REPORT: VAT SET TO TAKE A TOLL ON PAY IN UAE AND SAUDI ARABIA

UAE inflation-adjusted salaries to contract by 0.5 per cent in 2018, according to consultancy Korn Ferry

Employers and employees in the UAE and Saudi Arabia are set for a potential conflict in 2018 on the back of a contraction in salaries in real terms as the region’s two biggest economies introduce value-added tax, according to the human resources consultancy Korn Ferry Hay Group.

Salaries in the UAE are expected to rise 4.1 per cent this year, but after factoring in an expected inflation rate of 4.6 per cent, they will on average contract by 0.5 per cent, it said in a report released yesterday.

“Employers in Saudi and UAE are bracing for a challenging time as they battle with managing business costs and meeting the expectations of disgruntled employees,” the HR consultancy said.

Businesses and employees are preparing for additional complexities of managing costs with the introduction of VAT from January 1, 2018. The biggest impact will be on end-consumer products which will be subject to a 5 per cent rise in all major purchases including household goods and utility expenses, Korn Ferry said.

“There seems to be little indication of employers supporting any real wage increases to support employees with the additional cost of living,” it said.

Globally, employees will experience an average wage increase of just 1.5 per cent after adjusting for inflation, while in the Middle East, wages on inflation-adjusted basis are set to rise 0.9 per cent.

The demand for professionals and skilled laborers, especially in the hospitality, healthcare and food and beverage sectors is still high. While the introduction of VAT makes the UAE a relatively less attractive place for employment, it is unlikely to be a deal-breaker for people currently employed in the country or seeking opportunities here. The levy of the new tax at 5 per cent rate in the UAE is still below the global average of 15 per cent.

“Yes it does bring down the attractiveness of the place but relatively speaking, it’s still very good,” said Harish Bhatia, a management consultant at Korn Ferry Hay Group. “We’re all making a big deal over VAT because it’s a new tax and we’ve never played with the word tax in this part of the world but it had to come and it was inevitable so the government has other sources of revenue.”

Economists have argued that VAT is unlikely to cause a huge spike in the cost of living at a time when rents, one of the major monthly expenses for residents, have fallen. According to the government officials, VAT is expected to net an estimated Dh12 billion in the first year and Dh20bn in the second year. That is likely to give a shot in the arm to the economy, and will ultimately boost hiring, according to economists.

The UAE economy has suffered in the aftermath of the oil price crash but there are clear signs of a bounce back. The country’s non-oil economy had the biggest three-month gain in November, boosted by steep growth in output and new business, according to the latest Purchasing Managers’ Index, a key gauge of the country’s nonoil economy.