While the new value-added tax (VAT) does not directly affect residential property, the housing market will definitely feel the effects of the new tax regime. From the outset, the increase in prices of goods and services in the UAE will take its toll on the purchasing power of residents, which will of course impact their budget on housing.
“Major expenditures such as housing rental, education and healthcare services are either zero rated or exempt from VAT,” Mayank Sawhney, director at MaxGrowth Consulting, tells PW. “All these comprise around 60 per cent of total household expenses. So in essence, the VAT should have resulted in an inflation of 2 per cent.”
Mayank Sawhney, director, MaxGrowth Consulting
However, retailers have not just increased prices based on VAT; many have built in much higher margins in their prices since January, according to Sawhney, bringing actual inflation closer to 4 per cent.
“Most retailers are passing on the costs to the customers, so the costs have gone up,” says Shiraz Khan, senior tax advisor at Al Tamimi & Company.
Inflation is forecast to be between 2 per cent and 4 per cent this year
Wholesalers and retailers are also going to be affected and, therefore, this segment will have a new financial burden. “Commercial properties are subject to VAT and all shopkeepers and retailers will have to pay the implementation costs of the tax,” says Muhammad Sohaib, senior accountant at Al Yousuf Real Estate. Such costs include training expenses and software purchases, as well as hiring of VAT accountants.
Muhammad Sohaib, senior accountant, Al Yousuf Real Estate
“For high-net-worth individuals, this will not make much of a difference,” notes Sawhney. “But for lower and mid-income people, especially when their salaries or business income is not increasing, even a 4 per cent increase in cost of living will have an effect on their spending.”
A recent survey by finance comparison site Yallacompare found that almost half of UAE residents (44.6 per cent) are worried they will not be able to afford the increase cost of living brought about by the country’s implementation of VAT. However, the survey, which was conducted in December and polled nearly 200 UAE residents, found that more than 62 per cent expect a salary raise this year.
“There is no big effect as the VAT is only on commercial property at the moment,” Laura Adams, managing director of Carlton Real Estate, tells PW. “We have seen no change in the market since it was introduced.”
Laura Adams, managing director, Carlton Real Estate
Moreover, VAT is only chargeable on agent commission and compared with the VAT rates of many other countries, 5 per cent is relatively low, adds Adams.
“I believe the problem we have at the moment is pricing,” says Adams. “Tenants and buyers just cannot afford the going rents so are sharing, which is leaving a number of units vacant in the rental market.”
There are around 60,140 apartments, 9,822 villas, 3,456 town houses and 7,5457 commercial units that are scheduled to be completed in Dubai this year, data from Propertymonitor shows. In comparison, only 14,514 apartments were completed last year, along with 6,015 villas, 1,898 town houses and 691 commercial units.
Based on these figures, the market will see a 250 per cent increase in handovers this year as opposed to 2017, a huge increase that some fear could lead to an oversupply. With that in mind, those looking to sell or lease their properties need to be reasonable with their expected prices, says Adams.
Investor mindset
Analysts agree the UAE has one of the cheapest VAT rates globally. According to Adams, the UK applies a VAT rate of 20 per cent, Russia 18 per cent, Australia 10 per cent and China 17 per cent. Similarly, Khan points out that in Europe, the average VAT rate is over 20 per cent, and in Africa it is around 15 per cent. The global average of VAT or similar tax is around 19 per cent.
How the UAE's VAT compares with other countries
Even recently introduced VAT schemes in other countries are higher than the UAE’s. Malaysia introduced a 6 per cent goods and sales tax (GST) in April 2015, while India’s GST that came into effect last year is the highest in the world at 28 per cent, more than Hungary’s 27 per cent.
“VAT is an investment-neutral tax, unlike corporate tax for example. Corporate tax is a tax on the profits of companies operating or doing business here, and this is what really affects direct investments,” Khan explains. “VAT is not supposed to be a cost to businesses.
“If you’re operating businesses here, you’re collecting tax on behalf of the government. You act as an agent for the government. It shouldn’t be a cost to you. You’re supposed to pass it on to the customers by collecting it from them for the government.”
Shiraz Khan, senior tax advisor at Al Tamimi & Company
While Dubai has long been positioned as a tax-free haven, this is no longer the case with the introduction of VAT. However, on the flipside, the UAE is moving in the right direction in terms of building trust with investors. The UAE, along with seven other countries, was removed from the European Union’s list of uncooperative tax havens in January, giving the country credit for further enhancing transparency in tax procedures.
To strengthen ties with EU partners, the UAE signed 113 additional agreements to avoid double taxation and eight more to facilitate the exchange information for tax purposes. The country also took measures to comply with the Common Reporting Standard and to ensure a transparent flow of information with international partners, including the EU.
“Media reports about Dubai being a ‘tax-free haven’ were related to the UAE not being prepared to give information for international assessors,” explains Sawhney. “That was a problem for the EU. Now the UAE has agreed to provide the necessary disclosures required and, as a result, the EU has withdrawn the country from the list — it has nothing to do with the VAT.”
In the long term, VAT is expected to positively influence the real estate market, bringing in more transparency and regularisation and increasing its appeal to foreign investors.
“The VAT will help in regularising a lot of processes in the UAE, which were not in line with international standards, because there was no proper system of maintaining books of accounts,” says Sawhney. “Now with every transaction you have to maintain proper documentation and disclose where the money came from — that will bring a lot of transparency to the sector.”
Read more about VAT in UAE.
