Free zones to benefit from UAE free trade deals

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22 November 2009
Free zones in the UAE will soon benefit from duty free trade with GCC states and other countries with whom the country has free trade agreements, Emirates Business has learnt.

Goods imported from the free zones are currently treated as foreign goods and are thus not entitled to benefit from the GCC Unified Customs Law, which eliminates customs duties among member states.

Companies in the free zones - except those wholly or at least 51 per cent owned by UAE nationals or by GCC national - are required to pay five per cent customs duty.

"We fought for the past two years to include the free zones in the free trade agreements and we win at last because we have local governments and ministries, including the foreign ministry, supporting us in this case," Ali Al Fayed, Manager, Department of Exports Origin, Ministry of EconomyMinistry of Economy, told Emirates Business.

"Under the current companies law, a national company is one which is owned 51 per cent by a national but this is being revised in the new company law. Once clauses 85 and 88 of the Unified Law is abolished, all products being exported to the Arab League by national or non-national firms will be able to have the same preferential treatment," he said.

According to Article 85, goods taken out from free zones into the customs office are treated as foreign goods even if incorporating local raw materials or articles on which customs duties and taxes have been collected prior to their admission into free zones. Article 88 on the other hand says goods imported from the free zones and duty free shops into or out of the country shall be treated as foreign goods.

"We are trying to do our best to get a quick decision from the GCC as one party," he said. "This case is very important because we have very large industries in free zones. When we enforce the FTA agreements with EU, Singapore and New Zealand, it will be applied automatically."

"But we still have a problem in the GCC," he added. "I think the GCC countries have the same problem like us. They are trying to escape at this point by putting new names like economic zones."

Samer Qudah, Partner, corporate commercial practice at Al Tamimi & Company, said: "Special economic zones are trying to avoid this argument. They do share some of the main features of a free zone. There are countries considering both options - special economic zones and free zones. The question of whether they will benefit from the removal of those barriers, I think it will take time to play but the answer of course is yes."

Al Fayed said the UAE has four FTAs - with European Union, Singapore, New Zealand and Asia Pacific. Negotiations for a free trade agreement (FTA) between the US and the UAE, however, were put on hold during the Bush administration.

"We have FTA with EU but it is still not finalised; FTA with FTA-AP was concluded but I don't know when we'll apply it. We have Singapore signed by the GCC, and we signed one with New Zealand recently. The US, we are not talking to them and we stopped talking to them since 2005," he said.

Currently, in most UAE free zones, only free zone manufacturing companies that are 51 per cent owned by GCC nationals benefit from a customs duties' exemption in other GCC countries, said Ahmad Azzouni, Senior Legal Consultant at DLA Piper.

In light of the above requirements, he said products manufactured in free zones - other than entities that are 51 per cent owned by GCC nationals - are treated as foreign goods regardless of whether customs duties have been paid on raw materials. "This would result in increasing the cost of products manufactured in free zones and sold in other GCC countries as customs duties would be paid by a) the manufacturer in relation to raw materials; and b) by the importer of the manufactured product in the relevant GCC country. This increase in cost would ultimately reflect on the price borne by end user," he said.

Azzouni said eliminating this requirement would facilitate the sales of products manufactured in free zones in other GCC countries. This would also attract foreign businesses to set up companies in free zones and target other GCC countries.

However, he said, the elimination of this restriction will not apply to products sold out of free zones, but manufactured in other countries.

"In free zones, entities can be established for the purpose of manufacturing products or trading in products manufactured abroad," he said. "This amendment is unlikely to apply to products imported by a free zone entity for the purpose of re-sale in the GCC such as products manufactured abroad. Therefore, free zone entities, which are in the business of trading rather than manufacturing, would not benefit from this amendment."

Qudah of Al Tamimi has another view. He said currently, free zones are excluded from the custom duty exemption that springs from the GCC economic treaty. In general, if the company holds an industrial licence in their respective GCC company, that company should be exempted from custom duties for exported goods from other GCC countries.

But in reality it does not always work like that, he said. "There are some UAE companies holding industrial licences located in free zones that are not able to benefit form the custom duty exemption," he said.

To obtain an industrial licence, two conditions are required - 40 per cent added value and an ownership structure of 51-49; 51 being the UAE national and 49 for the non-UAE national.

Once met, those companies are granted the industrial licence because they are deemed strategic in the overall UAE economy. In reality, they should enjoy the benefits that spring from the table - the exemption from the custom duty - as holder of an industrial licence.

But some GCC countries would look at the location of that company and look at the barrier under the current GCC economic treaty, which clearly excludes free zones and still apply custom duties on their company.

"It depends on certain countries. Some are flexible - they went by the licence and they assume that a company with industrial licence has satisfied all the requirements and they decide to grant them the custom duty exemption," Qudah said.

"Whereas some went by the book and looked at clause in Unified Custom Law that clearly excludes free zones. They look up the address of the companies and the fact that they are located in free zones, they concluded that they should not be included in the custom duty exemption," he said.

Qudah said he is not aware of discussions about lifting that article. But if removed then any company that holds a national industrial licence will enjoy free trade in other GCC countries, he said.

Will that benefit non-national companies in free zones as well?

This means only those with national industrial licences are likely to benefit.

Overall, analysts look at the progress positively. "This should be good for the UAE and the GCC as a whole," said Schuyler D'Souza, Chief Commercial Officer of Export Credit Insurance Company of the Emirates. "It is good for the GCC because it is the largest supply point and gateway in the Mena therefore it will benefit the economy."

Dubai export market recovering
The Dubai export market has recovered and is now treading the growth path, industry players told Emirates Business.

The sector is expected to end the year with a 12 per cent growth - a significant decline from last year - but an achievement considering the economic crisis that the world has plunged into.

Jagdish Wadhwani, Exports Manager, T Choithram & SonsT Choithram & Sons, said exports after October or post-Ramadan had soared by 30 per cent.

He said: "It is better than before. After October, we started growing in sales. The difference is 25-30 per cent over last year. It was not due to Dubai problems but due to shortage of foreign funds in importing countries.

"We are exporters. We didn't have problem in resources because there are a lot of goods available here. Now things have improved in terms of funding and also Dubai has been flexible in terms of pricing so we've started to see an increase in sales."

According to Nassim Saeed Al Muhairi, Senior Manager, Dubai Trade Statistics Department-Dubai World, the emirate has experienced a 45 per cent growth rate in export over the past five years. "Dubai's export turnover reached $11bn (Dh40.4bn) in 2008 with more than 6,000 companies exporting from the emirate," he said.

"Since the start of the 21st century, export trade in Dubai has registered an average growth of 27 per cent, posting record highs in the past five years. Dubai exports are expected to surge by 12 per cent by the end of 2009," Al Muhairi said.

"Things are moving for better. The crisis is not yet over, but it's gradually getting better," said Ankur, Marketing Manager at Dana GroupDana Group of companies. "The banks are lending money for business. The export market is picking up. Dubai as such has picked up a bit. Projects on hold are now beginning to start again. Abu Dhabi is definitely doing well now. The green shoots are real."

Growth is coming from North Africa and India, analysts say. "Around 10 per cent of our products go to exports market. The growth is coming from the African market and Iran and Iraq. Dubai is facilitating growth in other markets," said Durgesh Ahuja, Deputy General Manager at Emirates National factory for Plastic.

"The crisis has passed. The market has started picking up and it's going at a steady pace. We hope it may pick up another notch by the first quarter next year," he said.

AbdulQader Al Talli, Exports Sales Manager, Gulf Dura Industries, said: "Things are getting better. Some markets are great such as Iran, Pakistan, North Africa and Saudi Africa. The GCC is affected. Dubai is nevertheless a good hub and has a good reputation."

Currently, the government is focusing on ironing the wrinkles out to revive the market. "We are not talking on numbers, not yet. We are focusing on the service, regulations and obstacles and how we can solve them. We are focusing on how we can increase our exports to the world - from regional to international," Saed Al Awadi, CEO, Dubai Export Development Corporation.

The agency is also looking at reducing fees, if feasible. "We are looking at all obstacles such as fees procedures, paper works - if we find out any fee is hindrance to the economy we will take it to concern organisation like Dubai Ports and if feasible we can do it," Al Awadi said.

Dubai accounted for 71 per cent of the UAE exports in 2008, indicating a large proportion of the UAE exports are either manufactured or exported through Dubai. According to the 2009 Dubai Export Monitor report, direct exports accounted for seven per cent of Dubai's total trade. Free zone trade accounted for 50 per cent of direct trade while it is estimated to account for 25 per cent of Dubai direct exports.

Graph: Dubai Economy and trade profile

By Karen Remo-Listana

© Emirates Business 24/7 2009