Levy of VAT will change landscape of UAE property

April, 2017

The UAE is set to levy a five per cent value-added tax (VAT) starting on January 1, 2018. The decision is broadly in line with an effort to raise government revenues in the region, which have recently lowered due to oil prices.

 

The capped VAT percentage has been recommended by the World Bank and the International Monetary Fund and will be liable to affect the UAE real estate market. By a general rule of thumb of taxing in the UK, Australia, Malaysia and Singapore, it is forecasted that VAT will be payable for both the sale and lease of commercial properties. High-end investors will also need to get to grips with being taxed and staying on the right side of tax efficiency.

 

The UAE’s Ministry of Finance has yet to cement a specified VAT framework on residential and commercial property, yet residential buying is expected to be taxable on the first sale but exempted on subsequent ones. By guidance of already taxing nations, when businesses charge a VAT fee on a sale it makes, it can then recover VAT they have paid on that purchase. The VAT amount payable to the government is calculated on the sum difference between what the businesses have charged in their sale and paid on their purchase.

 

Residential leasing is planned to be relieved of the financial burden of taxation, which will prohibit landlords from adding VAT on rent. As a result, landlords will stand to lose on recovering taxes on expenses they incur, which will subsequently influence a surge in higher rents for a lucrative return on investment.

 

The VAT inclusion will also have to be factored in by those shopping for luxury goods, yet it is estimated to bypass inflation for the average resident’s household expenses on staple foods. These 100 basic foods, which include coffee, tea, children’s milk, pasta, rice and cereals, will be exempt from VAT. The healthcare and education sectors will also not be impacted and result in zero rated VAT. The low rate taxation is equally expected to not hit commodity prices for UAE citizens for crude oils, gold, natural gas and agricultural products such as cattle or corn.

 

The International Monetary Fund has indicated that a VAT rate of five per cent could hike the revenue of the total value of goods produced and services provided in the country by 1.5 per cent in one year. The UAE’s gross domestic product is incentivised to jump and on this assessed value, the country is expected to bag $6.5 billion of growth in economy by the implementation of VAT by 2019, which will ultimately characterise the future of the real estate market.

 

The recovery of the property sector since the financial slowdown in 2008 has shown a continued upturn in buyer activity. To carry over a robust and stable market post VAT, administration processes and compliance procedures will need to adapt to the landscape of the taxation system. It is too early to set in stone what the final UAE VAT law will choose to incorporate, yet official rules will be imprinted by the summer. After its inception in the UAE, all GCC countries will be ushering in their own VAT legislation.

Source credit: Khaleejtimes.com

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