By Julia | November 21st, 2017 | VAT
As UAE is all set to welcome the new tax reforms with the introduction of value added tax (VAT) on January 1, 2018, it is a little difficult at this point to predict what lies ahead for one of the most prominent and flourishing sectors in the economy, namely hospitality and tourism, once the VAT comes into the picture. But let’s discuss some possible influence of VAT on the businesses and the people involved in the hospitality and tourism sector.
VAT is set to implement major shifts in the way businesses are operated in the hospitality industry. Organizations have to consider reshuffling their marketing and supply chain strategy. It is a recognized fact that this industry alone forms a considerable chunk to boost the GDP of the UAE. For this simple reason, the implications of VAT on this sector needs to be closely checked. The industry insiders are hopeful that the government will maintain a perfect balance and will not impose the hospitality and tourism industry with too many additional charges. This will help to avert any larger consequences on the consumer which may result in the sharp decrease in demand.
UAE being the prime tourist attraction owing to its exotic and picturesque locales, people hailing from the tourism and hospitality industry are well aware that it is not a sector that can be presented as a whole from the purview of VAT. There is a multitude of extremely distinctive functions or features that can be roughly divided as part of the hospitality industry, which includes airlines, tour operators, travel agents, accommodation and other services. Every one of these spheres will be influenced in some way or other by the implementation of VAT all across the GCC (Gulf Cooperation Council). Considering the intricacies that are prevalent across the tourism and hospitality businesses within the Gulf region, the entire industry in the GCC could turn out to be one of the most complex sectors to delve into regarding determination of the influence of VAT.
The tourism sector primarily consists of the following sub-divisions: tourism and tour operators, airlines, hotel industry etc. The range of tourism and hospitality services under these categories are quite vast and may include the following –
It is significant to define the particular VAT treatment of each one of these supplies to make sure VAT is applied and reported properly according to the government regulations.
The reason for the intricate nature of the hospitality and tourism businesses contributes heavily in the implementation of the VAT, in many aspects, both when it comes to a tax on transactions that happen within the industry as well as a tax that is concerned with a geographical region. The effect of the former suggests that not only is it essential to recognize the different kinds of transactions that may have been taking place within the industry, but also the connections that are formed as an inevitable outcome of making these transactions. In this case, one pertinent question that may crop up is:
Are these organizations serving as a principal or merely as agents?
Now many organizations in the tourism industry define themselves only as ‘agents’, but these organizations must take into account that they are serving as a principal in reality while acknowledging themselves an ‘agent’. This will be a significant determining factor as it will have an immense influence on the way in which VAT needs to be applied all through the tourism sector. On the other hand, the influence of the geographical factor is that the hospitality and tourism industry will be responsible for both domestic tourism activities aside from international tourism (both outbound and inbound). This leads to the unavoidable intricacies over the ‘place of supply’ and also over the applicable VAT rate. The industry has evolved as years passed by, which is partly due to the technological advancements that allowed people to buy online flight tickets, hotel rooms etc. However, this will make determining the place where the services are availed from and consumed, and the subsequent application of VAT more complicated. As it is, the sphere of domestic tourism will ideally be open to VAT at a specific rate. Inbound tourism will also possibly be included in the VAT structure in UAE and its other GCC counterparts at a pre-determined rate.
Outbound tourism, on the other hand, will resort to the partial implementation of VAT in the GCC at the standard charges, and will also adopt the VAT procedure at zero-rate (or entirely outside the domain of GCC VAT). Indeed, outbound tourism can in some cases, be preferable when it comes to export services. Within such services, the supply of the activities within the realm of hospitality and tourism will take place offshore and are likely to be brought under VAT in the country in which the tourism has flourished. To some extent, this will also rely on which features are carried out in the GCC states and the frequency in which these features are implemented.
The influence of VAT on the tourists
When a domestic tourist deals with a travel ‘agent’ for a package on an overseas trip, the said agent is liable to look after every aspect of the tourist’s requirements. For example, that ‘agent’ will book the overseas flight, will arrange for the accommodation, and will take care of other important aspects for the tourist overseas. The services offered would probably be considered as zero-rated from the perspective of UAE as the basic supply will take place offshore (generally by organizations that are located offshore and would not be required to register for VAT procedures in the UAE). The handling of the charges made by the ‘agent’ for the services he provided, might, however, be dependent on whether the ‘agent’ is serving in the role of an actual agent or as a principal. In this case, it is the tourist’s movements that in multiple ways will define whether supply will be zero-rated or should be brought under the VAT system at standard cost, rather than the VAT status of the travel agent.
In addition to that, it could be assumed as counterintuitive that even though the agent’s services may be availed in the UAE, and indeed payment may be made against the services, the services (namely air transportation facilities, hotel accommodation, tours etc.) will take place offshore, and are probably to be under the purview of VAT there. The agents will need to minutely go through each travel package to identify the correct implementation of the VAT. As for the agent’s separate services, while they happen in the UAE or any one of the GCC countries, the general contractual or legal relationship will be between the offshore service provider and the ‘agent’, that is the hotels, or car rental services etc. The agent is ideally paid by these service providers, instead of by the tourist himself.
The application of VAT for various tourism operators can differ from being comparatively simple to be a lot more complicated than the operators may be capable of dealing with. This intricacy may prompt some operators to make the necessary alterations to the way they carry on with their businesses. In simple language, tourism operators will normally discover that, if they breach the window for being able to sign up for VAT, they will need to apply VAT charges on their overall fees or remuneration. This will be applicable even after the fact that a considerable section of their client base will be tourists belonging to offshore, and also that many of these tours may be arranged while the tourist is located to some other country outside UAE. The act is that the tax authorities in UAE will possibly consider the perspective that the service is provided in the respective GCC state, and that it should hence be applicable for VAT there.
The tourism industry has a significant role to play in shaping up the Gulf economies and offers humongous scope for individual tourism operators throughout the UAE and other GCC countries, but every one of these operators will encounter major complications in the manner in which they are required to prepare themselves for the implementation of the VAT. It is clear from the discussed points in this article that we have only managed to scratch the surface of the potential intricacies. To give adequate time to solve the issues and be prepared for a successful application of VAT, it would be wise for the service providers within the industry to start their implementation procedures sooner instead of later.
The tourism industry in the UAE and its neighbouring countries is at its pinnacle, with millions of tourists flocking to explore the richness of the middle-eastern delights. With the implementation of VAT in all areas of tourism and hospitality industry, your business should be prepared for quantum shifts on how the operations are being carried out. This is when Uaevatexpert.ae can be beneficial to address your VAT requirements within the hospitality and tourism industry.
The services of the website are all structured so that it provides a wholesome solution to your issues. The consultants employed by the website are all industry veterans, adept at successfully offering their valuable insights on the implementation of the VAT.
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