Is the GCC's construction workforce ready for VAT?
The introduction of value-added tax (VAT) is likely to offer long-term benefits for the Gulf’s economies, but is the regional construction workforce ready for the change?
Last month, the UAE approved a law to introduce a 5% value-added tax (VAT) in the country, which will be implemented starting 1 January, 2018.
The President of the UAE, HH Sheikh Khalifa Bin Zayed Al Nahyan, approved the VAT law, which would set the tax’s general implementation rules, and include details of the goods and services subjected to – or exempt from – VAT, according to WAM.
In an official statement, HH Sheikh Hamdan Bin Rashid Al Maktoum, Deputy Ruler of Dubai, the UAE’s Minister of Finance, and Chairman of the Federal Tax Authority, said the VAT law “is the bedrock of the UAE’s planned tax system”.
He added: “VAT, which is set to be implemented across all GCC countries over the next two years, will bring a new revenue stream for national economy and GDP [gross domestic product].”
In a market traditionally positioned as a tax-free haven, VAT will have an undeniable impact on key economic sectors.
For companies operating in the Gulf’s building sectors, VAT will lead to reworks in accounting procedures, as well as recruitment policies – both of which are likely to change the regional construction workforce’s operations.
Kunal Bilakhia, senior consultant at Dubai-based SM Joshi Chartered Accountants, says construction costs could increase following the implementation of VAT, adding the tax “will play a major role” in the property end-user segment as well.
He continues: “Only residential property and bare land will be exempt from VAT. However, [the tax is] more like premium pricing for those who deal in properties. They pay it all the time – this time, it will lead to better governance.”
Bilakhia adds that businesses with short debtors turnover periods are less likely to feel severely impacted by VAT.
“Whatever you pay in the form of VAT is debit on your cash flows, and whatever you earn as VAT is a credit on your cash flows,” he tells Construction Week.
“So, if you have a quick collection cycle, your cash flows will more or less remain the same. However, if your firm’s collection cycles are long, then you may feel the pinch of 5% on your cash flows.”
Bilakhia’s next opinion will soothe the nerves of those construction professionals that are concerned about how VAT may impact their salaries: “I don’t see any effect from VAT on current salaries, and you will still make the same money. Legally, VAT cannot be the reason for reduction in expenses like salary, since you’re bound by the labour contract. It is a different story for bonuses, since a bonus is paid out of distributable profits.
“If you are able to recover the portion of VAT paid [through] your portion of VAT collected, then there is no negative change in profits.”
Industry experts foresee construction recruitment remaining largely unaffected by the implementation of VAT.
Speaking to Construction Week, Zander Muego, director at Thomas & Adamson, says that while VAT may impact accounting and budgets, “it won’t affect recruitment at this stage”.
He adds: “In certain scenarios, the cost structure of the real estate development process will now have to include taxation. Therefore, there will be an impact on the availability of funds for all costs, and staff costs will certainly be a part of this.”
Indeed, as it stands, the only recruitment-related cost that experts predict VAT may drive is in relation to hiring the right staff to support company transitions towards tax-oriented systems and structures. Bilakhia points out that resistance to change might pose challenges for human resources (HR) leaders.
“No one likes changes, [...] especially if that change means you have to carry out two extra steps to complete your job,” he adds.
However, Aaron Fletcher, head of construction, property, and engineering at Randstad Middle East and North Africa (MENA), says an “initial effect” of VAT “that we are already witnessing [is] the administration costs to employ additional staff with VAT experience”.
He continues: “Following that, I predict that we may see a rise in project disputes, [involving] long-term contracts that have been under execution since early 2016, or the redesign or re-tender of projects that have also not factored in VAT.
“Contractors will be forced to urgently adapt and prepare for VAT, or face the threat of a forecast that was once a profit turning into a loss-making project.
“Once the market has adapted, and the new legislations are in place, I can only seeing the construction market benefiting from future investment into the infrastructure, residential, healthcare, and education sectors.”
While there is unanimous agreement about the long-term benefits of VAT implementation, expert opinion is divided regarding the direct impact – positive or otherwise – of VAT on talent sourcing in the region.
Scott Flournoy, recruitment manager at Faithful+Gould, tells Construction Week that there is “likely to be a negative effect” in the Gulf, following the introduction of VAT and excise tax.
He adds: “We may start to see a talent drain. The cost of living continues to increase at a rapid rate and salaries aren’t moving in line, as relative pay increases are few and far between.
“Although it is widely believed that VAT will not apply to school fees, education experts think parents will feel an indirect impact, and this is likely to put pressure on families and influence decisions on whether to remain in the GCC.”
Additionally, Flournoy says VAT may lead to fewer expats joining the Gulf’s construction sector. However, Randstad’s Fletcher believes the region’s “career opportunities, complex projects, beautiful weather, and way of life certainly outweigh the new tax implications”.
He adds: “The Middle East often attracts candidates from countries where paying up to 40% income tax and VAT is the norm, so I believe that VAT will have little impact on the number of expats working in the region.”
Marcus Taylor, managing partner of Taylor Sterling, agrees with this view, stating that the “earning potential” for expats in the GCC will be “far more beneficial than in their home countries”.
He adds: “However, VAT will certainly stop recruiters and the GCC’s talent marketers selling the UAE’s tax-free proposition. I really don’t expect VAT to affect the individual too much – it’s mainly focussed toward businesses.”
All experts are in agreement about one trend – it is unlikely that the construction sector will witness significant salary hikes this year. Faithful+Gould’s Flournoy says he does not foresee immediate salary growth in the regional sector.
He continues: “Wage growth in 2017 is slow at best. Expectations of increases by 2% or 3% are at the optimistic end of forecasts, with large sections of the market expecting flat wage reviews.
“Given the drop in vacancies across the UAE and a contraction of the construction and real estate sectors, it may be 2018 before some growth returns.”
Fletcher agrees, adding that while a short-term view of the construction sector may not include positive salary growth prospects, companies prepared to adapt to VAT “will not be swallowing the cost” of the tax, thus insulating them against significant expenses.
He adds: “Due to market conditions, salaries have decreased significantly since 2014. I am confident that in the long term, VAT will be one of the many factors across the globe that boosts the economy, and we will see an increase in salaries once again.”
For VAT-savvy construction professionals, the future is bright, Thomas & Adamson’s Muego concludes: “VAT is becoming an increasingly demanded skill set and understanding its commercial implications is extremely important for those of us who advise the construction industry.”