FOREIGN-TRADE ZONE (FTZ)
OVERVIEW OF BENEFITS:
- Cash Flow: Customs duties and/or federal excise tax (e.g., alcohol, perfume, etc.) are paid only when foreign merchandise is shipped into US Customs territory. Therefore, standing inventory is held in the FTZ without duty, often resulting in large savings, particularly during the first year.
- Estimated Weekly Entry - Customs broker fee & MPF (Merchandise Processing Fee): The Customs broker collects fees for preparing and filing each entry with U.S. Customs & Border Protection; Customs collects the MPF, which is assessed (with a minimum of $25.67 and a maximum of $508.70) against each entry filed. The FTZ program allows consolidation from daily or per-container entries into weekly entries, often resulting in a substantial savings.
- Logistics timeline: There is no need to hold product for Customs clearance or experience delays in Customs examination at the port of entry. This often results in a one to three day reduction in the supply chain, which benefits not only manufacturers and other end users, but 3PL (third party logistics) providers.
- Direct Delivery: With prior approval by Customs, FTZ operators can facilitate the movement of foreign product: they do not need to wait for Customs officers to be present before breaking seals or even shipping products. This benefit is specially valuable to 3PL’s and large distribution centers with cross dock operations.
- Return on Investment: Normally, the ROI will begin 12-18 months from start of the project.
- Duty deferral: There is significant deferral on the average inventory during the first year in the FTZ program with capital costs captured each subsequent Year.
- Inventory Control: The FTZ program requires accurate reporting to follow foreign merchandise from receipt, processing and shipment for export or entry in the Customs territory of the U.S, reducing inaccurate inventory, emergency shipments and tracking of all import receipts from the point of origin to the final destination. In this post-9/11 age, additional reporting requirements (10+2 filing/Safe Port Act of 2006) are now required. Increased accountability will reduce staff time needed to deal with government regulations.
- Quality Assurance & Customs compliance: With the high quality of inventory control systems required, quality control is a side benefit. These benefits include location and tracing of all foreign merchandise, including those returned or destroyed under Customs supervision. This reporting will assure that only duty or associated fees will be paid. In addition, the system can help pinpoint problems in production.
- Accounting system: Fungible inventory methods, such as FIFO and FOFI (Foreign First) inventory accounting methods, have been approved by Customs for Zone operations.
- Inventory insurance costs: The insurable value of foreign merchandise in a FTZ will not include Customs duties already paid, reducing insurance premiums.
- Cargo insurance: Some FTZ Operators and Users have been successful in negotiating a reduction in cargo insurance rates by arguing that direct shipment avoids pilferage opportunities at the point of Customs Entry.
EXPORTS & ZONE-TO-ZONE TRANSFER:
- Exports: Foreign merchandise in the Zone may be re-exported free of duty and federal excise tax. U.S. exports are exempt from federal excise tax by exportation through the Zone.
- Export returns: Returns of foreign merchandise to exporters using the FTZ program pay no duties on these products. Outside the Zone, duties were paid upon export and again on return.
- Duty Drawback: Outside of the FTZ, drawback (refund) on returns allows recovery of previously paid Customs duty. This includes products that remain on site (such as manufacturing equipment), in the Customs territory, or exported outside the US:place>:country-region>. For items exported, the law is especially complex and the companies often experience a long wait for return of their funds. Inside the Zone, no duties are paid so this cumbersome process is not necessary.
- Zone-to-Zone transfer: Duty deferral benefits are available when transferring product “in-bond” from one Zone to another. This may be most beneficial to firms with multiple FTZ subzones/sites around the country or for 3PL’s serving an end user who may hold their own FTZ status; also, to big box stores with regional warehouses each holding FTZ designation. It is aIso possible to pay duty on the original price of the component to the first FTZ user, not on the subsequent prices.
- Temporary Importation Bond (TIB): The TlB allows merchandise to Enter the U.S.:place>:country-region> in-bond. It can also be used to ship from the FTZ location to a destination inside the U.S. Customs territory for processing and return to that FTZ subzone/site for further processing and eventual sale in the U.S.
- Temporary removal procedure/exhibition: Merchandise may be removed from an FTZ subzone/site in-bond and returned without Customs duty payment. Examples would include demonstration models for trade shows or special traveling displays as well as laboratory testing, and much more!
- Antidumping/Countervailing duties: Use of an FTZ defers the payment of these duties until merchandise enters the U.S. Customs territory. Exported merchandise is not subject to these duties.
- Entireties Provision: Importers can decide whether to apply the entireties provision (all necessary parts classified as the finished product) to merchandise admitted to an FTZ
- General System of Preferences (GSP): Products deleted from the GSP list that were admitted to an FTZ in Privileged Foreign (PF) status, may retain the GSP duty-free status even after the change date.
- Timing: Merchandise may be held in an FTZ, even if it is subject to a U.S.:place>:country-region> quota restriction. When the quota is lifted, the merchandise may be entered immediately in the U.S. marketplace for distribution, providing a distinct marketing and sales advantage.
- Avoidance: If foreign merchandise within an FTZ is “substantially transformed” into a non-quota item, it can enter Customs territory without the quota restrictions.
- Scrap/waste/damaged goods: No duties are paid on most scrapped product. If the FTZ user has paid for the scrap, duty is assessed against the lower scrap value.
- Consumed merchandise: Merchandise consumed in processing in the FTZ is generally not subject to Customs duties.
- Inverted tariff: In situations where Zone assembly, manufacturing or otherwise production results in a finished product that has a lower duty rate than the rates on foreign inputs (inverted tariff), the importer may elect to pay the duty on the raw materials/components and/or the finished good, whichever is lower!
- Value-Added: Value-added to merchandise in an FTZ is not dutiable. Customs duties are not owed on labor, overhead and profit attributed to production operations in the FTZ.
- Production equipment: Certain duty deferral and reduction benefits apply on production equipment admitted to the FTZ for assembly and testing prior
- to use in production. Duties are deferred until the equipment is placed in service. During the assembly and testing period (which can be substantial for a complex assembly or manufacturing process), no duties are paid. If the machine is defective, no drawback is necessary if part or all is returned to the manufacturer overseas. Since no duty is paid until it is a functional part of the production line, payment of duty moves much closer to the generation of revenue, resulting in a substantial cash flow savings. In addition, the duty rates on parts are often higher than the finished unit, producing direct duly savings.
- Spare parts: While just-in-time supply chain logistics and lean manufacturing have transformed much of the industrial landscape in the past 25 years, many suppliers still hold spare parts in this country for immediate shipment. This foreign merchandise may be held in the FTZ or returned to the vendor free of duty or destroyed without payment of duty as the product never entered the U.S.:place>:country-region> commerce.
- Security: Customs & Border Protection (CBP) is responsible for FTZ supervision and security requirements. Penalties are severe (2 years in prison and $250,000/offense) for unauthorized withdrawal, including employee theft. For many employers, this is a decided benefit.
- Commingling: Domestic and foreign merchandise may be commingled in the FTZ.
TAX, COMPLIANCE ISSUES & OTHER BENEFITS:
- Inventory taxes: In several states, ad valorem taxes on inventory are assessed. By federal law, merchandise inside the FTZ is not inside the U.S. Customs territory, and therefore not subject to these taxes.
- Transfer of title: Title to merchandise may be transferred in the FTZ, as long as there is no “retail” sale. The global supplier can own it until it is shipped under lean logistics models such as vendor management inventory and just-in-time to local manufacturers and retailers.
- Federal laws restricting import: Various federal laws govern the ability to import foreign merchandise, often restricting or prohibiting for a variety of reasons. Some FDA, DOT, EPA and USDA laws may not apply to goods while inside the FTZ.
- Changing circumstances: U.S.:place>:country-region> laws relating to Customs, quotas, and international trade are constantly in flux. FTZ status provides great flexibility in responding to these external regulations.