VAT and the art business: the case for exemption

Entrepreneur Peter Goodwin believes the UAE’s art business – from artists to galleries – should be exempt from VAT. He outlined the arguments in a think piece that had the desired effect: it got us thinking. So we started a conversation with him …

PG: The UAE is gradually building a robust creative economy. If we look across the world, creativity underpins so much of the global economy. Some of the biggest companies in the world – Google, Apple, Microsoft, I could go on – are all built solidly on creativity, of which the origin is artistic in some form or another.

Globally, artists don’t get the help they deserve. But thanks to the innovative environment in the UAE, we have the opportunity to be different here – making real and lasting change and help them reach their full potential.

Many independent artists will have sales that fall below the AED 375,000 threshold for the newly introduced VAT, but surely every gallery in the UAE will qualify. This is effectively putting a tax on our creative industry. Some may argue that it is a commercial sector just as any other; I would say that the creative economy should be given as much chance as possible to succeed and therefore, should be exempt from VAT.

Peter Goodwin’s opinion is probably worth listening to, for he’s a successful entrepreneur at the commercial end of the region’s art; for four years to 2015 he was the director of operations at Gallery One, the “gallery and cultural retail group” that has developed a successful business model in the Middle East based on franchise retailing and a product line that emphasises the kind of practical interior décor purchases that you would want on your apartment walls or your souvenir/gift list.
He now runs Mestaria, essentially a consultancy that aims to bring larger cultural brands and institutions to the region while also acting as agents for selected local artists and an organiser of events that bring all those parties together.
He’s also Chief Business Development Officer for ArteVue, an app that aims to make the art world accessible to everyone, anywhere in the world, by connecting and sharing art between artists, enthusiast, collectors, galleries, art professionals and institutions.
The future of the art business, says Goodwin, lies in recognising artists as brands and stopping the creative process being stifled when the focus is on commercial enterprise rather than the individual.

I support VAT and believe it is a necessary step for the nation. But by leaving artistic transactions out of the VAT rule, the UAE could offer a boost to this sector and a huge opportunity for its growth.

magpie: I suspect that those who have framed the VAT system would agree entirely – except that they’d argue the huge opportunity for growth would produce corporate revenues that cannot be ignored by the State and so must be included in the tax regime. Otherwise there won’t be enough tax revenues coming in.

PG: And perhaps when a certain threshold is reached, then it is the right time. But there are plenty of arguments to say we are some way off this. Certainly looking at the economic mix of the UAE (and indeed the wider GCC) means that such a reprieve would not make much of dent.

magpie: Ok, but you talk about ‘regional creatives’ and most galleries don’t support local artists – rather, they engage in a kind of constructive speculation, where it’s in the gallery’s interests to increase the price levels for their artists. A VAT-free business model would effectively benefit a handful of gallery owners (many of whom are based overseas, or at least have overseas partners) and a coterie of non-local artists.

PG: It depends on how you define the term ‘local’. Locally based artists are certainly sold in the UAE through a number of galleries, and most of the gallery owners I deal with are UAE-based. The benefit for owners domiciled outside the UAE is noted; but VAT exemption would reinforce their justification to continue trading here and continue supporting art and artists, whatever the origin.

It could also encourage notable international art brands to open up here. That too would be highly beneficial to the overall market.

But it would mainly benefit local artists, who continually struggle to make money. Their income is essential for survival, but is not fuel for their creativity. Taxation of any sort just makes it harder to survive and justify a full-time existence as a creative. Surely we don’t need to shackle our nascent artistic population further?

magpie: But as you said at the start, most artists won’t reach the earnings threshold for VAT. Or do you believe that there is enough of a market building up in the UAE for a significant number to make the big bucks

PG: The market is building for sure. More artists are in fact choosing to base themselves here and do indeed meet the threshold. And the indicator that there is more to come is clear through the enquiries we receive at Mestaria.

The art market works in two major ways: primary and secondary. The primary market covers sales that benefit the artist directly – whether that is through a gallery, agent or other third party. There is also the secondary market, or ‘selling on’ of an artwork, where an artist is not likely to profit other than an increased value – or perceived value? – of their work in the market and where the price of an artwork inflates.

There is a reason to protect both of these transactions from VAT. First, to give artists the chance to make money; second, to support regional auction houses and other secondary market outlets – both of which are an essential part of the art ecosystem.

Furthermore, pulling art buyers from across the world to an entirely tax-free art sales environment would have huge benefits for the wider economy.

Without galleries, most artists’ careers would not survive. The relationship between galleries and artists has remained necessary for as long as the existence of commercial art. As such, galleries also need to be able to profit to ensure the survival of the artist. In the modern digital age, this is a more complex and ever-evolving subject, but one thing remains true: art needs to be experienced in the flesh to be truly appreciated.

Running an art gallery is hard at the best of times since art is so often a spontaneous purchase based on desire rather than outright need. Galleries rely on marketing and PR almost exclusively to attract clients, and this is expensive. Spaces have to be a significant size to be taken seriously and to accommodate key artworks, and this also comes at significant cost. Staff are a considerable overhead as good quality consultants are costly and that is not to mention logistics, insurance, framing and shipment. And, there is an ongoing need to invest speculatively prior to realising any revenue at all.

Most galleries run a ‘feast or famine’ model of sales with high income during the peak times and much reduced revenue during quieter months or outside of key exhibition dates. With this in mind, VAT creates a range of problems for galleries: many of their suppliers (artists) are not VAT registered due to the threshold, so the gallery has to shoulder the full VAT bill – without being able to recover any of it.

Further to this, art stock tends to be in gallery possession for many months, or sometimes years; that older work must now be sold with 5 percent VAT added. Again, there is no chance to recover any part of it.

Finally, no gallery that I know of has a full-time qualified accountant on board. As such, they now have to outlay further funds to get the help they need to manage the process. The cost of VAT can of course be mitigated with a price increase. But passing the costs on comes with a risk of reducing the number of deals a gallery can close, and just adds to all the challenges I have outlined so far.

magpie: Well, there is one obvious way to recover the tax – increase the price of the work sold. Adding 5 percent to a $5,000 painting takes it to $5,250, which doesn’t seem like a massive jump … particularly as the pricing is always subjective: it’s not cost-plus, after all. Part of the skill of a gallerist is pitching their artists’ prices at the right level to obtain sales, and more generally to position their artists in a particular price band.

PG: This is one way to do it, of course, and certainly it’s the way that most business are being forced to cope. But forcing a price increase across the board on an entire industry will have a detrimental impact. A collector who was contemplating buying work is likely to demand it at the price they saw it at recently. And price increases in a gallery are normally based on demand (secondary market included), not laid across all work regardless of market prices – and collectors will know this.

I can also imagine in many cases, certainly within the Middle East, buyers will be looking to negotiate that 5 percent off. Not having VAT on artwork allows artists and galleries to boast that such a purchase is better than a comparable purchase on other luxury goods …

Besides, there’s a philosophical argument. Education, the medical field and transport are not subject to VAT; but art is equally as important to people’s wellbeing.

magpie: Surely the argument is that galleries operate more like a retailer, and retailers are subject to VAT: and that education, health and transport are unavoidable essentials for most people, while art is a discretionary purchase …

PG: VAT exemption would be an opportunity to support the industry first and foremost – and in doing so makes a statement that a government believes that art does in fact offer a comparable contribution to wellbeing in a similar (albeit I accept not entirely comparable) way.

magpie: Yes, I agree it would send a message. Especially from a government that has had sufficient insight to name a Minister for Happiness two years ago; there’s clearly a belief in the value of non-material wellbeing.

PG: Allowing creative transactions to be made freely without added costs would also send a strong message of support for regional creatives.

magpie: It would, but why favour art and artists over say design studios and the fashion industry? Surely they are equally creative?

PG: Because art is the origin of all design – whether it is branding, product design, or fashion. Art is where designers go to get inspired or to relieve themselves of constraint. Our argument is that art is the root of all creativity and should have special treatment … VAT exemption for art would be a world first. (At least, I cannot find any other tax jurisdiction that does this.)

magpie: Well, there’s Hong Kong, which sort of qualifies; art isn’t a dutiable good for export and import purposes, and there’s neither sales nor capital gains tax.

PG: A fair point. However, my point is more that there is no one worldwide that has a taxable zone that chooses to exempt art from tax within this zone.

magpie: Plus there are a number of freeports around the world which sort-of provides exemption from normal taxes, including sales taxes. In theory, they’re intended as entrepôts, halfway houses for the storage of goods (like art) in transit – and VAT or similar taxes would become due when the goods leave the Freeport. But they’re relevant only for speculators and traders, not people who actually like looking at the art they own … Still, something similar in the UAE could provide an incentive for buyers. Maybe Alserkal Avenue and/or DIFC could be declared a free zone for art?

PG: An inspired idea.

magpie: Businesses in the UAE’s free zones aren’t exempt from VAT, but they are free from many of the restrictions of setting up and trading that apply generally. In particular, a business can be wholly owned by expatriates; and all of the profits can be remitted overseas if required. Combined with some kind of art free zone visa for self-employed individuals like artists and maybe dealers, this could be a neat and comprehensive solution. More effort than simply exempting art sales from VAT, admittedly, but more of an across-the-board fillip.

The big negative about VAT is that it’s regressive. It’s a tax on turnover rather than profit, and even a loss-making business will be liable for the tax hit if it happens to have sales over the threshold. That’s a strong incentive for businesses not to grow too much.

And what’s your view of supporting artists by giving them some of the value of the secondary market? An artist’s resale right, in fact, something like the EU’s Resale Rights Directive (artists get a small percentage of the sale value of their works when they’re sold on). Good idea or bad?

PG: Droit de suite was an excellent idea, but I do not know whether it is or can be particularly well enforced. Claiming and then distributing such revenues requires funding in itself and I do not know that this has been made available in any amount that would make a difference. I think without doubt that the artist (or the artist’s foundation) should definitely benefit from sales in the secondary market. In fact, Mestaria is already working with technology that could in fact realise this in a cost-free and entirely trackable manner… another article in waiting perhaps when it comes to our release of this platform!

magpie: How do you react to the argument that maybe art has been underpriced in the UAE because hitherto it has been untaxed? And that maybe this has created an artificial market by comparison with international practice? Say artist x has done a painting; in Munich his gallery has to sell it with a 19 percent VAT charge, in Zurich it’s 8 percent, in London it would be 20 percent … but up to now his Dubai gallery has been able to sell it without that kind of premium.

PG: Well, art pricing is relative of course. There should be parity across the board so that the same piece is the same price regardless of where you might pick it up… that being the case, then it would perhaps be a fair statement. However, much of the work sold here is sourced regionally and sold regionally.

magpie: Surely small commercial galleries elsewhere – particularly in the EU – are in the same position? Many (admittedly not all) seem to be coping …

PG: Indeed, but in principle my argument has really two angles. For one, the art sector here is not big enough or robust enough yet and needs support – VAT exemption would be a great opportunity to do so at little cost. And second, there’s the message it sends to the sector and the world by a hugely innovative and forward-thinking government …

I firmly believe that if there is one country that can achieve something unique and seemingly complex beyond expectation – if for no other reason to prove its intent and set a global standard – it is the UAE.

VAT exemption for art sales is an interesting idea, and incentives for art and artists would fit the UAE’s (and especially Dubai’s) desire to incentivise creative industries. Few incentives work better than saving money; and while statistics are hard to come by, it must surely be the case that the tax revenues raised from art sales right now will represent a very small part of the total take. For the branding benefit, the UAE can surely afford to write it off.

On the other hand, we don’t see much likelihood of this proposal bearing fruit unless it is espoused by one of the country’s leaders or their advisors.

There would be practical objections to the idea of new free zone for art, too; a free zone needs an administrative entity, a legal framework, lots of overheads that will be passed on to the companies operating in the zone.

There is however an existing free zone of relevance in Dubai, in the shape of Dubai Design District; and while free zones really ought to consist of a physically contiguous area (not least because the free zone authority makes money from rents in the buildings it runs) it shouldn’t be too difficult to amend the statutes governing d3 to include say Alserkal Avenue and the businesses operating there.

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