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Issue:# 11 NEWSLETTER

March, 2011

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US applies 2% tax on foreign suppliers, including UAE

In a report released by the UAE Ministry of Foreign Trade's (MoFT) Department of Foreign Trade Policies, the United States, under government procurement programs, have issued a 2% tax on purchases from the United Arab Emirates in effect from January 2011. The US move will target foreign suppliers on government procurement contracts, where foreign companies are from countries that are not part of the WTO's Agreement on Government Procurement Procedures. The UAE is not currently included in this WTO agreement. However, the MoFT has confirmed that a study may be performed to examine the positive and negative aspects of signing such an agreement.

The report also states that the US has eased its quantitive restrictions on imports from China; whilst this may ease relations and trade between the two countries, it may disadvantage other would be competitors. One further observation of significance was that the US government has made known its intentions to dispose of large amounts of equity within it's own American institutions; an observation that may instill confidence in some regarding the US economy.

UN flagNew sanctions

In response to the worsening situation in Libya involving violence and the use of force against civilians, acting under Chapter VII of the Charter of the United Nations, on the 26 February 2011, the United Nations Security Council (UNSC) adopted Resolution 1970 (2011) imposing sanctions against Libya.

The measures included prohibitions on trading or transportation of arms and related materials to Libya, dealings with designated person, and provision of technical, financial or other assistance to military activities or the use of arms or related materials. Any exceptions require direct approval from the UNSC.

The European Union government (27 member countries in total) also approved a package of sanctions against Muammar Gaddafi, the Libyan leader, and those close to him, including an arms embargo in addition to travel bans and various asset freezes. The EU continues to have sanctions in place with regard to key individuals in Egypt related or close to the former president Mohamed Hosni Elsayed Mubarak.

On 22 March 2011, the US placed sanctions on 14 entities that are owned / controlled by Libya's state oil company, in a further bid to apply pressure to Gaddafi's regime.

Ireland continues moves to get closer to MEA region

Since early 2011, Ireland has recently ratified the double taxation agreement that it signed with Kuwait (23 November 2010), with Morocco (22 June 2010), United Arab Emirates (1 July 2010), and furthermore the amending protocol (signed March 2010) for the existing treaty with South Africa.

Kuwait forms an independant Capital Markets Authority

Officially published on March 13th 2011, Kuwait Parliament passed new legislation for the establishment of an independent authority to oversee and regulate on the five member Capital Markets Authority (CMA). The role of the CMA will be to ensure continued transparency and to prevent any instances of illegal activity, such as insider trading.

Previously the role had been managed by the Kuwait Stock Exchange (KSE) since its establishment which, with its lack of persistent transparency, has perhaps put off foreign investors from investing heavily in the past.

The formation of the CMA is hoped to remedy this, not only with the creation of a separate regulating body, but in addition the new laws call for the bourse itself to be transformed into a private shareholding company, with 50% of its shares being made available to Kuwait citizens.

The passing of the by-laws through Parliament signifies a dedication on the behalf of the Kuwait government to bolster economic reform throughout the country during a critical global time when many countries are imposing stricter fiscal spending and market regulations.

Cragus ranked as leading transactional firm

Following the recent annual survey by Euromoney's International Tax Review, the results published in March 2011 reveal that once again The Cragus Group has appeared as a leading tax transactional firm for the GCC (Gulf Co-operation Countries) region.

Cragus has now appeared in various global rankings by Euromoney for 6 years in a row, annually since Cragus was first established. Cragus would like to thank their clients and peers, in addition to International Tax Review, for their continued support - without which none of this would be possible.

Qatar Statistics Authority releases third quarter estimates

In January 2011, the Qatar Statistics Authority (QSA) released its third quarter 2010 estimates at 111.25 Billion Qatari Riyals. Looking at data from the third quarter in 2009, the GDP has increased by 21.1%. Sectors including the oil and gas industry, representing approximately 51% of the GDP, enjoyed growth of 36.2% compared to the same period in 2009.

Bahrain and IoM sign DTA

On February 3rd 2011, the Kingdom of Bahrain and the Isle of Man government signed an agreement for the avoidance of double taxation and the prevention of fiscal evasion in respect to taxes on income. The agreement which closely follows the OECD (Organization for Economic Cooperation and Development) demonstrates the willingness of both parties to further develop their investment and economic ties.

The Minister of Finance for Bahrain said that "the DTA will certainly encourage transparency and the exchange of information for tax purposes".

Both parties also signed a Memorandum of Understanding detailing that the two governments intend to work closely together in hopes of facilitating the development of bilateral economic activity for mutual benefit.

Bahrain's 29th DTA, the agreement contains a provision on the exchange of information on tax, in line with the international standard currently adopted by institutions such as the aforementioned OECD and the United Nations.

Malaysia and GCC move towards FTA

On the 30th January 2011, it was confirmed that a Free Trade Agreement (FTA) between Malaysia and The Gulf Cooperation Council (GCC) had been completed.

Though further studies are expected, Malaysia's Minister of InternaMalaysia, street in Ipohtional Trade and Industry, Datuk Seri. Mustapa Mohamed, confirm that they would proceed to conclude the bilateral FTA with the objective of boosting two-way trade and investment opportunities in multiple sectors such as Islamic Banking and Finance, Renewable energy and tourism.

It is hoped that whilst setting up a regional headquarters in Malaysia, GCC countries could also develop businesses in oil and gas amongst others.

Brunei and Bahrain sign DTA

The Double Taxation Agreement signed by Bahrain and Brunei has entered into force as of 1st January 2011, stipulating that dividend payments to non-residents will be exempt from withholding tax. The clause however does not negate the withholding tax imposed on interest and royalties, at a maximum rate of 5%, and any technical fees remitted to non-residents which remain capped at 10%.

Brunei does not impose withholding tax on dividends remitted to non-residents, however interest paid is subject to a 15% withholding tax, with royalties and technical fees subject to a rate of 10%.

Events

TEI event in Dubai
On Wednesday the 25th of January, Tax Executives Institute (TEI) EMEA chapter held their regional conference in Dubai. TEI is a worldwide association of Tax Executives in the Industry (membership is restricted to in-house tax professionals). The event was very successful and also drew local in-house tax executives. Cragus, alongside Ernst & Young, were delighted to assist in hosting TEI. The event was also attended by Assistant Undersecretary of the Ministry of Finance and Industry, HE Khalid Ali Al Bustani. We hope that TEI will return to Dubai and the region again for future events.

Taxand annual event in Paris
Taxand will be holding their annual event in Paris 26to 29 April this year. Cragus have accepted an invitation to attend, as have International Tax Review, along with tax executives from some of the world's leading multinationals.

IBA annual event to be held in Dubai in 2011
The International Bar Association will be holding their annual event in Dubai this year between 30th October and 4th of November. Over 4,000 lawyers are expected to attend the event, covering a huge range of practice areas.

Tax treaty updates

Bahrain

Treaty between Bahrain and Turkmenistan signed
On 9 February 2011, Bahrain and Turkmenistan signed an income and capital tax treaty in Manama. Further details of the treaty will be reported subsequently.

Kuwait

Treaty between Kuwait and Guyana approved by Kuwait

On 23 January 2011, the Kuwaiti cabinet approved the income and capital tax treaty between Kuwait and Guyana, signed on 19 July 2010. Further details of the treaty will be reported subsequently.

Protocol to treaty between Korea (Rep.) and Kuwait enters into force
The amending protocol, signed on 2 October 2007, to the Korea (Rep.)-Kuwait income and capital tax treaty of 5 December 1998, entered into force on 27 December 2010. The treaty generally applies from 1 January 2011.

Portugal ratifies treaty with Kuwait
In March 2011, Portugal ratified the DTA with Kuwait (signed Feb 2010).

Qatar

Protocol to treaty between Qatar and Malaysia signed
On 16 February 2011, Qatar and Malaysia signed an amending protocol to the income tax treaty of 3 July 2008.

Treaty between Bulgaria and Qatar enters into force

The income tax treaty between Bulgaria and Qatar, signed on 22 March 2010, entered into force on 23 December 2010. The treaty generally applies from 1 January 2011.

Treaty between Qatar and Georgia ratified by Qatar
On 14 February 2011, Qatar ratified the income tax treaty between Qatar and Georgia, signed on 22 December 2010.

Protocol United Kingdom and Qatar ratified by Qatar
On 20 February 2011, Qatar ratified the amending protocol signed on 20 October 2010, to the Qatar & United Kingdom tax treaty of 25 June 2009.

Air transport agreement signed between Qatar and Slovenia
On 16 March 2011, Qatar ratified (16 March 2011) the air transport agreement between Qatar and Slovenia, which was signed on the 1 February 2011.

Air transport agreement between Austria and Qatar ratified by Qatar
On 20 February 2011, Qatar ratified the air transport agreement between Austria and Qatar, signed on 30 December 2010.

Treaty between Austria and Qatar ratified by Qatar
On 20 February 2011, Qatar ratified the income and capital tax treaty between Austria and Qatar, signed on 30 December 2010.

Saudi Arabia

Treaty between Saudi Arabia and Greece enters into force
The income and capital tax treaty and protocol between Saudi Arabia and Greece, signed on 19 June 2008, entered into force on 1 May 2010. The treaty generally applies from 1 January 2011.

Saudi Arabia signs DTA with Poland
The Kingdom of Saudi Arabia and Poland signed a double taxation agreement in Riyadh on the 22 February 2011.

Saudi Arabia DTA with Russia enters into force
This treaty will enter into force on 1 January 2011. Under certain conditions, the treaty provides relief from withholding taxes on business profits, limits withholding tax on dividends and interest to 5 percent and on royalties to 10 percent.

Saudi Arabia and Syria DTA enters into force
This tax treaty will enter into force on 1 January 2011. Under certain conditions, the treaty provides relief from withholding taxes on business profits, limits withholding tax on dividends to zero percent, on interest to 7.5 percent (although, in practice, the domestic rate of 5 percent would apply) and on royalties to 15 percent (which is the Saudi domestic rate in any case).

Saudi Arabia DTA with Netherlands in force
The treaty was ratified on 13 October 2010 and is in force from 1 January 2011. Under certain conditions, the treaty provides relief from withholding taxes on business profits, limits withholding tax on dividends to 5 percent, on interest to 5 percent and on royalties to 7 percent.

UAE

Russia signs and ratifies UAE air transport agreement
On 7 February 2011, Russia ratified the air transport agreement between Russia and the United Arab Emirates, signed on 10 September 2007, by way of Federal Law No. 12-FZ.

UAE approves treaty with Georgia
On 6 February 2011, the United Arab Emirates' cabinet approved the tax treaty between the United Arab Emirates and Georgia, signed on 25 November 2010.

UAE and Cypus sign DTA
Both countries signed a DTA on 27 February 2011 in Abu Dhabi.

UAE approves treaty with Venezuela
On 6 February 2011, the United Arab Emirates' cabinet approved the tax treaty between the UAE and Venezuela, signed on 7 June 2010.

UAE cabinet approves air transport agreement with Argentina
United Arab Emirates' cabinet gave approval for signing of the agreement on 27 February 2011.

Notes from America: waiting for strategy

We are in dark territory, and no one knows what the outcome will be. - US Secretary of Defense Robert Gates, March 23, 2011

Advice to post-modern states: accept that intervention in the pre-modern is going to be a fact of life. Robert Cooper, Director General, Politico-Military Affairs, Council of the European Union, January, 2000.

The Ides of March appears to be the chosen period for launching war in the Middle East. On 20 March, 2003, the U.S. initiated the Second Gulf War against Iraq, a foreign entanglement that persists today. On 19 March, 2011, the U.S. launched, in the company of yet another ad hoc international coalition, armed intervention against the regime of Muammar Qaddafi. Ostensibly designed to protect civilians and blunt a government offensive against the opposition held city of Benghazi by the establishment of a "no fly" zone, the operation lacks a clear strategic objective and may create greater long-term risks than it does near-term rewards.

President Obama sought to internationalize the operation in Libya due to a desire to preserve U.S. credibility, limit political risks to the U.S., and force allies to shoulder burdens. Having achieved this first set of goals, the Obama Administration is now attempting to negotiate its exit from the frontlines of the conflict before public opinion at home and abroad turns against U.S. actions. Transition to NATO or other foreign leadership of the operation cannot come soon enough for many in Washington who are now belatedly waking to the disturbing possibility of yet another open-ended military commitment in the Middle East.

A Short Term Diplomatic Win...

Arguably, the Obama team displayed some of its most adept diplomacy to date in marshalling the international response. President Obama's initial reluctance to act unilaterally and lack of aggressive rhetoric toward Qaddafi became sources of leverage, stoking fears in Paris, London and apparently several Arab capitals that the US would not act. Still smarting from being caught behind the curve on Tunisia and Egypt, and hamstrung by the immediate strategic significance of Bahrain, the Administration was at pains to establish deep political cover for military intervention, and to secure any U.S. action under a legal mandate from the international community. The Arab League statement in support of a no-fly zone, and the resulting UN Security Council resolution authorizing robust intervention, together sidelined critics of potential unilateral US action while also empowering Washington to lead the first phase of the operation against Libyan government forces.

...Dependent upon Managing Fragile Coalition and Domestic Politics

U.S. goals are, in a political sense, defensive. The U.S. now seeks to disengage from frontline operations as soon as possible while at the same time securing broad participation of European and Middle Eastern allies in the campaign. The Administration has encountered difficulties navigating the questions of NATO management, political ownership, and an expanded role by Arab states in the operation. The perceived delay in transitioning leadership to coalition members has also struck a negative chord with a U.S. Congress already angered at the Obama Administration's use of military force without express Congressional consent. Indeed, Obama's efforts on the Libya operation continue an imperial White House style that rejects meaningful consultation with the legislative branch. Congress is expected to hold hearings next week on Libya, demanding of the White House answers, explanations, and not least a clear explication of the precise goals of the Libya intervention.

Deeper Problems in Washington

Outside a small circle of policymakers there is little appreciation in official Washington for the intricacies of Arabian Gulf politics, of relationships between GCC member states, or of the tenuous strategic situation regarding Iran's impact on the region. In general, Members of Congress, their staff and the media tend to simplify the complexities of the region - with dangerous consequences for matters of policy. Looming institutional problems that are certain to beset tentative new democracies in Egypt and Tunisia, for example, will be dismissed until crises demand attention. The situations in Saudi Arabia and Bahrain, meanwhile, are likely to be portrayed as popular spontaneous uprisings for democracy rather than instances of provocative foreign influences or historical strife between competing sects. The GCC's intervention in Bahrain has not been understood in Washington from the perspective of Gulf governments concerned about external sources of instability.

Unfortunately, however, this lack of rigor appears to plague the Administration's decision-making process as well. Despite the warnings of the Pentagon and intelligence community, the core White House team appears to have scant appreciation of the 140 tribes in play in Libya, and no solid assessment of the potential for the rebels to govern Libya in the aftermath of civil war. In seeking to achieve short-term stability in Libya and win the approbation of American and Arab publics alike, it is entirely likely that the US-led intervention will have several negative consequences in the Middle East.

Mounting Problems for the Region

These consequences may take many forms. But regional leaders should focus their concerns on the following.

Regional arms race: The ease with which coalition forces dismantled the second largest air defense system in the region will not escape notice in Tehran. Iran is certain to redouble efforts to improved air defense as well as anti-ship capabilities in order to threaten Western power projection platforms in the Arabian Gulf.

Iranian pursuit of WMD: Qaddafi gave up nuclear weapons to international acclaim in 2004. Doubtless Iran will conclude the decision directly contributed to Qaddafi's vulnerability to attack today.

Opening for Al Qaeda in Libya: Many in the current rebel host in eastern Libya fought previously against the United States in Iraq under the banner of Al Qaeda. Should the Libyan state collapse completely, or be split into eastern and western quasi states, Libyan territory threatens to become - akin to Somalia - fertile ground for radical terrorism.

Ambiguity = Uncertainty: The ambiguity of US policy toward Libya and the apparent lack of an overarching strategic vision for the region presents many more questions than answers for enemies and allies in the Middle East alike. Washington will be hard-pressed to define a forward-looking strategy from this moment in Libya.

Conclusions: Arab States Must Renew Efforts in Washington

These past two months of turmoil in the Middle East have revealed the tenuous relationships of too many Arabian Gulf states in Washington. To date, most US allies in the region have tended to pursue shallow efforts at relationship developments with executive branch policymakers du jour. Not enough work done by the Gulf States to develop "relationships in depth" in Washington. Major and sustained investments in education and relationship building with all strata of the Washington establishment, particularly in Congress and the media, should be made by Gulf leaders to ease this perilous transitional period, to better inform US policy decisions, and to secure stability for the long haul.

This contribution was gratefully received from Eric Shimp - Special Advisor to UAE regarding the UAE-USA FTA Negotiations, and Senior Director, Global Business Strategy, Alston & Bird, LLP.

If you would like further information on The Cragus Group or tax matters relating to the Arabian Gulf or surrounding region, please contact:

Dominic Treays, Director of Practice Development, on [email protected]

Or visit our website www.cragus.com

Sincerely,

Gemma Eagle

Marketing Manager

The Cragus Group

[email protected]

Copyright © 2011 Cragus. All rights reserved. Please note that all use of this newsletter is subject to the Cragus Terms of Use available at http://www.cragus.com/legal.php, including the disclaimers, qualifications and limitations of liability set forth therein.

In This Issue
US applies 2% tax to UAE purchases
Sanctions
Ireland closer to MEA
Kuwait's CMA
Cragus survey success
Qatar releases stats
Bahrain & IoM sign
Malaysia & GCC progress FTA
Brunei & Bahrain sign DTA
Events news
Article Headline
Quick Links
About The Cragus Group
The Cragus Group is made up of hand-picked individuals from tax, legal and accounting backgrounds, with experience of international tax in the Middle East dating back 20 years. Primarily dealing with corporate international tax planning, they also provide advice on transfer pricing, tax controversy, legal structuring, oil and gas and general corporate advisory services. They serve a range of clients across the Middle East and Africa.
The Cragus Group consists of well known international tax advisors based in Dubai and a long standing network of trusted independent Member law firms, correspondents, and advisors of high professional reputation in Kuwait (Kuwait City), Oman (Muscat, Salalah, Sohar), Saudi Arabia (Jeddah), Qatar (Doha), UAE (Abu Dhabi, Dubai), and the USA (Washington DC).
Tax Leadership/Contacts:
Dominic Treays

Reggie Mezu

Mark Stevens
(Strategic Adviser)
Dr. Robert E. B. Peake
(Strategic Adviser)

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