The levy is expected to increase transparency, considering the rigid audit requirements
When value-added tax (VAT) was introduced in the UAE and Saudi Arabia on January 1, 2018, initially stakeholders were wary on the potential impact of the new tax policy on the economy.
A study conducted by Alliance Business Centers Network said that the UAE would be least affected by the imposition of VAT because it is one of the lowest globally compared to countries such as the UK, Switzerland, Germany, Mexico, South Africa and Australia. The study revealed that the VAT in UK and France was 20 per cent, which is substantially higher than the five per cent implemented in the UAE and Saudi Arabia.
With the adoption of VAT in the real estate sector, investors and stakeholders are weighing the impact on market valuations. According to Deloitte, in the UAE, commercial property is clustered in the taxable bracket and therefore the costs of buying or leasing such property are likely to increase.
Moreover, stakeholders in the UAE real estate sector see the pricing of ancillary services such as brokerage, maintenance services, car parking, facility management and property management increase as such services will be subject to VAT and do not fall within the exemption for rental of residential real estate, even where provided in connection with a residential contract.
Landlords may attempt to transfer the additional increase of costs by incorporating it in the commercial or residential lease. However, as the market’s competitiveness intensifies and supply increases, some landlords may absorb the burden of the increase in those costs to retain their tenants.
On the other hand, the additional income stream from VAT will help the UAE to move towards its vision of reducing dependency on the hydrocarbon sector. The implementation of VAT will also provide the government with additional revenue streams that will contribute to the continued provision of high-quality public services which will enhance the performance of other economic activities such as construction, tourism and social infrastructure.
Further, the implementation of VAT is expected to increase transparency, considering the rigid audit requirements which will require many firms to update their auditing process with the new regulations. This will provide an additional incentive for global institutional investors, sovereign wealth funds, regional asset managers, pension and insurance companies to explore opportunities in the regional real estate sector.
As for Saudi Arabia, a report published by JLL clarifies that VAT is applied to any real estate transaction in the kingdom. The five per cent rate is implemented on the sale of a residential, commercial, transfer of ownership of undeveloped land and the sale of partly completed construction works.
However, rental agreements are exempted from VAT charges, which may impact the sale of new property combined with the five per cent VAT on brokerage as buyers may divert from buying new property and instead opt for leasing as an alternative. Though, costs for leasing may also increase as ancillary services are subject to VAT.
The introduction of VAT in Saudi Arabia is changing the market dynamics and bringing more transparency to the sector. Similar to the UAE, VAT will contribute to the governments’ initiatives for economic diversification and continued improvement of public services to the general public.
In conclusion, the above-mentioned views on the potential impact of VAT are only assumptions. Since real estate is a long-term product, the real effect of VAT in both countries will be defined further in the coming years.
All rights reserved to the initial publisher for Khaleej Times