Developments Affecting Foreign Investors in Saudi Arabia October 2016

Business Climate

The Saudi government has proposed and/or implemented a wide range of procrustean measures to adjust to new fiscal realities in the wake of falling oil revenues, including canceling tens of billions of dollars of contracts,1 merging, eliminating or privatizing key government agencies (including Saudi ARAMCO), taxing expatriate income and remittances, drastically raising traffic fines and visa fees, and much more.

Payments on construction and other contracts have lagged materially, resulting in tens of thousands of layoffs and organized protests.2 The Binladin Group, drowning in red ink, has finally received a lifeline.3 Retail lease rates have fallen drastically, particularly in the mid-market sector.

While nonpayment of salaries has been characterized by Ministry of Labor officials as criminal in nature, payment delays by government agencies are apparently viewed more as prudent fiscal discipline. The Tax Department has been delaying issuance of final tax clearance certificates, depriving contractors of a necessary requirement for claiming contract payments.

A National Program Management Office has been created to help manage contract costs and timelines and reduce the fiscal drain,4 all part of a broad plan by Deputy Crown Prince Mohammed bin Salman to narrow a gaping budget. His National Transformation Plan on the other hand seeks to increase foreign investment. These two conflicting goals are being pursued through sometimes contradictory measures, creating doubt for foreign investors and questions about their effectiveness in addressing current challenges.

At the same time, news of OPEC production restraint in late September may by restoring oil revenues improve fiscal balance.

Firms that depend directly or indirectly on government projects are facing hard times generally; many construction firms have been driven to insolvency or compelled to withdraw from the market, with an often severe trickle-down impact on subcontractors and suppliers.

Discussion: While the government deserves credit for a courageous and far-seeing Vision 2030, the wisdom that it has demonstrated in articulating its longer term plan has yet to be matched by a similar degree of coherence, consistency, or sustainability in shorter term measures.  While Vision 2030 relies on foreign investment to replace government on the commanding heights, recent reforms and stopgap budget deficit relief measures have had a mostly negative impact on business, and a deterrent effect on foreign investment. Unless and until short term policies are better aligned with longer term vision, hopes for attracting foreign investment remain questionable.

National Transformation Plan

While the National Transformation Plan promises to place the Kingdom within the top 20 in World Bank ratings for ease of doing business, and to adopt hundreds of reforms designed to attract foreign investment, the news in recent months has been mostly negative, including announcements and rumors of new taxes, greater difficulties and expense in obtaining work visas for expatriate workers and ever-expanding Saudiization requirements.

A delegation of senior U.S. Government officials is currently in Riyadh to meet with Saudi counterparts regarding implementation of Vision 2030 and the NTP, and to provide input on options for aligning enlightened goals with often problematic specific initiatives.

Discussion: While Vision 2030 and the National Transformation Plan build on free market investment-friendly measures similar to those implemented by Margaret Thatcher in the 1980s, the business regulatory agencies, including the Ministries of Labor, Finance (tax, customs, audit control) and Commerce, have implemented uncoordinated and often onerous reforms.  While these agencies wield significant regulatory power, they are only poorly accountable to those affected; recent reforms have too often had the perverse effect of deterring further investment and undermining the viability of existing investments.  Unless and until the initiatives of agencies with overlapping horizontal jurisdiction are better aligned with goals of growth and dynamism, potential investors will have little incentive to choose Saudi Arabia over Thailand, Vietnam, or Bangladesh in allocating scarce capital.

Arbitration 

While the 2012 Saudi Arbitration Law5 raised hopes for a more cost-effective and expedited dispute resolution option, proceedings under this system have continued to rely heavily on Saudi courts as supervising and regulatory authorities, substantially undermining the law’s intended benefits.

The Saudi Center for Commercial Arbitration (SCCA)6 has now opened its doors for business in the Council of Saudi Chambers building in Riyadh, with the ambition of becoming a leading regional arbitration center.

SCCA’s Arbitration Rules are based on the United Nations Commission on International Trade Law (UNCITRAL) rules,7 which among other issues address

  • initiating arbitral proceedings,
  • constituting a tribunal,
  • discovery, use of experts, and interim orders,
  • issuing awards, and
  • fees and costs.

SCCA has also adopted Mediation Rules based on those of the AAA-ICDR.8

While in 1992 Saudi Arabia became a party to the New York Convention on Recognition and Enforcement of Foreign Arbitral Awards,9 thereby committing to honor awards issued in other signatory states,10 effective enforcement under the original regime was evident in the breach. To be enforced, awards needed first be presented to the Grievance Board, which has in some cases re-litigated underlying disputes on the merits.

Under the 2012 Enforcement Law,11 enforcement of both domestic and foreign awards was entrusted to newly constituted Enforcement Courts, which have exceeded expectations in their reliability, speed, and effectiveness. While enforcement judges apply shari’a principles,12 this exception has proven to be narrow, with appeals limited to “enforcement disputes.”

Hopefully as a harbinger for a generally improved enforcement climate for foreign awards as well as foreign judgments, a UAE-based award creditor has reportedly recently succeeded in enforcing a US$18.5 million London arbitral award.13

Discussion:  The Saudi National Transformation Plan contemplates three new arbitration centers by 2020, beginning impliedly with the SCCA. While yet to be proven in practice, this initiative may well foreshadow a better quality of justice, hopefully comparable to that offered by the Dubai International Financial Center Courts.14 Saudi arbitration has hitherto been fraught with procedural complexities, including the right of interlocutory appeal, undermining its attractiveness; it will no doubt take time for foreign investors to gain confidence in Saudi arbitration over proven alternatives, such as the London Court of International Arbitration and the DIFC Courts.

Labor

Taqat Recruitment System

As part of a campaign to expand employment opportunities for Saudis, the Ministry of Labor has introduced a “taqat” portal whereby companies applying for work visas for expatriates must first search the labor market for qualified Saudis.

After identifying a new position for which it seeks to recruit an expatriate for any block visa category, a company must first post the vacancy on the taqat portal.

While in theory foreign investors are entitled to a residency visa at least for the general manager, the system currently requires even this position be listed.  While this may ultimately prove to be a formality, it adds another problematic delay to an already cumbersome business startup process.

Vacancies must be posted on the taqat portal for 14 days, during which Saudi candidates may apply.  If no qualified candidates appear, there is no obligation to actually hire the Saudi candidates who step forward; a visa block position may at least in theory be approved, and a corresponding work visa issued.  After complying with this procedure and interviewing available candidates, the visa block application may be submitted to the MOL with proof of the interviews having been conducted, with reasons for rejection.

Upon approval, the applicant may apply for a work visa to allow the expatriate candidate to enter the Kingdom for conversion to an iqama.

Nitaqat

The MOL has announced plans to amend its nitaqat system, which currently ranks employers based on numbers of Saudis employed, with a color grade allocated based on company size (10-49, 50-499, 500-2999, and 3000+) and industry, with expanded focus on

  • numbers of female nationals,
  • average salary to Saudi nationals,
  • length of tenure of Saudi nationals, and
  • nature of assignment, i.e. administrative vs. management or technical.

Other reforms under discussion include

  • nitaqat credit for part-time Saudi employees,
  • double counting of expatriates aged 60+,
  • revisions to existing “rolling averages” methodology of calculating Saudiization levels,
  • further restrictions on expatriate recruitment, and
  • revised Saudiization bands (50-99, 100-199, 200-499).

Discussion:  While Vision 2030 seeks to expand private sector employment opportunities for Saudis, which nitaqat is designed to promote, it also assumes substantial new foreign investment.  Like the UAE, Saudi Arabia currently offers foreign investors access to cheap, qualified South Asian and other expatriate labor. To the extent that this advantage is eroded by requirements to replace qualified and cost-effective expatriate labor with underqualified and unaffordable Saudi labor, foreign capital may look elsewhere. A better balance is required between the imperative to mobilize Saudi manpower vs. the competitive advantage of qualified, cost-effective expatriate labor.

Taxes and Tariffs

Visas

To increase government revenues, immigration service fees have been raised as follows:

  • for visitors, SR2,000 ($530) for “single entry” visas, and
  • SR3-8,000 ($800-2,130) for “multiple entry” visas,
  • for residents, SR 200 ($50) for two-month, single exit/re-entry visas, and SR100 for each additional month (up to the underlying residency), i.e. doubling of previous SR 200 flat rate for visits up to six months, and
  • SR 500 ($130) for a 3-month, multiple-visit visa with an additional SR 200 ($50) for each additional month (up to the underlying residency), i.e. 260% increase from the previous SR500 flat rate for up to six months.
Income and Remittance Taxes

The local press in June quoted Labor Ministry officials as announcing plans to tax expatriate income and remittances abroad, reportedly at levels of 10% and 6% respectively, to enhance government revenues and encourage spending of income locally. Rumored reforms have included an income tax that falls over time; limiting remittances; and automatic tax deductions from expatriate workers’ bank accounts, which expatriates are now required to have under the Wage Protection Program.

More recently, the government has clarified that such taxes remain under review; a similar plan in the mid 1980’s was abandoned after widespread resignations of physicians at King Faisal Specialist Hospital and elsewhere.

Discussion:  To the extent that the proposed taxes aim to encourage expatriates to spend earnings in the Kingdom, this same objective may be promoted by plans to allow cinemas and other new amenities similar to what is available in Dubai.  While the Kingdom seeks to attract foreign tourism, which could include visits by relatives of workers resident in the Kingdom, this may no longer be affordable given high visa charges. At the same time, many expatriates’ core objective is to save and send money home; as new charges erode this hope, many will choose to return home.

Justice Against Sponsors of Terrorism Act (JASTA)

On September 28, both houses of the U.S. Congress for the first time overrode President Obama’s veto, by enacting the Justice Against Sponsors of Terrorism Act (“JASTA”).15

Under the doctrine of sovereign immunity, states and their officials are immune from jurisdiction in foreign courts for official acts;16 existing U.S. exceptions to sovereign immunity include liability for torture, extrajudicial killing, aircraft sabotage, and hostage taking.17  JASTA deprives government defendants of sovereign immunity in actions brought by U.S. citizens for terrorist acts on U.S. soil, and opens the door to lawsuits against the Saudi government and its officials.18

Although 15 of the 19 9/11 hijackers were Saudi, the Saudi government has long denied complicity in these actions. The administration has opposed JASTA based on the Saudi regime’s strong anti-terrorism cooperation in the wake of the attack, and on the risk of reciprocal measures by other countries.

Under JASTA, a U.S. national may now bring an international terrorism suit against a foreign state, unless the foreign state enjoys immunity by virtue of 2 below;19 and U.S. courts may hear cases against foreign states for physical injury to a person or property or death that occurs inside the United States, and caused by

  • an act of international terrorism in the United States, and
  • tortious acts of the foreign state or its officials acting within the scope of their duties.20

JASTA does not however deprive a foreign state of sovereign immunity “on the basis of an omission or a tortious act or acts that constitute mere negligence;”21 an affirmative act is required, beyond mere negligence.

Further limiting JASTA’s potential impact, the Attorney General may seek “a stay of the civil action, in whole or in part,”  and the U.S. Court may then “stay a proceeding against a foreign state if the Secretary of State certifies that the United States is engaged in good-faith discussions with the foreign-state defendant concerning the resolution of the claims against the foreign state, or any other parties as to whom a stay of claims is sought” for up to 180 days, and additional 180-day extensions thereafter.22

While several 9/11-related suits have already been filed, no interventions have yet been made, nor have other states retaliated with similar limitations on sovereign immunity for the U.S. and its government officials.

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1. http://www.bloomberg.com/news/articles/2016-09-06/saudi-arabia-said-to-weigh-canceling-20-billion-of-projects 
2. http://www.middleeasteye.net/news/sacked-workers-saudi-arabia-set-fire-buses-over-unpaid-salaries-372554115, http://www.arabnews.com/node/961966/saudi-arabia
3. http://sustg.com/saudi-binladen-group-says-government-resumes-payment-of-dues/
4. http://www.argaam.com/en/article/articledetail/id/432518
5. Royal Decree No. M/34, 24/5/1433 (April 16, 2012).
6. www.sadr.org, Council of Ministers Decree No. 2057, 14/6/1435 (March 15, 2014).
7. http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/2010Arbitration_rules.html
8. https://www.icdr.org/
9. http://www.newyorkconvention.org
10. With certain reservations, including an exception for elements that violate public policy, which has been interpreted to include the Islamic shari’a prohibition against riba (usurious interest).

11. Royal Decree No. M/53,13/8/1433 (July 3, 2012).
12. Enforcement Law Implementing Regulations, Arts. 2.1 and 9.1.
13. https://www.cliffordchance.com/briefings/2016/10/new_arbitration_centreopensinriyadh.html
14. http://difccourts.ae/
15. Justice Against Sponsors of Terrorism Act, Public Law 114-222, https://en.wikipedia.org/wiki/Justice_Against_Sponsors_of_Terrorism_Act
16. Before JASTA became law, U.S. nationals were barred from bringing international terrorism suit against “a foreign state, an agency of a foreign state, or an officer or employee of a foreign state or an agency thereof acting within his or her official capacity or under color of legal authority,”18 U.S.C. § 2337.

17. 28 U.S.C. § 1605A; any U.S. national “injured in his or her person, property, or business by reason of an act of international terrorism, or his or her estate, survivors, or heirs, may sue therefor in any appropriate district court of the United States and shall recover threefold the damages he or she sustains and the cost of the suit, including attorney’s fees,” 18 U.S.C. § 2333.
18. JASTA purports to “provide civil litigants with the broadest possible basis . . . to seek relief against foreign countries . . . that have provided material support, directly or indirectly, to foreign organizations or persons that engage in terrorist activities against the United States,” Sec. 2 (b).
19. JASTA, Sec. 3 (2016), to be codified at 28 U.S.C. § 1605B(c).
20. Id., to be codified at 28 U.S.C. § 1605B(b).
21. Id., to be codified at 28 U.S.C. § 1605B(d).
22. Id., Sec. 5 (2016).

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About the Author
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Chris Johnson

Active in the Kingdom since 1978, Chris Johnson is the founding partner of Johnson & Pump/Al-Sharif Law Office, based in Riyadh. chris@alshariflaw.com +966-11-462-5925