Special Reports
Free-Trade Zone Eliminates Customs Duty on Intra-Arab Trade

International Tax Review
February 2005

The Arab Free Trade Zone came into effect on January 1 2005 marking
the elimination of customs duty on intra-Arab trade. However,
individual states will still have a "negative list" of trade items
which will not qualify for exemption from customs duty. The Arab
free trade zone currently comprises 17 member states: Saudi Arabia,
Qatar, Bahrain, Egypt, UAE, Iraq, Jordan, Kuwait, Lebanon, Libya,
Morocco, Oman, the Palestine Authority, Sudan, Syria, Tunisia and
Yemen. There is ambiguity on how the changes - with effect from
January 1 2005 in case of intra-Arab trade- will be implemented as
no procedural guidelines on the actual implementation have been
issued yet. Imports from non-member countries will continue to be
subject to customs duty based on the individual country's legislations.

On January 1 2003, the Gulf Co-operation Council (GCC) countries
(that is, Saudi Arabia, Kuwait, Oman, Bahrain, Qatar and UAE) formed
a customs union removing the barriers to free trade between member
states. A flat rate of duty of 5% is now imposed on most imported
goods apart from listed exemptions at the first point of entry into
the GCC. Those goods may then move freely between GCC countries
without the imposition of any further duty. There is a 'transition'
period of three years, until December 31 2005, allowing any teething
problems to be ironed out.

There is no excise duty or sales tax in any of the GCC countries.
The formation of the GCC Customs Union, the Arab Free Trade Zone and
various international commitments - including those under the WTO
agreement - all point to a probable reduction in customs duty as a
source of revenue for the governments. Recently there has been
debate, at the GCC level, regarding the possible introduction of
another form of indirect taxation, such as value-added tax (VAT).

The GCC Finance & Economic Co-operation Committee has suggested a
comprehensive study is undertaken by the member states to consider
this further. While governments in the GCC have started exploring
new indirect taxes, there has been no formal decision on any
specific form of tax or the timeline for introducing any such taxes.


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