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Planning for Tax Era: UAE Developers Buy Materials in Bulk to Avoid VAT Effect

May 31, 2017 | Zawya

Dubai: In a move to avoid any VAT-related costs, local developers with existing projects are already placing orders on building materials they will need only after construction is complete. By placing orders now and receiving the goods before the year is out, they will not have to factor in the 5 per cent additional surcharge that will come into effect from 2018, according to an industry source.

“This is happening even with projects that are only at the beginning stage,” said Mohammad Mustafa, managing director of Emsquare Engineering Consultants. “If they place the orders now for categories such as ceramics, doors, ironmongery, pay and have them delivered, the developer makes sure those VAT charges do not apply for their existing project. As such, it will mean quite a difference between what it will cost them now and the likely expenses from 2018.

“But any project coming after three months will feel the impact of VAT and will need to factor in the increased costs and related overheads.”

Over the last three quarters, a rush of projects were put out for tendering, and particularly so in Dubai. Project promoters have also been quick to announce contractors and get the work cracking on site.

Doing so also places them in a stronger position to start placing orders on what these projects will require after completion. Clearly, VAT has been a clear factor in their cost equations, industry sources add.

Fortunately, the bulk of the building material categories are seeing price stability. It is not yet certain whether developers bringing forward their orders will put pressure on such commodity prices.

“All VAT-related material costs will have to paid by the developer… this is being strictly enforced in new contractual terms by the contractors,” said Mustafa. “They have issued notices to all parties in the last three months. Developers will need to do some preparatory work on managing their costs after VAT gets implemented. There will be a steep learning curve.”

Mustafa’s firm is currently associated with 60 ongoing projects with a combined value of Dh4 billion.

According to him, even as most material prices have been stable, cement has gone through 5-10 per cent cost inflation in the last 12-18 months.

“Also, Dubai Municipality has during this period been stringent in requiring sub-contractors to have valid Dubai licenses for participation. And that their labour force must have accommodation in Dubai itself.”

Their contractors and sub-contractors are taking every precaution not to get hit by any sudden cost spiral.

Lump-sum contractual deals are the norm, which allows contractors to factor any possible increases in key commodity costs.

“Lump sum contracts offer a lot of security for contractors — as such, no developer is willing to accept inflation-related cost escalations for materials,” said Mustafa. “They will only agree to pay what’s been agreed at the beginning.

“So, contractors key in all sorts of cost risks over the 18- to 20-month period a project typically takes. This way he is already covered before the start of a project. In an uncertain market situation, this is still the best way to stay on top of cost-inflation risks.”

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