How UAE's property sector may be impacted by 5% levy

Picture for illustrative purposes

A five per cent value-added tax (VAT) on property transactions is expected to impact only big-ticket investors and those dealing with commercial properties in the UAE, while residential deals, including rentals, will remain tax exempt.
As a bulk of the average monthly spend by families in the UAE is for rents and other essential items including food, healthcare and education, all of which are exempted, VAT - set to be implemented in the UAE from January 1, 2018 - will pose an extra burden only for high-end investors or those shopping for luxury goods.
The UAE's Ministry of Finance has yet to issue specific guidance in relation to VAT on residential and commercial property.
However, experience of VAT and goods and services tax systems in Singapore, Malaysia, Australia, and the UK suggests that both sale and lease of for commercial properties are taxable.
Residential properties are taxable on first sale, exempt on subsequent sale, while rental is treated as exempt.
Clare McColl, partner at KPMG Lower Gulf, said commercial rents are likely to attract VAT at five per cent, but residential rents are likely to be VAT exempt, which means the landlord is unable to add VAT on to the rent.
"However, it should be borne in mind that if this is the case, the landlord may not be entitled to recover VAT incurred on his costs which would impact on his margin and therefore price," said McColl.
According to Finbarr Sexton, a tax expert, VAT on real estate is one of the most complex areas that governments in the region have to make a determination on. "The VAT treatment of real estate can differ between the sale of undeveloped property, developed commercial property and residential property. Additionally, the rental of commercial property may be treated differently to the rental of residential properties."
Experts said since commercial property is normally subject to VAT, the sale and rent of commercial property could be subject to VAT. They expected the government to make a distinction between commercial and residential transactions from a VAT perspective.
issacjohn@khaleejtimes.com
Experts allay inflation fears
VAT at five per cent, as recommended by the World Bank and the International Monetary Fund, is modest by global standards, and will not stoke inflation for the common man as vital household expenditure items are exempted from its ambit, tax experts said.
The exempted items include 100 types of staple food, and other essential service sectors such as healthcare and education.
VAT will have an effect on the buying power of tourists as they will have to pay duty tax again on certain goods in their country of origin.
According to estimates by the International Monetary Fund, a VAT rate of five per cent would generate additional revenue equivalent to about 1.5 per cent of the UAE's gross domestic product.
Given that the UAE economy is forecast to grow to $440 billion in 2019, the VAT contribution would be approximately $6.5 billion, according to Alp Eke, senior economist at the National Bank of Abu Dhabi.
Since VAT does not exceed the rate of five per cent, commodity price levels will not increase substantially for citizens.
According to experts, when a business charges VAT on a sale, it can reclaim VAT they have paid on their purchases. The difference between what they have charged on sales and paid on purchases is required to be paid to government.
issacjohn@khaleejtimes.com

Issac John

issacjohn@khaleejtimes.com