UAE free zone companies must comply with import and export laws and regulations or risk unexpected “avoidable” expenses. Non-compliance can lead to import duties plus penalties of any missing or untraceable goods.
UAE free zones are generally viewed as trading centers or hubs for customs duty purposes. If a company imports goods and does not export those goods from the free zone, such goods are assumed to be at the company’s premises.
In other words, if a company imports X amount of goods and exports Y amount of goods, then the Z balance is assumed to be at the company’s site. You can expect fines for the difference if the quantity is inaccurate or cannot be traceable.
A Look at Traceability
Import and export transactions require the processing of customs declarations. These include the following main fields:
1. Customs declaration reference number
2. Good’s Harmonized Systems (“HS”) Code
A company is required to trace its import and export transactions following the equation “Import – Export = Inventory.” This formula applies to HS codes, weight, and quantity. For example:
o Imported HS codes – Exported HS Codes = Inventory HS Codes
o Imported weight – Exported weight = Inventory weight
o Imported customs declarations – Export from those customs declarations = Balance of imported customs declarations (FIFO is usually followed for this)
When a company is inconsistent in its traceability, its inventory with the customs authorities’ records will not be accurate. A company with flawed data can expect to be flagged by the customs authorities as a high-risk entity. Thus, increasing the likelihood of an impending audit.
What Companies Forget to Take into Account
A company with a reliable ERP system and supply chain may assume that they are meeting the above requirements. However, certain activities are commonly missed in the declarations of free zone companies. For example:
- Goods consumed within the free zone: Stationary, supplies, etc.
- Scrapes: Imported furniture and IT equipment that are disposed
- Samples: Imported samples that are removed from the free zones without a customs declaration
Any of the above if not declared to the customs authorities is assumed to be in the companies’ inventory. If not, then those goods are deemed as being smuggled into the UAE local market.
The quantities may sound minimal, but when a free zone entity gets audited for its activities for the past ten years, these small amounts can become excessive. In some instances, the quantities can reach into the hundreds of thousands, and in some cases, millions.
How to Mitigate and Potentially Eliminate Risk
There are several steps and procedures available by the UAE customs authorities that can be followed to mitigate the risk of non-compliance, and potentially eliminate any risk. Here are a few steps that we recommend:
1. Implement a proper inventory system that supports UAE customs authorities’ requirements
2. Conduct regular internal checks and audits to remain in compliance
3. Connect with the customs authorities in advance to mitigate future risks (request of voluntary audits)
Each UAE Emirates’ customs office can offer additional steps and options to stay compliant.
We at Limitless Business Avenue urge free zone entities to review their position and identify any non-compliant acts. Implement periodical tests and checks and disclose any misconduct in advance before being subject to a formal customs audit.