The forthcoming summit of the GCC Finance and Economic Committee scheduled for 4th April in Riyadh will be devoted to the implementation of the GCC Supreme Council decision in December 2009 on the completion of the GCC Customs Union. A key plank in this process of regional integration will be the design of an acceptable mechanism for sharing customs duties among member countries. Currently the common rate applied by the GCC Customs Union on imports from outside the GCC is typically 5% (among the exceptions, duties on tobacco are 50%, on alcoholic drinks are 100% while foodstuff and pharmaceuticals are exempted).

Three policy options for revenues sharing are on the table:

1. Make permanent the current mechanism (which was agreed in 2003 to last only for three years and periodically extended), by which the custom duties are retained by the country where imported goods are consumed. This “final destination” criterion is supported by Saudi Arabia, the largest economy (and consumer) of the GCC.

2. Allocate the revenues according to a proportion (to be specified) between the country where the first port of entry is located and the country where it is consumed. This would allay some of the costs of customs clearance at the ports of entry, and avoid the more efficient ports with good logistics and customs clearance being burdened by other countries’ imports. This is the criterion endorsed by the GCC Secretariat.

3. Adopt a rule whereby the country where the port of entry is located keeps a fraction (to be decided) of the duties, transfers a second fraction to a common GCC fund and distributes the rest to member countries in proportion to their final consumption expenditure (private and government). The idea is for the common fund to be available for the financing of GCC wide activities, administration, and projects, including infrastructure.

Clearly, each option has asymmetric redistributive effects. In order to provide an estimate on the orders of magnitude involved we have estimated the custom duties revenues in each of the three scenarios based on 2007 trade data (which are the latest available). The table below summarizes the figures for individual countries.

The first option favors countries with a large import share passing through points of entry in other GCC states. Based on re-export values (at f.o.b. prices) by country of destination in 2007, it emerges that the UAE will be the largest beneficiary of option 1.

As to the second option, we consider the value of re-exports at f.o.b. prices by country of origin and consider three hypotheses on the revenue split: a 25-75% between country of entry and country of destination, an equal 50:50 proportion and a 75-25% between country of entry and country of destination. Due to its trade hub advantages, the UAE will be the largest beneficiary of option 2, to an even larger extent tan under option 1. Interestingly, the changing the split would not matter much in term of total revenues for the UAE or the KSA.

The effects of the third option are more difficult to estimate given that it involves a three-way split. However for the sake of simplicity we neglect the portion that would go to a common fund and focus on the split between the country of entry and the consumption expenditure criterion. Using the data on total consumption in GDP we considered again three hypotheses. If the portion devolved to a common fund were, say, 20%, all the figures would be proportionately reduced by 20%. The final redistributive effects would depend on how the proceeds of the common fund would be used (e.g. infrastructure projects) and the country shares.

Source: UN Comtrade - Data for 2007 in million US$

Source: UN Comtrade - Data for 2007 in million US$

Source: UN Comtrade & GCC national statistics offices - Data for 2007 in million US$

As a matter of comparison, we notice that the European Union utilizes custom duties to finance its institutions. In particular EU member states keep 25 % of the amount collected as a compensation for collection costs and transfer the rest (75%) to the coffers of the EU Commission.

The average growth rate of re-exports between the GCC countries (since the inception of GCC Custom Union five years ago) is 36%. If this trend were to continue, the projected value of custom duties revenues after five years will be $ 2,161 million, a substantial sum. If the GCC countries adopted the EU mechanism in revenue collection and distribution from the payment of customs duties, the GCC Secretariat General would gain $ 1,621 million by 2012 to finance common GCC interest programmes. We believe the most likely scenario to win is the second option discussed above, especially in the absence of VAT or a General Sales Tax in the GCC which would have allowed for revenues to be raised as an alternative to customs. The expected revenues in 2012 (US$ million) would be as follows: Bahrain: 117, Kuwait: 130, Oman: 214, Qatar: 137, KSA: 360 and UAE: 663 (see Table 2 above).

Dr. Nasser Saidi, Dr. Fabio Scacciavillani & Fahad Ali