Cross-border trade is ramping up across the Middle East as Gulf Cooperation Council (GCC) countries have introduced trade incentives and reduced customs duties through domestic concessions and extensive free trade agreements. In this environment, managing customs costs may seem less important that other value-adding pursuits. However, incorrect assumptions about the simplicity of these duties in the GCC leave many importers with substantial untapped savings potential. Craig Richardson,Head of Tax and Corporate Services for KPMG in Qatar, explains.
Since 1998, the Greater Arab Free Trade Area (GAFTA) has been in force among its 17 member countries, including the six GCC countries: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates. In 2005, the agreement fully liberalized the trade of goods through the full exemption of customs duties and charges having equivalent effect between all Arab countries members of the GAFTA. The agreement is an important step toward the establishment of the Arab Common Market.
Further, the GCC is embarking on a comprehensive new free trade agreement (FTA) with Singapore, which is expected to come into force retrospectively with effect from 1 September 2013. The FTA will cover trade in goods and services, investments, rules of origin, customs procedures, government procurement, electronic commerce and economic cooperation. Under the FTA, the GCC is expected to eliminate approximately 99 percent of customs duties applicable to Singaporean products (for 95 percent of products on entry into force and the remainder by 2018). Similarly, Singapore is expected to eliminate all customs duties applied to goods that originate from GCC member states.
While FTA talks with the European Union appear stalled, the GCC has entered into a framework agreement with Malaysia and has also been engaged in trade negotiations with countries such as China, India, Japan, Australia, New Zealand, South Korea and Pakistan. A number of bilateral agreements are also in effect, such as those between with Turkey and several GCC countries.
On the surface, customs duties in the GCC seem straightforward. You pay a 5 percent entry duty on imports, and you can ship goods anywhere within the GCC without further customs charges. Many companies treat customs charges as routine and inescapable costs of doing business. In fact, there are ways to manage customs costs by reducing or deferring import and export charges. Companies that do not take the time to plan their customs import and export activities could be leaving significant amounts of money on the table.
In addition to the FTAs mentioned above, one of the biggest sources of potential savings lies in better managing how goods are valued for customs purposes. For goods imported into the GCC countries, the customs value is the value of the deal – the price actually paid or payable by the importer, as set out in the invoice or purchase order.
While the customs value may need to include certain costs not included on the invoice, such as brokers’ commissions, packaging charges and royalties, many costs can be excluded. These include charges for items typically incurred after import, such as installation, construction and transport costs, domestic taxes and a range of other charges. By clearly separating these costs from the price of the goods, the customs valuation can be considerably reduced.
Other savings can be realized by taking advantage of concessions available in special free zones. For example, when imported goods are shipped to free zones in Bahrain and Dubai, payment of import duties can be deferred until the goods are actually released from such zones. For high value goods, such as specialized machinery and equipment, that are not being put to immediate use, the duty deferral can produce tremendous cash flow benefits.
These zones also provide an ideal distribution point. Duty is not only deferred – if the goods are exported out of the country or customs territory, duty may not be paid at all.
These potential savings are not the primary focus of most customs brokers. Their main priority is to clear goods from local Customs as quickly as possible. As a result, in the experience of KPMG member firms in the region, many GCC importers realize that they need to look beyond their customs brokers in order to obtain advisory services to help minimize their customs duties.
This is a complex question, but perhaps the greatest risk arises from possible adjustments to customs valuation or tariff classification on the part of customs officials. If there is doubt as to the credibility of the customs value of goods, customs officials have broad powers to adjust the dutiable value. The authorities can also change goods’ classification codes, which can result in higher customs duty rates (e.g. from 0 percent to 5 percent).
Importers also risk extra charges and penalties for compliance problems. For example, in Qatar, fines of up to double the customs duty can apply for offences such as unjustified increases or decreases in the particulars of the manifest, for using privileged goods for purposes other than originally intended, and for improperly disposing of goods that are in pending customs duties status.
To help mitigate these risks, having complete, accurate and detailed documentation supporting the information declared to customs officials is critical. It is also important to have knowledgeable trade and customs advisers who are well versed in local laws and informal procedures, who can negotiate effectively with customs authorities and who can assist with administrative and judicial appeals of customs authority decisions, when needed.