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UAE Hotels: How to price right and accommodate new tax laws

On January 1, 2018, a 5% Value Added Tax (VAT) will be introduced on all hotel services, service charges and municipality fees for hotels in the UAE. This new consumption tax will be charged at every stage of the supply chain.

It is expected that the new tax will generate $3.27 billion for the UAE Government within its first year, rising to $5.45 billion by 2019.

Hospitality revenue in the UAE is reportedly forecast to reach nearly $10 billion by 2020. Yet, recent figures have shown revenue to be in decline. What will the additional 5% VAT charge mean for hotels in key markets such as Dubai and Abu Dhabi?

According to data from STR, Dubai hotels saw a 14.8% decline in RevPAR to AED381.20 in September 2017. ADR dropped 10.6% to AED497.67 during that same month.

Tax experts in the region believe that the 5% VAT will not impact demand, as the increase is only small. However, it is accepted that hotels may have to absorb some of the extra cost. Hotelier Middle East reported earlier this year that prices would be impacted, with most hotels simply passing the charge on to customers. But can Dubai’s room rates afford this extra charge? Already, Dubai hotel rates include a 10% municipality fee, 10% service charge and a tourism dirham of AED20 per bed.

How will new VAT laws affect hotel room rates?

It has been speculated that the mid-market hotel sector, which has long been seen as offering the largest growth opportunity in the UAE, could be the one most affected by the introduction of VAT. This is because margins are already tight for this sector.

However, the mid-market attracts a large number of business travellers. For those travelling on behalf of VAT registered businesses, the 5% charge will be of no consequence. For group bookings, many hotels have an addendum in their contracts to cover government changes, such as the introduction of new taxes and charges.

But what about the increasing number of leisure travellers who are opting to stay in mid-tier properties? These are the travellers that are most price-conscious. Hoteliers need to be more strategic than simply adding 5% to the price. If your room rate is 5% higher than your competitive set then you may lose out in this segment.

However, the current strength of the dollar will help hotels remain cost effective to many international visitors. The UAE dirham is pegged to the dollar. For those spending dollars or other currencies index linked to the dollar, the UAE is still a cost-effective destination.

3 steps UAE hotels can take to limit VAT impact

With RevPAR and ADR in decline, a 5% price hike could lead travellers looking elsewhere for their winter sun. Hotels need to adopt a Revenue Strategy that has the ability to move with the market. Here’s how:

  1. Benchmark effectively. RevPAR Index is the most effective way of benchmarking against the total market, segments within that market and your competitive set. Using RGI, hotels will be able to gauge how others in the market are treating the VAT increase, and strategise accordingly.
  2. Use segmentation: Certain segments, such as business travel and group bookings, will be less affected by the VAT introduction. Using segmentation, hotels can price more flexibly, using Open Pricing to tailor rates to specific groups or customer types.
  3. Adopt Open Pricing: An Open Pricing method enables hotels to price all room types, channels and dates independently. This fluidity to the pricing process enables hotels to adapt quicker to market opportunities or crises, enabling them to present the right price to the right customer, thus driving revenue increases where possible.

Many believe that the introduction of a VAT system will lead to greater accounting transparency in the hospitality sector. All areas of the business will be affected, including restaurant prices and other ancillary spend. The new VAT laws will mean a lot more than just adding 5% to room rates. Hoteliers need to set up a system to incorporate VAT, ensure that their PMS and other POS systems are charging it, and make sure all suppliers are also VAT registered. Hotels have until December 31, 2018, to have their VAT systems in full working order.

Hotels that are able to get more granular in their pricing and adopt a true Revenue Strategy will have a smoother transition to a VAT-loaded pricing structure.

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Sarah McCay Tams, Director of Marketing Communications.

Sarah joined Duetto in 2015 as a contributing editor covering Europe, Middle East & Africa (EMEA). In 2017, she was promoted to Director of Content, EMEA, and in 2022 promoted to Director of Marketing Communications. An experienced B2B travel industry journalist, Sarah spent 14 years working in the Middle East, most notably as senior editor – hospitality for ITP Publishing Group in Dubai, where she headed up the editorial teams on Hotelier Middle East, Caterer Middle East and Arabian Travel News. Sarah is now based back in the UK.

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