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Saudi sets new tax rules

Customs authorities scrap import duty on computer products in Saudi, vendors and distributors predict big shake-up as regional channel weighs up impact of new ruling

New customs regulations exempting certain computer products from import tax in Saudi Arabia is poised to have huge implications for the dynamics of the Middle East IT channel, according to a number of sources in the market. Saudi authorities confirmed last month that a broad range of technology devices, including PCs, accessories, telecommunication products and mobile phones, are no longer the subject of a 5% customs levy when imported into the country. Cartridges and toners are not exempt from the tax, however.

The move is understood to fall in line with the unified customs tariff agreed by the GCC states as of January 1st 2007, although Saudi Arabia so far appears to be the only country to have formally announced such an action.

Local IT players speculate that the new tariff system could impact the market in a number of ways.

Like several other vendors polled by Channel Middle East, Karim Hammad, commercial products sales manager at Acer's Saudi office reckons end-users will emerge as the biggest beneficiaries of the new tax system because overall price points in the market will be reduced by 5%.

But he also believes the move could reshape the logistics and re-export market as the new system challenges the competitiveness of small distribution firms operating from Dubai.

"Companies in Jebel Ali will have to justify their presence because the whole Kingdom could act as a free zone now that IT products are exempt from duty," he suggested. "Many companies will have to reconsider their strategies."

Sherif Nasr Khattab, general manager eastern region at Saudi distributor and retailer Al-Jassim Electronics, believes the business model of IT-focused freight forwarding firms that move products into the Kingdom by road will be severely tested.

Many companies move IT products out of Jebel Ali and through Dubai, paying a duty to Dubai customs in the process.

"These logistics companies making big business by road will lose this business unless they transfer it by sea or air where they won't pay anything," he said.

He also claims the overall size of the Saudi market will increase as a direct result of more competitive pricing with Dubai, while end-user organisations that have planned their 2007 budgets will effectively be able to procure more equipment for the same amount of money.

There is also speculation from some sources that the new system could give Saudi distributors the impetus to transition into stronger regional players now that they do not have a price disadvantage.

Meanwhile, Francois Feuillet, Middle East general manager at Lexmark, believes there will be minimal impact at vendor level. "The prices will decrease, but the competition remains the same," he argued. "However, it could help stop some of the VAT cheats that under-invoiced orders. As the customs duty has disappeared there is a portion of dishonest businesses that may lose out."

The boss of one high-end infrastructure distributor based in Dubai believes the removal of the import duty could facilitate the processing of orders between distributor and reseller: "Under the old system, the 5% was always a disputed area in terms of who would pick up the cost. It used to lead to lengthy negotiations, which won't be the case anymore."

Some distributors are ruing the short term impact of the new system, however. The speed at which the ruling was introduced caught many companies by surprise, leaving some in-country distributors with several weeks of inventory that they had already paid a 5% duty on. That could force them to sell at a loss if they attempt to match current prices.

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