28 April 2016 The Gulf's introduction of value-added tax (VAT) could be detrimental to hotel demand, especially in the fast-growing mid market, travel and tourism experts warned at an industry event in Dubai this week. Gulf Cooperative Council (GCC) governments have been forced to find alternative sources of revenue to counteract the shortfall in their budgets caused by the sharp drop in oil prices, with VAT presented as one of the obvious solutions.
After years of debate, it was announced last year the United Arab Emirates (UAE) will be the first GCC member to introduce a 5 percent VAT rate in January 2018, with the other five members set to follow suit by the end of the 2018.
Alex Kyriakidis, Marriott International president and managing director, Middle East and Africa, told audience members at the Arabian Hotel Investment Conference (AHIC) in Dubai that governments need to strike a "fine balance" and make sure they do not levy the industry with too many extra costs.
Kyriakidis highlighted the fact that hotels already have to add a 10 percent service charge and a 10 percent municipality fee to their room rates. Serviced apartments also have a "room tax" of 15 UAE dirhams ($4) per day for four-star hotels, while 20 UAE dirhams per day is added to five-star properties.
"You need to be very careful and make sure that what we don't do for this industry is to generate tax but actually reduce demand overall, because there is a fine point at which you begin - another 5 percent on an already 20 percent stamp plus room charges, it begins to have an impact on the consumer," Kyriakidis said.
Mid-market expansion
When it comes to individual sectors, Kyriakidis said that while luxury hotel guests may be able to sustain a small rise in rates, more price sensitive consumer may be put off. "Turn the clock back six, seven years ago, 70 percent of this market was upper-upscale luxury, 30 percent was mid-tier budget. Today, and into the future, it's going to flip the other way around.
"Another 5 percent [on upmarket hotel rooms], would it really affect their buying decisions? Probably not," he asserted. "But once you get to mid-tier and budget, another 5 percent could make a difference."
The mid-market sector is a priority for the Dubai government, as it looks to diversify its travel offering, so any negative impact from VAT is a legitimate concern. A report by consultancy firm PwC, unveiled at the Arabian Travel Market conference in Dubai this week found plenty of scope for growth in this area.
Dubai's mid-market sector accounts for 51 percent of hotel rooms, compared to 88 percent, 89 percent and 90 percent of hotels in London, New York and Los Angeles, respectively.
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"You may have the VAT, but you may decide you're going to exempt certain sectors because of that balance that I mentioned earlier," Kyriakidis said, referring to the existing fees. "Let's make sure that good work is done on assessing the economic implications before pressing the start button."
Gerald Lawless, head of tourism and hospitality, Dubai Holding and chairman of the World Travel & Tourism Council (WTTC), echoed Kyriakidis' concerns. "You might also ask the question, should we be paying 10 percent municipality fee as well as paying 5 percent VAT? Perhaps one falls into the other," he told the audience during a panel at AHIC.
Job losses
Looking at the VAT plans from a global perspective, WTTC president and chief executive officer David Scowsill pointed to the introduction of air passenger taxes in the United Kingdom (UK) as an example of how extra levies can actually have a detrimental impact on demand.
"When we looked at the numbers, the chancellor in the UK receives about 2.8 billion British Pounds [$4 billion] of income but by our calculations the UK is losing about 4.2 billion British Pounds and about 100,000 jobs because of the high level of this tax. Because it's putting off people from travelling," Scowsill said.
Focusing on the UAE, he concluded: "If you were talking about imposing 20 percent VAT, which is about the level in other markets around the world, then that would be a severe issue. Five percent it can probably absorb, but again, as Alex Kyriakidis said, it is important to look at the numbers behind this, to run the numbers, to make sure as an income stream it's going to be valuable to the UAE but that it's not going to have the reverse effect - dampening demand and putting people off and losing jobs as part of that process.
