Foreign Trade Zone
The FTZ program is a partnership of the U.S. government and private sector importers. Each approved location is specially-designated area and considered to be outside of U.S. Customs territory. For that reason, when cargo arrives in the country for an FTZ operator, it does not immediately clear Customs. The cargo receives preferential treatment with duties deferred, reduced or eliminated. In addition, there are supply chain, inventory control and other savings available through the FTZ program.
Some of the benefits of utilizing FTZ benefits include:
Customs duties are paid only when foreign merchandise is shipped into US Customs territory. Therefore, standing inventory is held in the FTZ subzone/site without duty, often resulting in large savings, particularly during the first year.
Supply chain timeline
There is no need to hold product for customs clearance. 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. 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 especially valuable to 3PL’s and large distribution centers with cross dock operations.
There is significant deferral on the average inventory during the first year in the FTZ program with capital costs captured each subsequent year.
- Exports: Foreign merchandise in the zone may be re-exported free of duty and federal excise tax.
- 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.
- 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.
In situations where zone manufacturing results in a finished product that has a lower duty rate than the rates on foreign inputs (inverted tariff), the finished products may be entered at the duly rate that applies to its condition as it leaves the zone – subject to public interest considerations.
Value added to merchandise in an FTZ subzone/site is not dutiable. Customs duties are not owed on labor, overhead and profit attributed to production operations in the FTZ.
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.
These are just some of the ways to save money by using a foreign trade zone. Real savings will depend on a company’s fact pattern, such as the total annual value and volume of imported (dutiable) merchandise, number of Customs entries made annually, total Annual Merchandise Processing Fee(s) paid, annual Customs Broker Fee(s) paid, average duty rate of imported merchandise, average number of inventory turns for previous year, percentage and/or value of foreign (dutiable) re-exports for the previous year, etc. Plugging this information into the below interactive calculator will give a preliminary estimate of what a company could save using the foreign trade zone.
There are two steps required to take advantage of the hundreds of ways to save in the Zone:
- Achieve FTZ designation for the property; and
- Win Customs approval to “activate”
Because FTZ #176 has applied for and received approval for expedited access, this process is now cheaper and faster. Some applicants will be operating within 3-4 months and reach their ROI (return on investment) in 6-12 months.