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.

Mahyra Roy (mahyraroy@kpmg.com), UAE