In Saudi Arabia, the rule sometimes seems to be, “language whose meaning is otherwise plain does indeed become ambiguous whenever the parties urge different interpretations.”

In part, translation plays a role here. English language contracts are extremely common, but in the event of litigation, they must be translated into Arabic (contract terms to the contrary will be ignored). Translation instills one set of ambiguities, which may be why judges usually consider extrinsic evidence when interpreting the contract (again, contract terms to the contrary will be ignored).

While no one knows the weight conferred to such parol evidence, merely considering it turns a straightforward claim that should be resolved in 3-4 hearings into a protracted, multi-year marathon.

Confusion runs in both directions, as a client discovered last year when a global financial company, relying upon a poorly translated power of attorney, refused to let a Saudi account administrator transfer funds. The culprit? Misapplied punctuation marks: the bank saw periods, instead of commas, as suggesting the administrator’s powers were quite limited outside Saudi Arabia, when in fact, they were comprehensive.

Yet in such banking contexts, the bank is acting cautiously and appropriately by verifying, to the best of its ability, that it is not permitting one party to pillage another. In a commercial litigation context, ambiguity works to the advantage of a wrongdoing party: simply by misconstruing a fairly clear agreement, a plaintiff or defendant can exploit the court system to harass a legitimate party. A legitimate party will pay for effective legal counsel when possible, incurring considerable legal cost; an illegitimate party will simply argue, as long as possible, repeating himself until the other side, distrurbed by excess costs, finally caves in and settles.

A “four corners rule” as in New York, might help alleviate this routine exploitation. Instead of merely signing translated agreements from other jurisdictions, Saudi businessmen might be induced to read them, and even hire someone to explain it to them. One hopes…

…the new tax law [in Oman] removes the disparity in rates between foreign and local companies. Tax rates for branches of foreign companies have now been reduced to 12 per cent.

According to the always interesting World Bank, Oman now has a total tax rate of 21.6%, ranking it 8th in their guide on “Paying Taxes.” Saudi Arabia, with a “total tax rate” of 14.5% (for 100% Saudi owned companies only), comes in 7th (if foreign companies were blended in, the “total tax rate” would go up to 32.4%).

Oman’s taxes are now 4.8x higher than those which Saudi Arabia applies to Saudis.

They are also 40% lower than the basic tax upon foreigners in Saudi Arabia.

How will Oman’s ranking be affected? Difficult to say, since the World Bank rewards countries which discriminate between foreign-owned and domestic-owned companies.

But are these distinctions “discriminatory” in the normal sense of the term, “unfair” to others?

Let’s consider how one might demonstrate a discrimination claim in America:

“…a plaintiff seeking to establish a violation of equal protection [the primary tool for reviewing unfair discrimination in America] by intentional discrimination may proceed in “several ways,” including by pointing to a law that expressly classifies on the basis of race, a facially neutral law or policy that has been applied in an unlawfully discriminatory manner, or a facially neutral policy that has an adverse effect and that was motivated by discriminatory animus. (Pyke v. Cuomo, 258 F.3d 107, 110 (2d Cir. 2001))

Does Saudi law expressly classify “on the basis of race?” Not exactly. It does classify on the basis of citizenship, but one can find numerous Saudis of various ethnic backgrounds due in part to the influence of the pilgrimage to Mecca (Hajj), whereby Muslims from West Africa to Indonesia have come and, in many instances, stayed. So long as they can prove they were here prior to the 1930s, they receive full national treatment.

Does Saudi law create “facially neutral laws or policies that have been applied in an unlawfully discriminatory manner”? Perhaps, although the primary recipients of such laws are women. Are women prohibited from driving in Saudi Arabia? Not exactly. Rather, no one is permitted to drive in Saudi Arabia without a license – the same regime as applies pretty much the world round. The twist in Saudi Arabia: women cannot obtain those licenses. That is a “facially neutral law” applied in a discriminatory manner, but not an unlawfully discriminatory manner in this kingdom.

Does Saudi law apply a “facially neutral policy” with an “adverse effect” and “motivated by discriminatory animus”? Difficult to say. Why? Because measuring the effect of any law is nearly impossible: one lacks evidence beyond anecdotal observations. Labor courts report that they handled X thousand cases last year and awarded Y million in payments; they do not provide sufficient evidence to discern how the brunt of the judgments came down. Judges report having awarded anywhere from 1-month’s salary to 11-month’s wages at time of termination – they do not say precisely how they reach their judgments (other than, “we apply the law,” which is not all that helpful).

So does the Kingdom “unfairly” discriminate in the “normal” sense of the term? The evidence is insufficient to reach a judgment. While the discrimination inherent in the system imposes burdens on foreign companies and individuals, there are many instances in which the judges strive to show considerable fairness and protection to all sides – subject to the uniquely Saudi legal principles.

The region is still a massive buyer of U.S. vehicles – but “dominance” is gone entirely.  Over the last 13 years, I’ve watched American brands erode, losing out to German, Japanese, and Korean competitors. What happened?

General Motors and Chrysler, he said, were “clear cases of insolvency,” in which mere loans would not accomplish the goal of getting the automakers past a temporary crisis. “There was no argument that they were solvent, no argument they could meet their obligations.”

via For G.M., a Step Toward Bankruptcy and a New Start – NYTimes.com

People will digest how this came about for years to come – but the normal explanations do not work in Saudi Arabia.

Oil shock?  Not here, where gas stayed under $1 a gallon.

Dearth of small cars? Saudi families (and Saudis themselves) tend to prefer large vehicles, but they opt for Japanese SUVs over American alternatives.

Unit costs?  American cars compete on price with Japanese, German, and Korean vehicles, but perhaps not resale value.

I overheard two young Saudis discussing a car selection last year.  One told the other he wanted a Jeep; the other joked, “George Bush’s favorite car!”  Not exactly a compliment here. While any link between Bush and American cars is irrational, the general view speaks volumes politics influencing tastes and preferences.

I fully hope both GM and Chrysler recover, and that Saudi Arabia delivers tremendous profits to both some day.

But perhaps Americans will learn from the Dubai Ports debacle: spurning money from the Gulf, mocking Arabs on talk radio, subjecting them to assorted indignities, shrugging at their complaints – such grandstanding garners some votes, but if one insults one’s customers, eventually they’ll look elsewhere.

To answer the question posed in the title: I would expect little or no spillover in Saudi Arabia…yet. The future of the Hummer will affect a significant number of Saudi youths who coveted the vehicle. Other lines also have a certain appeal, particularly GMC SUVs and Suburbans. We shall see what remains…

The following was printed (in Arabic) in Okaz Daily yesterday:

In a circular distributed to local banks and brokerage firms, [the Saudi Capital Market Authority] warned that the following behaviors are prohibited: investors entering purchase or sale orders with advance knowledge that similar orders will be entered at the same time and same price, or entering orders at a fixed price for sale, purchase or demand.

The translation doesn’t dwell on “trivial” legalities like “what the heck does this circular actually mean?”

I invest in my IRAs and other accounts with Sharebuilder. It’s cheap, simple, and straightforward (this is not an endorsement: there may be cheaper, better options out there). The “limit order” feature is especially attractive: when I buy shares, I name a price that is 10% below the current price on securities I want to buy, and Sharebuilder executes an order as soon as the security reaches that price. If a stock never falls 10%, then I never buy it. I’ll miss out on massive upswings (like March – May), but c’est la vie. I also apply stop losses of 10% from my purchase price on everything. There may be better options, but I’m a keep-it-simple guy. I lost 10% last year – not bad compared to the overall market, but nothing to boast about.

Way I understand it, Sharebuilder never executes an “order” when I place my limit order or stop loss order. Instead, their computer system records my “request,” and then executes the order automatically when the price is right (or wrong, as the case may be).

Now, here’s the question: Is the CMA banning the practice of stop-loss and limit orders entirely? Or are they simply requiring that brokers refrain from sending orders except at a specific time once the price has reached a specific target?

The distinction would make all the difference in the world for me. Hopefully, the circular released by the CMA explains things in better detail. Alas, there’s no information or English translation of the circular that I can find on their website - just a new set of prospectuses approved, etc. Maybe it’s in Arabic-only…or maybe, as is so often the case, it’s not been published at all except among key players in the field.

…individuals are only taxed on their business income in Saudi Arabia but even then there are distinctions. Non-Saudi and non-GCC citizens are taxed on their Saudi sourced income.

via Tax Time – But Not in Saudi « American Bedu.

While the information is accurate at this point, it may not be tomorrow. Here’s why:

The Income Tax Law of Saudi Arabia defines “taxpayers” as follows:

Article 2: Persons Subject to Taxation

(b) A resident non-Saudi natural person who conducts business in the Kingdom.

The wording of the tax applicable for natural persons is as follows:

The tax rate on a non-Saudi resident natural person who does business in the Kingdom is 20 percent of tax base.

What does “doing business in the Kingdom” mean for tax purposes?  Pretty much whatever the Department of Zakat and Income Tax wishes.  Currently, they do not define “earning a wage” as “doing business.”  However, the Bylaws, Art. 1, leave the matter open:

The provisions of the Law also apply to non-resident persons, natural or corporate, Saudi or non-Saudi, who conduct business in the Kingdom through a permanent establishment located in the Kingdom or who derive income from a source in the Kingdom.

Non-Saudi individuals may not “conduct business,” but certainly “derive income from a source in the Kingdom.”  Art. 2 of the Bylaws defines taxable activities as

Taxable activity… includes professional and trade activity, or any other similar activity that is for profit, such as agencies and brokerage and other similar activities.

“Professional” and “trade” activities covers an awful lot of activity performed by expatriates in the Kingdom.

The point is: the law is written such that any time the DZIT pleases, they may apply the income tax upon expatriates in the Kingdom, just as they currently tax companies.  Given the need for foreign workers, they do not.

What about tomorrow?  God only knows.  Saudi Arabia has no intention of becoming a haven for (non-Saudi) tax dodgers, and is uncomfortable with its dependency on foreign workers of all sorts.

As John Marshall put it, “The power to tax is the power to destroy.” (McCulloch v. Maryland) As soon as Saudi authorities wish to eliminate the institutional dependency on foreign workers, they could impose the tax regime, at least on all expatriates who are not subject to a tax treaty that specifically excludes their income from taxation locally.

It’s a uniquely misleading comparison. Consider: rather than opening Excel, inputting a data set, and inputting a formula, I often turn to my trusty calculator. I wouldn’t pretend my calculator outranked Excel simply because it handles arithmetic better. So too with the property registration system in Saudi Arabia: often faster than other systems, but only because of it’s limited feature set.

The World Bank, based on local lawyers, reports:

…The buyer will simply be required to appear before the notary, sign a confirmation of receipt of the title deed and receive the title deed. The whole procedure will take approximately two hours.

For Saudis, registering property is a matter of sitting down over tea and waiting for the kindly sheikhs and their clerks to review all the documents. Takes minutes.

For non-Saudis, it’s different. But we’ve discussed the distinctions between Saudis and non-Saudis before. For real estate, there are broader implications that affect all property owners. What are the mortgage rules? What are rights to grant and restrict access, to subdivide, to maintain easements, covenants, rights-of-way and municipal leases? Takings and condemnation proceedings? Zoning rules? What if a prince alleges some claim of title?

Real estate systems start out “simple” – and then accrue regulations and controls after certain types of abuses and fraud and addressed. Consider the U.S. property registration system (as recorded by the World Bank):

Obtain a title report (Saudi skips that step – but should you?)

Produce an environmental impact study (Saudi skips that step – but is this a good thing?)

Pay property tax (Saudi omits property taxes; for non-Saudis, income taxes may apply, particularly if one non-Saudi sells land to another non-Saudi…since this is exceptionally uncommon, it’s not likely to come up…but one might ask, why is it so uncommon?)

Ranking the Kingdom an attractive destination for businesses because it is easy for a Saudi to “register property” makes as much sense as ranking Intel and AMD chipsets below office calculators because it’s much harder to get these processors to generate answers to simple math problems.

The Kingdom is making serious efforts to improve its basic administrative operations. It has opened up to foreign investors – to some extent. But perhaps the World Bank would come closer to reflecting reality if it just asked for quotes to perform the transactions it measures, rather than just asking “what process” and “how long.”

The principle tax authority in Saudi Arabia is the “Department of Zakat and Income Tax.” Zakat is a Muslim obligation for a small payment intended for charitable purposes or maintenance of the public good, amounting to approximately 2.5% of income (actually the basis for determining zakat is more complex, but this is a helpful guide). A Saudi company that pays zakat effectively pays one of the lowest income taxes in the world.

However, non-Saudi companies seldom get such benefits, but instead pay “income tax,” which for most types of enterprises (outside petrol sector) amounts to 20%, or roughly 8x the burden.

As obtaining tax certificates is critical for any company (necessary to engage in bids and to maintain licenses needed to obtain visas and other operations), the disparate treatment raises certain problems. Consider: while taxes for foreign stakeholdings are supposedly passed through as in a partnership in the U.S., in practice, each entity will pay tax separately (and possibly file for a refund at a future date). Thus, a foreign company that owns shares in a Saudi-based entity, which in turn owns shares in another Saudi-based entity, will pay taxes twice in order to maintain the requisite licenses. If they remit funds to a parent company outside the kingdom (as in a management or licensing contract), they may pay a further withholding tax (ranging from 5 – 20%).

Thus, the 2.5% that the World Bank indicates can, for foreigners, quickly grow into 40-50% tax burdens, depending on the structure. Ouch.

Why does the Kingdom create an inherently discriminatory tax regime? Ostensibly, the system distinguishes “zakat” from “income tax” because zakat is a moral obligation for all Muslims, while income tax is an obligation for others. However, the vast majority of the world’s Muslims will still be treated as though they were any other non-Muslim enterprise (e.g., Indonesian, Indian, Pakistani, Bangladeshi, Nigerian, and Egyptian companies would all pay income tax).

Only Saudis, together with 100% GCC-owned enterprises (that is, 100% Bahraini, Kuwaiti, Omani, Qatari, and Emirati companies – and not mixed ventures involving foreign partners) pay zakat. That ought to call into question the “moral” basis for the disparate tax regimes.

The 20% basic rate in Saudi Arabia is certainly lower than the rates in many other countries, and the Kingdom should be recognized for its reasonable burdens. But it should not be unduly rewarded by ignoring basic facts that encourage discriminatory treatment.

The Bank reports that establishing a business in the Kingdom can take about 12 business days. For Saudis, it can actually require even less time. For non-Saudis, it will always require far longer.

Consider the Bank’s baseline assumptions:

The business:
* Is a limited liability company. If there is more than one type of limited liability company in the country, the limited liability form most popular among domestic firms is chosen. …
* Is 100% domestically owned and has 5 owners, none of whom is a legal entity.

If 5 Saudi individuals establish an LLC, the Bank estimates it will take 12 business days to complete 7 procedures. I’d estimate closer to 5-7 business days.

However, if 4 Saudi individuals and 1 European establish an LLC, the process requires over 15 procedures (possibly more) and will take at least 30 business days (often much longer).

Why the discrepancy? Most issues are procedural: the foreigner must authenticate documents from outside the Kingdom (add 1-3 weeks), obtain a foreign investment license (add 2-3 weeks), provide financial statements (add 1-2 weeks to translate to Arabic), obtain a visa, execute leases, and the like. Activities for foreign-owned LLC are more limited than for Saudi-owned LLCs. Foreigners may be allowed to consult or sell their own products in the Kingdom, but many additional hurdles exist.

Ostensibly, the World Bank changed its methodology in 2008 to foster “apples-to-apples” comparisons. However, when countries have separate regimes for foreigners and citizens, the rankings reward a sort of selective discrimination, and have other odd effects. Countries applying equal treatment to foreigners and citizens suffer (e.g., the European Union). Countries that set up preferred industrial zones suffer (e.g., #46 United Arab Emirates).

Saudi Arabia is serious about reform, but Bank’s ranking system actually impedes the effort – making important initiatives like e-governance unlikely to have much positive effect, while ignoring regulatory regimes that have disparate impacts (e.g., foreign companies undergo routine and intrusive inspections to maintain their foreign investment license – Saudi companies do not).

One way to improve the ranking would be to average the time frame for two different sorts of entities. That would penalize countries that discriminate against foreign investors, while recognizing strides made wherever they occur.

However, he and I look at the same letter in a very different way.

A group of reform activists has published an open letter to King Abdullah, asking him to ensure public and fair trials for alleged terrorists and demanding other judicial and political reforms.

via Another Day, Another Statement « Saudi Jeans.

He is properly worried about linking this particular reform demand with other reforms the activists call for.  Diluting one’s message is one of the great impediments to serious reforms: asking for everything at once, one gets nothing but cosmetics.

But whether or not to give the alleged terrorists a fair trial is less intriguing to me than the question: whose petition should the government hear?

That’s a technical issue.  One notes that the most senior princes and government officials get deluged by petitions, claims, requests, pleadings – a host of documents which, in other settings, would all be legal pleas for equitable relief.  Indeed, the British tradition of equity originated from the practice of seeking relief from noble Lords and royal officials: it is an age-old practice which, over time became formalized into the modern practice of law.

Why should a petition signed by 37 people merit the attention and action of the government, as opposed to, say, a petition signed by one person in desperate need for money for her family?  Why should one group of people take priority over another?

This is not an indictment of the petitioner – far from it.  Rather, the question is, how are these various petitions handled?  And, normally, when one seeks the aid of a public figure, why shouldn’t the petitions that public figure hears be made public in turn?  And more important ultimately, the process of selecting petitions be made public?