Members of the CFA Society Emirates predict that sales of luxury cars would bear the brunt of the new tax. Charles Crowell for The National
Members of the CFA Society Emirates predict that sales of luxury cars would bear the brunt of the new tax. Charles Crowell for The National

Business

Middle East’s businesses not prepared for VAT, polls find

According to the Deloitte survey of 88 listed and non-listed companies in the Middle East, almost half of those polled said that their business had a 'minimal understanding' of the range of impacts typically associated with the introduction of VAT.

Lucy Barnard

June 06, 2016

The individuals in charge of some of the GCC’s biggest companies are bracing themselves for the introduction of value-added tax (VAT) in two years’ time, according to two surveys.

Arabian Gulf ministers in February signed an agreement to introduce a 5 per cent tax on consumption to be implemented across the region by January 1, 2019.

The UAE is set to become the first GCC country to bring in the tax, with plans to impose it on goods and services from the end of 2018.

A poll of chief financial officers across the region conducted by the accountancy company Deloitte found that 93 per cent of those polled expected the new tax to have some impact on their businesses.

According to the Deloitte survey of 88 listed and non-listed companies in the Middle East, most of which had an annual turnover of more than US$100 million, almost half of those polled said that their business had a “minimal understanding” of the range of impacts typically associated with the introduction of VAT. Moreover, 81 per cent said that their businesses had not yet incorporated VAT into their financial plans.

At the same time an online survey by CFA Society Emirates, an organisation for finance professionals in the UAE, found that 82 per cent of the 68 members polled said the new tax would lead to higher inflation rates in the UAE.

“CFA professionals see VAT as a paradigm shifting reform in the GCC’s fiscal policy and are unanimous that it will lead to higher inflation,” said Amer Khansaheb, the president of CFA Society Emirates.

Members predicted that sales of luxury cars would bear the brunt of the new tax, with 79 per cent of those polled believing that the car industry will be affected and 77 per cent believing that luxury goods will feel the impact more than other industries.

Respondents were even more gloomy when asked about the possibility of taxing wages, with 80 per cent saying that they would consider moving abroad if an income tax were to be introduced.

Humaid Obaid Al Tayer, the Minister of State for Financial Affairs, confirmed in February that VAT would be implemented by the end of 2018 as part of a drive to reduce the country’s dependence on oil.

At the same time he added that studies into a possible corporate tax were also under way.

The UAE is expected to generate about Dh10 billion to Dh12bn as a result of introducing VAT in the first year of its implementation, the CFA survey said.

lbarnard@thenational.ae

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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

“Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

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Flight connections to Ulaanbaatar are available through a variety of hubs, including Seoul and Beijing, with airlines including Mongolian Airlines and Korean Air. While some nationalities, such as Americans, don’t need a tourist visa for Mongolia, others, including UAE citizens, can obtain a visa on arrival, while others including UK citizens, need to obtain a visa in advance. Contact the Mongolian Embassy in the UAE for more information.

Nomadic Road offers expedition-style trips to Mongolia in January and August, and other destinations during most other months. Its nine-day August 2020 Mongolia trip will cost from $5,250 per person based on two sharing, including airport transfers, two nights’ hotel accommodation in Ulaanbaatar, vehicle rental, fuel, third party vehicle liability insurance, the services of a guide and support team, accommodation, food and entrance fees; nomadicroad.com

A fully guided three-day, two-night itinerary at Three Camel Lodge costs from $2,420 per person based on two sharing, including airport transfers, accommodation, meals and excursions including the Yol Valley and Flaming Cliffs. A return internal flight from Ulaanbaatar to Dalanzadgad costs $300 per person and the flight takes 90 minutes each way; threecamellodge.com

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