How VAT will impact UAE’s tourism sector

The travel and tourism industry is an important part of the UAE’s national economy, with the sector’s contribution to the national purse averaging Dh130 billion annually. More so, hospitality revenue in the UAE is forecast to increase by 10.8 per cent annually from last year to $9.8 billion by 2020, driven by a steady growth in international tourists at seven per cent annually, and the opening of new attractions and theme parks, such as Motiongate Dubai, Bollywood Parks, IMG Worlds of Adventure, Wire World Theme Park and Dubai Parks and Resorts.

According to the World Travel and Tourism Council (WTTC), travel spending by visitors to the UAE in 2016 grew at 4.3 per cent over the previous year, to reach $26.9 billion. So, with the impending roll out of Value Added Tax (VAT) in the country in 2018, how will it impact the sector?

The latest update from the ministry of finance is that businesses with annual taxable turnover of more than Dh375,000 are obliged to be a VAT registered business, whilst businesses with annual taxable turnover between Dh187,500 and Dh375,000 have the option to register.

Businesses with annual taxable turnover below Dh187,500 are not allowed to register. The taxable businesses have to charge VAT on their sales if their sales do not fall under the exempt or zerorated categories. In countries with established VAT regime, it is not unusual to either zero-rate or exempt goods or services which are of basic necessity in nature. However, it may not be the case for most of the tourist’s consumption in the UAE.

The travel and tourism sector in the UAE can be categorised into several components, such luxury, medical, education, meetings, exhibitions, events and other special interest group. It is expected that healthcare and education are zero-rated supplies in the UAE, however, the details are still to be announced. If these supplies are to be zerorated, the impact to medical tourism or education related tourism may not be applicable.

To dissect it further, there is a term that is normally used in the sector, known as MICE (Meetings, Incentives, Conferences and Events). This component accounts for a significant portion in the revenue generating drive of the tourism sector.

Unlike the luxury type of tourism, MICE tourism is often conducted purely for professional or education purposes, and as such may have different consequences for VAT purposes. Services operating in the MICE space may be on a smaller or a larger scale. Larger MICE events may take the form of industry or professional conferences, or trade shows such as the upcoming Expo 2020 or the regular exhibitions hosted at places such as the Dubai World Trade Centre or the Abu Dhabi National Exhibition Centre.

The current GCC VAT framework agreement gives the option to the member countries to either zero-rate or apply the standard rate on international hosting of events such as the World Expo. If the UAE takes the decision to zero-rate, this will benefit the larger exhibition where a standard five per cent rate may have significant impact.

For other related tourism items, such as luxury tourists, it is expected that the standard rate may apply. Currently the UAE is doing a feasibility study of a Tourist Refund Scheme where visitors and tourists will be able to claim a refund on the paid VAT on certain goods and services they purchase in the UAE.

Considering the lower percentage of the VAT charged and the potential administrative charge, which in other countries with VAT will be a certain percentage of the claimable amount, it is expected that the refund may also be very nominal to most tourists. Once and if the scheme is introduced, tourists should also consider the administrative burden and the actual refund received.

The road towards the implementation of the VAT is paved with hurdles, trials and errors, however, once streamlined, it will become the cornerstone of the UAE’s economic system.

The road towards the implementation of the VAT is paved with hurdles, trials and errors, however, once streamlined, it will become the cornerstone of the UAE’s economic system