerns the regulation of the place and time of sale in order to claim the VAT. Early bookings, cancellations, tour packages, online reservations etc. makes this harder than in other industries. This is because the procurement and consumption of a product can occur at different times and in some cases, through a different entity than the actual consumer.
Well established management and good planning can help business anticipate these conflicts and regulate activities appropriately. Once VAT has been introduced, businesses can then further analyze any changes in consumer behavior and trends in demand growth. However, at this stage their main focus will be to establish new procedures and regulations in order to be fully prepared for the rate introduction next year. The role of the asset manager is to ensure these changes are smoothly introduced and act as intermediary between the business and all the stakeholders.
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