UAE’s hotels can do with some tax relief

This article appeared originally in Gulf News: link to original article

In the UAE, staycations have been the main alternative to travel as the lockdown was eased. With a few remaining restrictions on mobility, one can get into a car and drive to a remote resort in the middle of the desert, or to a beach resort that may even boast of exclusive water villas.

While this is the only travel alternative for those who are willing to take the risk of moving, with face masks and social distancing, it also is a way to partially make up for tourism-generated revenues. Aviation and tourism are after all responsible for more than 13 per cent of the UAE’s GDP, according to the International Air Transport Association (IATA).

What’s important to note here is that no matter how many individuals opt for staycations within the UAE, these are not there to bring occupancy levels at hotels to their average levels during the summer reason. Dubai alone received more than 16 million visitors in 2019, which is impressive compared to a UAE’s 9-10 million population.

Rates didn’t budget as much

As things started to go back to normal, the expectation was that hotel rates would be competitively and reasonably priced to attract as many guests as possible, especially since supply far outstrips demand. Rather, hotel rates were more or less at the same levels that would have been expected in a busy summer season in the UAE.

Furthermore, resorts with an edge – i.e., remote location, private villas, beachfront and so on – had even more reason to keep their rates at their usual levels, if not higher.

Why’s that?

First, this has to do with supply and demand. Since supply significantly exceeds demand, then higher room rates multiplied by lower occupancy rates, compared to a year ago, may generate better revenues for hotels than if room rates were lowered and occupancy rates fail to make up for the revenue shortfall.

Also, as individuals would logically prefer hotels and resorts with premium locations and a more exclusive feel compared to a normal room, such destinations can subsequently ask for higher nightly rates. Having been in lockdown and with very limited travel options, individuals have got the cash to spend on whatever exotic staycations that they can get.

Need to balance

Secondly, there has been no policy driven encouragement to offer better deals by relieving hotels and resorts from tourism-related taxes. Given that those taxes have always been passed on to individuals in normal times, it would only make sense to have them passed on to individuals now as hotels and resorts struggle financially.

Put differently, hotels and resorts need to be paid enough to sustain their operations. Meanwhile, tourism regulators need to generate enough revenues to balance their budgets. The situation is even more financially pressing, with aviation and tourism activities being much lower than their pre-COVID-19 levels.

Now, what if tourism-related taxes have been experimentally waived off for a month or two during the summer season? This could have encouraged more individuals to go for staycations and to spend more in hotels and resorts by staying for longer durations.

More so as many were working from home, which could be done from anywhere. Not only would this have been more beneficial for hotels and resorts, but the forgone revenues, from tourism-related taxes, could be marked as part of the fiscal stimulus aimed at reigniting economic activity in the UAE.

In conclusion, staycations have been the choice of necessity in the UAE. Generally, hotel rates did not drop to levels lower than those observed last year. This is due to an anticipated low occupancy rate and the inclusion of tourism-related taxes in hotel rates.

Removal of the latter, even if only experimentally during the summer period, may have shown the way to better support the sector.

The last thought that I want to leave you with: What could replace tourism-related taxes?