Inboundlogistics: The Benefits of Using a Foreign Trade Zone
March 17, 2014 | By Ty Bordner
From large manufacturers to individuals, any size importer or exporter can take advantage of a foreign-trade zone (FTZ). However, many companies are unaware of the sizeable cost savings and other benefits they can achieve by taking advantage of an FTZ program. Utilizing an FTZ can significantly reduce costs from customs duties, taxes and tariffs; improve global market competitiveness; and minimize bureaucratic regulations. Outside the United States, there are many other names for FTZs, including free, foreign, or export processing zones. Below are some benefits of using an FTZ.
- Deferral, reduction, or elimination of certain duties. FTZs allow the most duty deferral of any kind of Customs program. Companies can bring goods into the FTZ without duties or most fees, including exemption from inventory tax.
- Relief from inverted tariffs. In some cases, tariffs on U.S. component items or raw materials have a higher duty rate than the finished product, putting a U.S. manufacturer at a cost disadvantage to an importer. However, by participating in an FTZ, the U.S. manufacturer pays whichever duty is lower. In many cases the tariff of the manufactured good is zero, eliminating any costs associated with importing raw materials and goods. There is no way to take advantage of inverted tariffs without operating in an FTZ.
- Duty exemption on re-exports. Since an FTZ is considered outside the commerce of the United States and U.S. Customs, a company importing components or raw material into the FTZ doesn't pay Customs duty until it enters U.S. commerce. If the good is exported from the FTZ, no Customs duty is due.
- Duty elimination on waste, scrap, and yield loss. Since a manufacturer operating in an FTZ doesn't pay duties on imports until its goods leave the FTZ and enter the United States, it essentially is paying for the duties on the raw materials after they have been processed. Thus, duties owed do not include manufacturing by products, such as waste, reducing the amount of goods taxed.
- Weekly entry savings. Instead of filing an entry every time a shipment enters the country, an importer operating in an FTZ only needs to file one Customs entry a week, reducing bureaucratic headaches and costs associated with entry filings. There is a 0.21-percent merchandise processing fee for every entry, with a minimum of $25 and a maximum of $485 per entry, which is for goods with a value of over $230,952. A company with 10 shipments a week, each of which are over $230,952, would save $226,980 annually with weekly entries. Weekly entries also save on customs brokerage fees.
- Improved compliance, inventory tracking, and quality control. FTZs allow companies to more closely track their inventory. By bringing goods into an FTZ warehouse that you control, you can identify and classify goods at the warehouse instead of at the port at a Customs control location.
- Indefinite storage. A company can hold its goods indefinitely in an FTZ until a port opens up, or if there are quotas on a good, until they can be entered into U.S. Commerce without falling under quota restrictions.
- Waived customs duties on zone-to-zone transfers. FTZs can be used to manage transshipping operations, saving money on manufacturing processing fees. While most companies are focused on using FTZs for exports, FTZs can also be used to take advantage of crossdocking and transferring goods from one FTZ to another without paying Customs duties. Many mid-level companies, in particular, are using this capability to transfer goods to FTZs both within and outside the United States.
Taking Advantage of an FTZ Program
To take advantage of an FTZ, companies need to be able to track their inventory; trace manufacturing and production orders; determine whether material came from domestic or international sources; and classify goods for duty deferrals and reductions. How much a company saves by using an FTZ depends on the size of the company and its business model. Reducing merchandise processing fees alone can save a company a substantial amount of money.
Larger companies may want to consider using automation to help alleviate the burden of managing the FTZ process, particularly since with high-volume operations it can be extremely difficult, if not impossible, to manage manually. The data needed for classifying goods, for example, is voluminous and frequently changes and must be pulled from country-specific lists. Software that has this information in a central repository with automatic updates can pull information from different systems, such as import/export and warehouse management systems, and use that data for Customs filing and inventory management.