GCC cost of living to rise after VAT, say business experts

Companies in the region would need time to redesign their strategies to focus more on long-term investments.

29 November 2016
By Yasmine Saleh

Business experts in the Gulf Arab region warned that if government authorities do not provide more clarity on the introduction of value-added tax (VAT) in 2018, it could lead to confusion for retail operators in a number of business sectors, as they struggle to understand how to manage their accounting structures and the extra costs.

Ever since the six-nation Gulf Cooperation Council (GCC) agreed in February to introduce a 5 percent VAT in 2018, the business community has been waiting anxiously for more details from officials on how the system will be implemented.

Analysts expected the United Arab Emirates to take the lead and announce some details last month, but a source familiar with the UAE discussions told Zawya last month the announcement had been delayed to an “indefinite period of time” until a decision was made over which sectors and products to be included on the list. Another source familiar with the process confirmed that there was no agreement yet on which sectors would be excluded from VAT.

Companies in the region would need time to redesign their strategies to focus more on long-term investments as a result of the initial impact of the introduction of VAT, according to Saleh M. Tabakh, the executive director of the Delta Real Estate brokerage, which operates in the GCC.

“The effect might be negative on the short-term as it will take time for the market to understand the new system and adopt it. We anticipate uncertainty for two to three years before recovery,” he told Zawya in a recent email interview.

Mohamed Alabbar, a prominent businessman and chairman of Dubai’s largest listed real estate firm, Emaar Properties, said he was in favour of VAT and that the extra cost could get split between the merchants and end users. “Honestly, VAT is used globally, the consumer will have to get used to it. Retail will take a little bit of that, the customer will take a little bit of that but I think it is fair,” Alabbar told reporters at a media event in Dubai this week.

“We don’t pay income tax or corporate tax… Government provides us with good infrastructure and they take a bit of charge off us I think is fair. We all have to adjust,” he added.

Consumer will pay

Abdulaziz Al Ghurair, CEO of Mashreq bank and the chairman of the UAE’s Banking Federation, said he expects the introduction of a 5 percent VAT to increase the cost of living in the UAE.

“The 5 percent will hit whatever sectors they hit. There will be no difference between one sector (and) another. Ultimately, who will pay this is the consumer,” he said.

Tax experts said companies need to be looking at what VAT will mean for them from an organizational, operational, commercial and financial perspective.

Al Ghurair, whose conglomerate Al Ghurair Investment runs a range of businesses across the Middle East region, said it could take companies in the UAE between one to two years to adjust to the VAT system.

“Eventually they all have to comply. It will take us time to understand, digest and get ready for VAT… When 2018 comes I don’t think we will be absolutely ready to jump in. It will be an adjustment, one year or two years,” he told Zawya in an interview last month.

Absorbing costs

Tabakh said consumers and investors should not absorb the extra cost alone.

“The tax should not be imposed on end users and investors to keep the market steady and attractive,” he said. “The extra cost should apply on both parties.”

Tax experts also said retailers could offer to absorb the initial hit on increased costs.

“Many (retailers) may, as an initial marketing ploy, offer to cover the full amount of the VAT in order to keep volume of sales at a reasonable level during the settling-in period,” Bruce Hamilton, the Middle East consumer business industry VAT leader at Deloitte, said in a report issued by the consultancy firm in October.

Regardless of who pays the extra cost, one big unknown at present for retailers is which products and services will be included, and which will be exempted.

Some indication was given earlier this year when the UAE Minister of State for Financial Affairs Obaid Humaid Al Tayer told Dubai-based newspaper Khaleej Times that basic food items as well as social, health and education services would be exempted.

“A business issue that retailers need to ponder is what will happen on the night of 31 December 2017,” said George Campbell, Deloitte Middle East automotive industry VAT leader, “the same applies to automotive”.

“The answer to this is that any self-respecting budget conscious shopper will consider perhaps accelerating a purchase, in order to avoid the VAT’s cost.”

Market confusion

A Deloitte whitepaper on the automotive industry, released last October called for clarity on how VAT would be imposed on vehicle purchases, in a bid to reduce confusion within the industry.

If it looks likely that VAT will be imposed on cars, this would lead to a short-term surge in demand as consumers look to avoid the extra cost when the tax is introduced. This means that dealerships need to consider building up inventory ahead of a potential surge, while keeping an eye out on the second-hand car markets as people move to sell their cars and buy new ones ahead of 2018.

The Middle East’s VAT and Indirect Tax Leader for consultancy firm PwC, Jeanine Daou, urged the GCC governments to release details of how the sector will be impacted.

“What businesses would want is to understand what is coming and when it will be implemented… So the more clarity, the more certainty, the better businessmen would be able to assess,” Daou told Zawya in an interview.

Ahead of the release of detailed information, most of those in the business community are still pessimistic about the impact that VAT will have, according to a new survey of more than 200 GCC-based financial executives from Bahrain, Kuwait and the United Arab Emirates (UAE).

The research, carried out by the CFA Institute, a global association of investment professionals, showed that 61 percent of respondents believe the introduction of VAT will increase the cost of doing business and compliance for firms, while 17 percent said it would discourage foreign direct investment.

Click here to read Zawya's full Special Coverage on the introduction of VAT.

(Additional reporting and editing by Shane McGinley)

© Zawya 2016