Value Added Tax in the GCC Insights by industry Volume 1 Meetings, Incentives, Conferences, and Events chapter Ninety years in the Middle East
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Chapter 5 Meetings, Incentives, Conferences, and Events (MICE) industry Lead times on the VAT challenge 27
For those that have not previously encountered this term, MICE is a descriptor of a sector of the tourism industry in which large groups, usually planned well in advance, are brought together for a particular purpose. Accordingly, it is sometimes referred to as either the 'meetings industry' or the events industry. Most components of MICE (Meetings, Incentives, Conferences and Events) are well understood, perhaps with the main exception being the incentives sector. Incentive tourism is usually undertaken as a type of employee reward by a company or institution for targets met or exceeded, or a job well done. Unlike the other types of MICE tourism, incentive tourism is often conducted purely for entertainment, rather than professional or education purposes, and as such may have different consequences for VAT purposes. MICE events, other than incentive tourism are usually centered on a theme or topic, whether industry focused or otherwise (the Ramadan night markets in the Dubai World Trade Centre would be a classic example), and are aimed at a professional, academic or trade organizations or other special interest group. Larger MICE events may take the form of Industry or Professional conferences, or Trade Shows and similar exhibitions, or could be even more extensive as, for example Expo 2020. From the perspective of the implementation of VAT this is an unusual commercial sector, as there are so many aspects to it. In a place like the UAE, there will be a number of businesses and activities that are likely to be impacted by the manner in which this sector will be treated for VAT purposes. Impact on different sectors operating in the MICE space At the outset it is useful to identify and consider some of the macro-industries that fall within the supply chain that allows the MICE sector to operate. In short, the supply chain will typically include the transport, tourism, accommodation and venue hire commercial sectors with lesser input from, or implications for, the suppliers of ancillary services such as caterers, sound system providers, lighting technicians and the like. Accordingly, to have a full understanding of the impact of the introduction of VAT on the MICE industry, one really needs to understand the various component parts and how they are to be treated for VAT. As a general rule, however, it can be assumed that most of the sectors identified, where the participants are either required to be registered, or are able to, and do, register voluntarily, will be subject to VAT at standard rate (probably 5%). They will then be entitled to claim back VAT incurred on costs as an input tax credit (ie they will be able to set off this VAT incurred against the VAT that they collect). The difficulty for the industry will be when one gets to the smaller sub-contractors (including, for example, lighting technicians, sound systems technicians and the like) in the supply chain as they will either not register for VAT, or not be entitled to do so. What this will mean is that they will incur VAT on their costs, and assuming that they wish to retain their profit margins, this VAT will then be built in with the charges that they make. As they will not be able to charge VAT that the larger organizations would be able to 28
recover as an input tax credit, this could lead to the potential for the additional costs flowing through the system, or a significant push to bring such smaller independent contractors into larger organizations, or for some, bringing work that is currently outsourced, in house. Dealing with lead times Another significant issue for the industry, particularly where conferences and exhibitions are being arranged, is that there may be longish lead times between the initial contract date and the actual date of the event as an extreme example, consider how long it takes between when a city bids for the Olympics, through to when they actually occur. Further, due to the costs that are generally involved in preparing a conference (arranging a venue for the event, accommodation, various facilities such as lighting, sound, subsidiary events etc, as well as project management, advertising and management of potential attendees) any contract for the conference will often include periodic milestone payments during the period up to the commencement of the event. These factors can lead to two issues that should be addressed. Firstly, if any ongoing, or longer term arrangements are currently being put in place for multiple annual events (ie the undertaking of an annual event over the next 3-5 years), then the contracts should be reviewed in order to establish the VAT consequences, if any, of any arrangements and whether they deal with the billings that will occur after the implementation of VAT. This will be particularly important, as a failure to address this issue could end up in the VAT becoming an additional cost that will come straight out of bottom line profits. Secondly, the tax point, at which VAT will become payable to the revenue authorities, will typically be the earlier of the date of an invoice, or the date on which a payment (any payment not necessarily payment of the full amount) is made. This being the case, if there are periodic milestone payments made some time before the event and, particularly, where these are not specifically linked to an activity, then unless properly structured there is a risk that VAT would need to be accounted for on the full contract value by the event manager well before it is possible to get the recipient to make payment. What this will mean, in effect is that the business will be paying out VAT on amounts that it may not yet even be entitled to charge to their client, for the simple reason that most of the contract charge is not yet due or payable. This could end up being a significant cashflow drain, particularly taking into account the From the perspective of the implementation of VAT this is an unusual commercial sector, as there are so many aspects to it. In a place like the UAE, there will be a number of businesses and activities that are likely to be impacted by the manner in which this sector will be treated for VAT purposes. fact that often the first payment is merely in the nature of a mobilization fee, and the VAT alone on the full contract value may even exceed that mobilization fee, which could have disastrous consequences for the funding structures adopted by the business. The reality is that none of this is disastrous. All it needs is close attention to detail, a review of transaction arrangements, and making an effort to revisit contractual arrangements. Add to this the need to set up contract files to reflect the manner in which charges have been raised, and having the ability to account for the VAT correctly due and payable out of the charges will be crucial. Contract issues A further concern that should be addressed in any review undertaken by the organizers of MICE events would be whether the existing contracts that apply to the full process for the arrangement of the event allow the organizer (and the various subcontractors) to charge VAT on those of the supplies that are considered to be made after VAT is operational. In this regard, it is important to understand that the manner in which VAT legislation is typically structured is that, as a self-assessment tax system, the responsibility for accounting for the VAT on the correct amounts, and at the correct time, rests solely on the supplier of the services in question. Should they not ensure that the contracts under which their services are supplied allow them to on-charge that VAT, then they will be considered to have included the VAT charge in their fees, and they will need to account for that VAT amount whether or not it is able to recover it from the recipient in any way. 29
In addition, as far as the recipient of the services may be concerned, if the recipient is not required to pay an additional amount to cover the VAT impost that will not be the end of it. They will still be entitled to request that the supplier provide them with the required documentation that will allow them to claim the VAT input tax. Essentially, this has the potential to result that for every AED100 they are required to pay, the supplier will receive AED95.25, and the VAT of AED4.75 will be payable by the supplier, and refundable to the recipient of the services that were supplied. While many businesses that are affected will consider themselves to be contractually protected on the basis that they have a tax clause in their agreements, this is seldom the case. Firstly, the GCC members, for the most part, do not have significant corporate tax imposts, so it is unlikely that adequate tax clauses will be found in many contracts. Secondly, standard tax clauses that may be found in some contracts will seldom be adequate when viewed in light of the requirements of the VAT. This is because the manner in which VAT is to be administered, and the minimum requirements for an adequate VAT Clause are vastly different from the manner in which corporate taxes would be addressed. It therefore becomes imperative that businesses protect themselves as a matter of urgency it may be too late to do so once an agreement has been concluded. It is important to understand that the manner in which VAT legislation is typically structured is that, as a self-assessment tax system, the responsibility for accounting for the VAT on the correct amounts, and at the correct time, rests solely on the supplier of the services in question 30
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