On 2 July 2021, the Saudi Arabian Minister of Finance introduced a new set of national rules of origin by virtue of Ministerial Decree No. 3852, dated 02 July 2021 (22/111/1442). The new rules include additional conditions to be met by Gulf Cooperation Council (“GCC”) products imported into Kingdom of Saudi Arabia (“KSA”) to benefit from the GCC preferential treatment based on the GCC Unified Economic Agreement.
1. The GCC Unified Economic Agreement
On 21 December 2001, the leaders of the GCC countries signed the GCC unified Economic Agreement. This new economic agreement improved the 1981 economic agreement that settled rules of economic ties among member countries and by which Free Trade Zones of Cooperation Council were established.
Included is the chapter on customs unity / trade exchange which provides the following points:
Under the GCC Unified Economic Agreement, transfer of GCC national goods between GCC countries are exempt from customs restrictions including customs duties. In the new RoO introduced by the KSA, additional conditions for a GCC national good apply to benefit from the GCC preferential regime.
2. The new national rules of origin (“RoO”)
The new RoO is effective from 2 July 2021 and is expected to be valid until a Unified GCC RoO is issued and become effective. Below, we summarized some of the key points of the new RoO:
A. Conditions for preferential treatment on customs tariff
To qualify as a GCC national good subject to customs exemption under the GCC Unified Economic Agreement, the GCC manufactured product should meet the following conditions:
The new RoO provides flexibility for the percentages of the required local workforce and local content value of the product. It defines that in case of a shortfall of one requirement it can be offset with the excess of the other requirement. However, the local workforce rate should be at least 10% and the local added value at least 20%.
Where the above conditions are not met, the GCC product imported into the KSA shall not qualify for the GCC preferential treatment. Hence, the product will not be exempt from customs duties in the KSA.
B. Goods with Israel link
Goods which include any component produced in Israel or manufactured by companies fully or partially owned by entities with commercial relations with Israel, as identified in the Arab boycott list, will be excluded from the GCC preferential regime.
C. Free zones
Free zones are areas which allow foreign companies to fully own companies and to work under lighter regulations. The following goods connected to any GCC free zones cannot qualify for the preferential treatment, hence are subject to customs duty:
Following the above, the new rules provide that goods transported through free zones will not be a direct transport to KSA and cannot benefit from the preferential treatment.
3. Impact in the United Arab Emirates (“UAE”)
The new RoO is seen to be a huge blow to the trade relations between the UAE and KSA. The new rules on local workforce and free zones will hugely affect the UAE, especially considering that factories in the UAE rely heavily on expatriate workers and that free zones are among the main drivers of the UAE’s economy.
Below, we summarize some of the possible impact of the new RoO rules to companies in the UAE:
4. Key takeaways
The changes support KSA’s goal of diversifying its economy and attracting foreign investment.
With the changes in the RoO rules in KSA, importers in KSA and GCC manufacturers/ exporters must consider whether their manufacturing activities and associated supply chains meet the conditions set out in the new regulations.
In this regard, business may evaluate whether to adjust their current activities and operations to comply with the new rules, or to amend their pricing strategies to accommodate the possible additional costs.
In addition, this move by the KSA may set a precedent in other GCC countries. Hence, business may also have to consider putting in place contingency plans in case other GCC countries follow KSA’s lead.
5. How Crowe can help
We expect that activities of many UAE companies may not meet the new RoO rules, and they are disqualified from the enjoyment of the preferential treatment for transfer of goods to KSA. We can assist with the following:
For your queries and more information regarding this new development please Contact Us: