Tax rollout in Middle East concerns hoteliers
Tax rollout in Middle East concerns hoteliers
08 MAY 2017 8:07 AM

Most agree the Middle East needs to introduce value-added and sales taxes in light of reduced energy income, but how it is introduced and what it means for hotel firms with cross-border assets remains a concern.

DUBAI, United Arab Emirates—The introduction of value-added/sales taxes to several nations throughout the Middle East is causing concern and confusion, despite agreement that such taxes are an obvious evolution in the region as it begins further diversification, sources said.

The United Arab Emirates is set to begin charging 5% VAT on 1 January 2018, and Saudi Arabia will follow suit in the “first half of 2018,” according to Badr Al Badr, CEO of Saudi firm Dur Hospitality.

“The addition of VAT is a natural evolution. Some (Middle Eastern) governments have added bonds to help yield curves of companies, and dynamics have started to improve, even with slumping oil prices. But mostly it is the private sector adding to growth, and that has led to a persistent rise in confidence and output in the area’s two major economies, the UAE and Saudi Arabia,” said Shady Shaher Elborno, head of macro strategy research, global markets and treasury, Emirates NBD, speaking on a panel tilted “Macroeconomic outlook for Middle East hospitality” at the 2017 Arabian Hotel Investment Conference.

“The private sector is responding to pressures, but we cannot say we are past the worst. We are optimistic for 2018 and 2019, but even the most optimistic prediction for oil means pressures remain,” Elborno added.

One major concern is that governments in some countries have not even announced when or how VAT will be imposed, panelists said.

Hoteliers in the region also would like to have legal clarification in regards to vacation ownership, they added.

Additional concerns focus on how to pay these taxes in businesses that cross national boundaries, as well as how to restructure companies to increase productivity.

“If we receive management fees, where do we pay them?” asked Amine Moukarzel, president, Middle East and North Africa, Louvre Hotels Group. “I wonder if we have the right auditors (on a government level) to process this? We need more time to change the culture. Are we going to swallow it, or are we passing it on to the customer, and can they afford it?”

He added that “we must remind them that the tourism industry will be the number-one VAT provider for the government.”

Joe Sita, CEO, IFA Hotel Investments, said he’s not sure the region’s advisory and accountancy firms are any clearer as to what will happen.

“I get lots of invites to tax forums,” he said.

Al Badr said he does not believe Saudi Arabia had the infrastructure that UAE has to count tourism numbers and hotel industry growth.

Legislative lag
Gulf Cooperation Council governments largely are putting into place sensible and needed reforms, in response to reduced income due to a slump in energy prices, panelists said.

But there have been some short-term negative effects, including “reduction of construction, in government spending and in the lowering of perks of government officials, which was reversed in April,” Al Badr said. He added that changes to the visa process for hajj pilgrims to Saudi Arabia would, in his estimation, increase those visitors from 2 million to 8 million a year.

Al Badr and Sita agreed that changes in the region will open opportunities.

“We’ve seen price pressures and reacted to them to the point we have seen some (revenue per available room) growth despite (them). … We have adopted a strategy at the Fairmont The Palm (in Dubai), for example, that has seen rate come back a bit, and demand and volume go up. We’ve been better and smarter about packaging,” Sita said.

New demand is also helping, panelists agreed.

“I heard on the radio (recently) that the (GCC hotel industry’s) future is east, and demographics are moving into the middle class. That will come with different travel needs, and midscale and economy brands will flourish,” said Ignace Bauwens, regional VP, Middle East and Africa, Wyndham Hotels Group.

“Wyndham’s Super 8 (brand) has more than 1,000 rooms in China, so bringing that brand into UAE will help connectivity,” Bauwens added.

Other panelists have their sights fixed on Asia, too.

“Indonesia is the largest potential market for hajj tourism,” Moukarzel said.

“Chinese travel is showing tremendous growth, mostly in the lower end, but it will improve. Yes, we are always concerned about new capacity, but when I arrived (in Dubai) as an outsider, I thought, how are we going to go from 30,000 to 60,000 rooms?” Sita said.

With the opening of the Westin Dubai Al Habtoor City in October 2016, Dubai surpassed its goal of 100,000 hotel rooms, according to reports.

“The Dubai government has its target of having 20 million visitors by 2020, and it is the middle class who is coming, so is the right thing to do to add another tax," Bauwens said. "Dubai is usually in the top five of expensive destinations. It all depends on how it’s done.”

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