Questions What is a Foreign Trade Zones? Benefits & Basics of FTZ
- Why do companies use Foreign Trade Zones?
- What are inverted tariffs?
- Can import taxes be deferred if I will be re-exporting goods?
- If I manufacture in the FTZ will I have to pay duty on waste, scrap or yield loss?
- Are there cost benefits to using a FTZ?
- There are many benefits the Foreign-Trade Zones program can offer manufacturers and processors located in the United States, the main reasons companies use FTZ are:
- Duty exemption on re-exports
- Relief from inverted tariffs
- Duty reductions due to waste, scrap and yield loss
- Weekly entry savings
- Duty deferral
- Inverted tariff situations occur when a component item or raw material carries a higher duty rate than the finished product. In these cases, the importer of the finished product pays a lower duty rate than a domestic manufacturer of the same product in the United States. This gives an importer an unfair and unintended advantage over the domestic manufacturer of the same item. The FTZ program removes this unintended penalty in these circumstances.EXAMPLE: A FTZ user imports a motor (which carries a duty rate of 4%) and uses it in when manufacturing a vacuum cleaner (which is free of duty). When the vacuum cleaner leaves the FTZ and enters the commerce of the U.S., the duty rate on the motor drops from the motor rate of 4% to the free vacuum cleaner rate. Participation in the Zones program allows the vacuum cleaner manufacturer to virtually eliminate duty on this component, and therefore reduced the component cost by 4%.
- Normally, when a manufacturer imports a component or material into the United States, they must pay the import tax (duty) at the time the component or material enters the country. A Foreign-Trade Zone is considered to be outside the commerce of the United States and the U.S. Customs territory. This means that when foreign merchandise is brought into a Foreign-Trade Zone, no Customs duty is owed until the merchandise leaves the zone and enters the commerce of the United States. This is when the merchandise is considered imported and a duty paid. If the imported merchandise is exported back out of the country, no duty is ever due.
- Outside a FTZ, importers pay the Customs duty owed as material is brought into the United States. If the manufacturer is performing its operations within a FTZ, the merchandise is not considered imported, and therefore no duty is owed until it leaves the zone for shipment into the United States. The benefits to a company that has scrap, waste, or yield loss from an imported component is that it does not pay duty on raw material lost during manufacturing processes inside the FTZ.EXAMPLE: A chemical plant manufacturing muchcleanol, which carries a 15% duty rate, uses the raw material dirtremoverol, which also carries a 15% duty rate, for one of its raw materials. Part of the production process consists of bringing the imported dirtremoveral to extreme temperatures; during this process 30% of the dirtremoverol is lost as heat. If a company not in the Zones program imports $10,000,000 of dirtremoverol per year, it will pay $1,500,000 in duty as the material enters the United States.If the same company utilizes the zones program, it does not pay duty on the dirtremoverol until it leaves the zone and is imported into the United States. The zone user brings the dirtremoverol into the zone with no duty owed. It then processes the dirtremoverol into muchcleanol. Remember, during this process 30% of the raw material is lost due to waste factors, so the $10,000,000 in dirtremoverol is now worth only $7,000,000. Assuming all of the end product is sold into the United States, the 15% Customs duty totals only $1,050,000. This represents a savings of $450,000.Initially it may look like the FTZ program favors importers, but we must remember that overseas competitors making the same product already have the benefit of not paying duty on the yield loss in the production of their muchcleanol.
- Through the use of Foreign Trade Zone like TVI Logistics, companies can benefit from Weekly Entries versus individual entries when importing. Weekly entries (allowed only to Foreign-Trade Zone users) provides economies for both Customs and Foreign-Trade Zone users. Under Weekly Entry procedures, users enjoy the benefits of one Customs Entry per week, rather than filing one Customs Entry per shipment. Let’s take a look at an example of a company that is using an FTZ and one that is not.For example, for companies that do not use a Foreign-Trade Zone would have to pay a .21% merchandise processing for each and every formal entry processed by U.S. Customs. There is a minimum $25 processing and a maximum $485 processing fee per Entry, regardless of the duty rate on the imported merchandise. The maximum processing fee is reached for Entries (shipments) with a value over $230,952. Companies often receive many shipments over this amount.For example, 10 shipments per week, each with a value of over $230,952, would amount to a merchandise processing fee of $4,850 ($485 x 10) per week. If this number is annualized the amount is $252,200 (52 x $4,850) per year.On the other hand, utilizing a Public foreign trade zone would allow this same company to do a Weekly Entry, meaning only one Entry per week. For example: The 10 ($230,952) shipments per week would be filed as a single shipment of $2,309,520 each week. The merchandise processing fee would amount to the maximum of $485 total for the week. If this fee is annualized utilizing Weekly Entry it is a total of only $25,220 yearly. In this example Weekly Entry provides a savings of $226,980 per year. A company’s savings could be significantly more or less depending on the number of shipments received during the year.