Are you considering supplying goods from the Gulf Cooperation Council (GCC) to the Kingdom of Saudi Arabia (KSA)? If the answer is yes, then this is a must read to check if you qualify for GCC preferential tax treatment (including custom duty exemption), and the commercial implications you need to consider if you don't.
On 2 July 2021, KSA's new national rules of origin (The Rules) came into effect. The Rules set out conditions which must be met in order for goods being imported into KSA to qualify for GCC preferential tax treatment.
Charlotte Wright, commercial and international trade specialist at Gowling WLG (Dubai) and Majed Alzaben, corporate and commercial specialist at Al Ghazzawi Professional Association (Riyadh) have teamed up to provide you with this essential Q&A to determine whether: a) you qualify for preferential tax treatment; and b) what you need to consider from a commercial perspective if you don't qualify for preferential tax treatment.
Q: What conditions do I have to meet to qualify for preferential treatment?
A: There are four main conditions that have to be satisfied in order for you to qualify for preferential tax treatment:
- You will need a valid certificate of origin for the goods and GCC origin labelling requirements will need to be complied with;
- The goods should arrive to KSA directly from the manufacturing GCC country of origin (GCC Free Zones will not qualify for preferential treatment);
- The manufacturing process should represent at least 40% local added value on the final price of the product (calculated using specific formula); and
- The GCC manufacturing entities should achieve a workforce localisation rate of at least 25% of the total workforce.
Q: The goods I sell in KSA have at least 50% local added value from my manufacturing capability in the UAE, but my localisation rate of the national workforce is lower than 25%, will I have to pay customs duty?
A: It depends. Provided your localisation rate is not less than 10% and the added value is not less than 20% the Rules provide some flexibility to offset the localisation rate and the added value. E.g. if you have added value of 50% and a localisation rate of 15% you would still qualify for preferential treatment.
Q: I manufacture goods in Jebel Ali Free Zone (JAFZA) using local raw materials, will I have to pay customs duty when exporting to KSA?
A: Yes. Goods that originate in JAFZA or any other GCC Free Zone will be treated as foreign goods and will not qualify for preferential treatment under The Rules, even if local materials are used. In addition, goods transported through GCC Free Zones cannot qualify for preferential treatment.
Q: If I obtain raw materials from one or more GCC countries, and manufacture a product out of these raw materials in another GCC country, will this prevent me from availing of the preferential tax treatment?
A: The Rules provide for cumulative origin, by which GCC manufacturers can obtain raw materials from one or more GCC countries and still avail of the preferential tax treatment. The Rules set forth specific provisions on cumulative origin which should be considered by manufacturers who make their goods using raw materials from more than one GCC country or complete the manufacturing process in more than one GCC country.
Q: What are the elements that do not matter in designating the national origin of a product?
A: The goods that are used in the manufacturing process but were not intended to be part of the final product. Plus, tools, equipment, and gas that are used in the manufacturing process are not considered for the purpose of designating the national origin of manufactured goods.
Q: I manufacture goods in a GCC country but I export them to KSA by transitioning through a non GCC country, will I still benefit from the preferential tax treatment?
A: Yes, as long as the following conditions are met:
- Transitioning through a non-GCC country was justified by geographical reasons; and
- No operations were carried out on the goods during transit other than operations of loading, unloading, handling or storing which were carried out for the purpose of maintaining the quality of the goods.
Q: What is the validity period of the Certificate of Origin?
A: Certificates of Origin are valid for 180 days from the date of issuance.
Q: I don't qualify for preferential tax treatment, what is the rate of customs duty that will apply to my goods in KSA?
A: While some goods are free of any customs duty, most of the other goods are subject to customs duty ranging between 5% and 15%. The customs duty can be higher for specific types of goods. Find out the current rates of customs duty on goods exported to the KSA.
Q: I don't qualify for preferential tax treatment, what should I do now?
A: Are you able to implement changes to your manufacturing processes and supply chain to accommodate the new rules and continue to access the KSA market on duty free basis? If this is not possible, consider who should bear the cost (customer or supplier) of customs duty and any other applicable taxes, ensuring that this is reflected in your commercial agreement and taken into account when pricing your goods for sale in KSA.
If you supply, or are considering supplying goods into KSA, Charlotte and Majed are on hand to assist you in interpreting how The Rules might affect your business and to advise you on the clauses in your commercial agreements regarding responsibility for the payment of customs duty and other applicable taxes in KSA.
Please contact Charlotte should you require assistance with supplying goods in other GCC countries.
This article was written in collaboration with Al Ghazzawi Professional Association.