GCC free zones: Are you compliant?

As per the revised Kyoto Convention, a free zone (FZ) for customs means a part of the territory of a contracting party where any goods introduced are generally regarded, insofar as import duties and taxes are concerned, as being outside the customs territory. The GCC Customs Law defines free zones as licensed buildings or places wherein goods are placed free of customs duties (indirect taxes) for purposes of display or sale. Therefore, goods imported into any of the GCC FZ are not subject to customs duty.

The GCC FZ landscape comprises more than 55 free zones in the UAE, four in Oman (Salalah, Sohar, Duqm, Al Mazunah), three in Bahrain, one in Kuwait (KTFZ), and one in Qatar. Saudi Arabia has set up “Special Economic Zones” (e.g. King Khalid Airport) and operate three bonded areas.

But while companies operating out of free zones in the GCC benefit from a lot of facilitation of the goods clearance and movements in addition to the customs duty suspension, they do face a maze of complex import, export and border security regulations. These must be carefully navigated in order to maintain compliance. These companies must perform periodical reviews of internal processes to assess customs entries made by the company, or its third-party agents, and implement remedial actions if necessary to avoid potential massive penalties in the case of non-compliance.

Based on GCC common customs laws, customs compliance is a continual process that does not start nor end at the point of customs clearance.

Companies wishing to operate out of the free zones must:

• Stay updated on the continually evolving laws, regulations and processes surrounding customs and international trade before engaging in the import or export process.
• Check and double check declarations and not assume they are correct. Customs authorities can challenge and audit information.
• Maintain strong compliance, leading to efficient customs duty management. Customs compliance management is also critical for the importer or exporter as they are legally responsible for customs compliance at each stage of the customs process.

Based on the above-mentioned, the challenge here, and the focus of the audits in the FZ entities is to justify the whereabouts of the goods brought into the FZ. FZ entities are obliged to provide customs authorities with sufficient evidence (i.e. customs declarations or commercial evidence) to demonstrate that the goods introduced in a FZ are either available in stock, or have been exported, consumed, used, disposed of, or destroyed following the applicable customs procedures.

Furthermore, as the importer or exporter, an entity is legally responsible for the accuracy of the information provided to customs, even in cases where a customs broker (third-party) prepares and lodges its declarations. Customs authorities have the right to audit up to five years back from the date of import or export declarations, and in practice, from the date of first entry into the free zone. Each FZ entity must manage and respond to investigations, audits, and examinations initiated by customs authorities proactively and in a timely manner.

The FZ entities are clearly responsible for establishing, operating and maintaining processes and controls for ensuring compliance with all customs laws and regulations impacting the import and export of goods inand out of any FZ based in the UAE or other GCC Countries. An importer or exporter into the GCC FZ shall design, implement, update and (where possible) automate operating procedures that integrate customs processes and activities into core business processes, which facilitates customs regulatory compliance and ensures consistency and compliance with customs requirements.

Compliance with GCC customs authorities laws calls forinternal controls, risk management, and overall competitiveness that mandate that GCC FZ companies leverage their financial, accounting, and business systems more effectively. In this way, companies can have access to the data necessary to properly manage and plan for customs duties, manage export control licenses, screen transactions, and report each transaction in an efficient and compliant manner. Companies need special customs and trade experience to help them select, implement, and customize effective trade automation solutions for the internal record keeping. Below is an overview of the process as and when customs authorities initiate an audit of a company’s FZ activities.

In terms of customs compliance and controls Dubai Customs have implemented a new procedure for clearance of goods consumed within Dubai FZs. Customs Notice No. 17/2020 enhances control of the stock maintained by businesses operating in Dubai FZs, establishing new compliance requirements to ensure the clearance of goods consumed, used and sold by FZs companies. The new rules entered into force on 25 October 2020 and include a mandatory “consumption goods” declaration to be submitted at least on a quarterly basis for any type of business based in the Dubai FZs.

It is important that companies operating out of a free zone adhere to the new declaration procedures in order to comply with Dubai Customs inventory tracking requirements and customs duty accounting, to avoid penalties
in case of non-compliance, in case of a customs audit. Moreover, Dubai Customs have identified the types of goods consumed in FZs: non-dutiable vs. dutiable and segregate the goods consumed/used in FZs into two categories: non-dutiable (i.e. goods that are not subject to customs duty when consumed/used, such as building equipment and materials used in construction projects) and dutiable (goods that are subject to customs duty when consumed/used, such as electronics, tires, perfumes, foodstuff, sold to the local market).

On a final note, all FZ entities must be aware of the opportunities risks presented by free zones. While the importing of goods into the UAE FZ is, in principle, not subject to customs duty, all the entities shall retain the customs documentation (i.e. customs declarations along withthe associated documents), maintain customs stock reconciliation and be ready for any customs audit.

by Fernand Rutten, Customs and Global Trade Leader and Shaimaa Husseiny, Senior Manager, Customs and Global Trade, Tax, Deloitte Middle East