Hospitality News Middle East - - BUSINESS - pro­to­

An in-depth look at the lat­est tax leg­is­la­tion in KSA, what in­dus­try play­ers can ex­pect and how to pre­pare, by Chadi Chidiac, man­ag­ing part­ner of PRO­TO­COL

The Gulf Co­op­er­a­tion Coun­cil (GCC) states are pre­par­ing for the in­tro­duc­tion of a Value Added Tax (VAT) in the re­gion start­ing Jan­uary 1, 2018. The pro­posed tax will be charged on most goods and ser­vices at a stan­dard rate of five per­cent, other than lim­ited, specif­i­cally ex­empt and zero-rated sup­plies. Busi­nesses reg­is­tered of­fer­ing goods and ser­vices at the stan­dard or zero rate are usu­ally en­ti­tled to claim a credit for VAT in­curred on their busi­ness ex­penses or in­put VAT.

The Gulf Co­op­er­a­tion Coun­cil Uni­fied Agree­ment for VAT and Ex­cise Tax is the frame­work through which GCC mem­ber states will im­ple­ment their own tax, ex­cise tax and reg­u­la­tions at na­tional leg­is­la­tion level. Mem­ber state rat­i­fi­ca­tions, such as that un­der­taken in Saudi Ara­bia on Jan­uary 30, 2017, rep­re­sent one of the fi­nal stages be­fore the taxes are ap­plied. The pub­li­ca­tion of the draft tax law is an im­por­tant step for the King­dom en route to a trou­ble-free im­ple­men­ta­tion of the new tax, in line with its ef­forts to im­prove com­mu­ni­ca­tion with tax­pay­ers, while cre­at­ing pub­lic aware­ness.

The law in ef­fect

The ex­cise tax law be­came ef­fec­tive on June 10, 2017, in KSA on key items, namely en­ergy drinks and to­bacco de­riv­a­tives, at 100 per­cent, and soft drinks and car­bon­ated wa­ter at 50 per­cent. In­put VAT can­not be claimed on sup­plies of ex­empt goods and ser­vices, mean­ing that this con­sti­tutes a tax cost for these busi­nesses.

When it comes to the im­pact of VAT on com­pa­nies in the hos­pi­tal­ity and leisure seg­ment, there are im­por­tant is­sues to note. In most tax ju­ris­dic­tions, hos­pi­tal­ity and leisure sup­plies are con­sid­ered tax­able. As such, in­dus­try play­ers in this area are re­quired to charge VAT on their sup­plies, mostly at stan­dard rate. They are also en­ti­tled to deduct or col­lect VAT in­curred on their ex­penses. Over the years, GCC states have col­lec­tively wel­comed mil­lions of vis­i­tors, with ar­rival num­bers still surg­ing in most des­ti­na­tions. The like­li­hood, there­fore, in the GCC con­text is that hos­pi­tal­ity and leisure com­pa­nies will be pro­duc­ing sup­plies which will be con­sid­ered as tax­able.

The hos­pi­tal­ity im­pact

The hos­pi­tal­ity and leisure arena in­cludes a range of sub­sec­tors, such as tour op­er­a­tors, ho­tels and restau­rants, and air­lines. The scope of their ser­vices is broad, en­com­pass­ing: • Tour op­er­a­tors and pack­ages • Trans­porta­tion • Ho­tel ac­com­mo­da­tion • Restau­rants • Tick­et­ing fees • En­ter­tain­ment and util­ity fees, such as tele­phones, tele­vi­sion and in­ter­net • Recre­ational fees, such as wed­dings • Con­fer­enc­ing ac­tiv­i­ties, such as ex­hi­bi­tions • Ser­vice charges • Agency ser­vices (act­ing as an in­ter­me­di­ary or co­or­di­na­tor) Thus far, the pur­pose of in­tro­duc­ing VAT re­mains un­clear. Per­son­ally, I be­lieve that im­ple­ment­ing it sim­ply to plug the gap in the deficit makes no sense, since the bot­tom line will reach no more than three per­cent of GDP. Rather than seek­ing short­term prof­itabil­ity, it will be more ben­e­fi­cial to fo­cus on putting in place sound in­sti­tu­tional gov­ern­ment struc­tures for the long haul. In brief, re­call­ing the ex­pe­ri­ences of some other mar­kets, while the ben­e­fits of VAT might have in­cluded ad­di­tional in­come for the au­thor­i­ties, the tax has also helped to pro­duce a greater level of trans­parency

across the busi­ness en­vi­ron­ment. To give just one ex­am­ple, an or­ga­ni­za­tion will im­me­di­ately have to put reg­u­la­tory struc­tures in place to re­port these num­bers, which, in turn, will boost the fi­nan­cial and op­er­a­tional in­fra­struc­ture of the busi­ness.

The first im­pres­sion we re­ceive when spend­ing time with hos­pi­tal­ity com­mu­ni­ties across the re­gion is that they feel the new tax leg­is­la­tion will un­doubt­edly make a dif­fer­ence to their op­er­a­tions in terms of pric­ing poli­cies and op­er­a­tional process. How­ever, given that VAT will be set at an in­tro­duc­tory rate of five per­cent, well be­low that of coun­tries such as the UK, (20 per­cent), and Le­banon (10 per­cent, pos­si­bly ris­ing to 11 per­cent), the sen­ti­ment seems to be op­ti­mistic. Sev­eral op­er­a­tors are con­fi­dent that their busi­ness will feel no ad­verse ef­fects and are keen to bet­ter un­der­stand how VAT will op­er­ate in KSA.

Fur­ther down the road and nearer to Jan­uary 2018, ad­di­tional mea­sures and mod­i­fi­ca­tions will need to be im­ple­mented by hote­liers and hos­pi­tal­ity op­er­a­tors in or­der to be VAT ready. It is im­per­a­tive that they set up the nec­es­sary sys­tem for VAT, en­sur­ing that man­age­ment charge it and that sup­pli­ers are Vat-reg­is­tered, by re­vis­ing all cer­ti­fi­ca­tions. In­dus­try play­ers must bear in mind that ex­ten­sive train­ing will be re­quired, with pro­cesses much more com­plex than sim­ply adding five per­cent to an in­voice. Busi­nesses will typ­i­cally need be­tween a year and 18 months to be­come VAT ready. Within your or­ga­ni­za­tion, it’s your re­spon­si­bil­ity to adopt a whole new mind­set. The first step is to rec­og­nize that VAT brings ad­di­tional costs, as well as in­come gen­er­a­tion. The sec­ond is to be aware that there is now a reg­u­la­tory re­quire­ment by which all stake­hold­ers in­side the or­ga­ni­za­tion must abide.

How to be VAT ready

There are sev­eral steps that com­pa­nies need to take in or­der to be well pre­pared for the new tax: 1. Look in­ter­nally at the data-pro­cess­ing cir­cuit. 2. Ex­am­ine all pro­cure­ment chan­nels, reg­u­la­tions and poli­cies, the con­tracts that are in place, the pay­ment meth­ods and fa­cil­i­ties, as well as all agree­ment terms. If you have con­tracts that roll over to 2018, you are go­ing to have to amend them. 3. IT sys­tems must be a pri­or­ity. They will need to be com­pletely up­dated and trans­formed into Vat-com­pat­i­ble sys­tems. When the 10 per­cent sales tax was in­tro­duced across Dubai ho­tels, op­er­a­tors were obliged to ac­cess a por­tal and fa­mil­iar­ize them­selves with it.

Con­sumers still test­ing ground

The chal­leng­ing eco­nomic con­di­tions in 2016 weighed on Saudi con­sumers, a trend par­tic­u­larly pro­nounced in the restau­rant and ho­tel seg­ments. How­ever, a re­cent ground sur­vey ex­e­cuted by PRO­TO­COL showed a re­cov­ery in sales for the first quar­ter of 2017, up 10 to 15 per­cent­age points.

With a strug­gling econ­omy pro­duc­ing a plateau in sales, GCA has plunged sharply. In­di­ca­tions are that eat­ing at home, rather than ven­tur­ing out to restau­rants, is a pref­er­ence for many, ac­cord­ing to PRO­TO­COL’S key per­for­mance in­di­ca­tor (KPI) of sales vol­umes, which showed gro­cery spend­ing out­pac­ing restau­rant spend­ing. The data in­di­cated that checks at restau­rants and ho­tels were 5 - 7 per­cent lower on av­er­age so far in 2017.

Dis­counted rates – lat­est weapon for the hos­pi­tal­ity in­dus­try

It has be­come clear that many restau­rants and ho­tels have turned to dis­count­ing in an ef­fort to fight the slow­down in con­sumer spend­ing. Back in De­cem­ber 2015, food for con­sump­tion at home be­came five per­cent cheaper in the King­dom, while restau­rant and ho­tel rates fell around two per­cent­age points. Lower prices can also be at­trib­uted to a stronger US dol­lar.

Im­pact of the new laws as yet un­clear

The na­tional pol­icy of re­plac­ing ex­pa­tri­ates with Saudi na­tion­als in the pri­vate sec­tor, known as Saudiza­tion, re­mains a bur­den for many busi­nesses, es­pe­cially those look­ing for low-skilled la­bor. Around 70 per­cent of work­ers in the King­dom are for­eign­ers. More­over, ex­pats make up be­tween 80 and 90 per­cent of the lowskilled la­bor work­force. A levy of SR 200 per month is paid by com­pa­nies op­er­at­ing in the King­dom on each ex­pat em­ployee they hire over and above the num­ber of lo­cal work­ers. An ex­pat levy to be phased in by 2020 will in­crease la­bor costs, es­pe­cially those of ho­tels and restau­rants, by push­ing charges to up to SR 800 per worker.

The food and bev­er­age in­dus­try will also be di­rectly af­fected by the 50 per­cent tax on soft drinks, which aims to curb obe­sity lev­els in the coun­try, and the 100 per­cent tax on cig­a­rettes and en­ergy drinks.

Op­ti­mism for tourism

A re­cent hike in devel­op­ment re­lated to tourism has also been ev­i­dent of late. A to­tal of 170 ho­tel mas­ter­plans have been fi­nal­ized and trans­ferred to the ex­e­cu­tion phase in the KSA, 48 of them in Riyadh alone, high­light­ing the po­ten­tial for a fur­ther surge in the coun­try’s tourism sec­tor. Cur­rently, F&B spend­ing per vis­i­tor com­prises about 14 per­cent of the spend in Dubai and 32 per­cent of that in Abu Dhabi.


The vi­sion of the King­dom’s lead­er­ship, the royal fam­ily, is to aim high, think big and make bold moves. Given cur­rent macroe­co­nomic con­di­tions, it won’t be plain sail­ing, as a di­ag­no­sis and anal­y­sis of the chal­lenges and op­por­tu­ni­ties within the KSA’S hos­pi­tal­ity sec­tor for the months ahead in­di­cate. How­ever, over­all, growth rates look likely to ac­cel­er­ate in 2018. The IMF ex­pects the King­dom’s growth to re­bound to 2.3 per­cent y-o-y, slightly less than the lender’s Oc­to­ber fore­cast of 2.6 per­cent, but still head­ing in the right di­rec­tion.

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