Is your business paying significant duty and excise tax on foreign imports? If you import raw materials to manufacture and sell the product in the United States or re-export the finished product, you might be able to benefit from a foreign trade zone.
What is a Foreign Trade Zone?
The U.S. government first created foreign trade zones to attract and promote international business in 1971. The term “foreign trade zone” (FTZ) means a discrete area located in or adjacent to a port of entry that is authorized by Congress to receive preferential treatment under the customs laws of the United States. FTZ’s are not considered to be in customs territory of the United States. This allows a business to import and store foreign merchandise without paying customs duties or Federal excise tax until the merchandise enters U.S. commerce.
What will an FTZ do for me?
There are several benefits for a business to utilize an FTZ. A manufacturer that imports raw material into the United States is required to pay duty at the time the raw material enters the country. However, merchandise or goods brought into an FTZ are not assessed duty until the merchandise leaves the zone or enters U.S. commerce. In addition, if the imported merchandise is brought into an FTZ and then exported back out of the country and does not enter into U.S. commerce, no duty is ever due. There are also no time limitations on how long goods can remain in an FTZ, regardless of whether the goods are subject to duty.
U.S. duty or import duty is a tax on goods that arrive in the United States Customs port with the intent to unload the goods and enter them into U.S. commerce. There are several different types of import duties which are calculated in a variety of ways. The import duty depends on the type of product imported, how much is being imported, its declared value, from which country the product was exported, and several other factors. The import duty can range from zero to 100% or more of the product’s declared value.
Can I Manufacture or Assemble in an FTZ?
Generally, yes. Foreign and domestic merchandise brought into an FTZ can be manipulated or manufactured in the zone unless it is prohibited by law. The business can then store, sell, exhibit, separate, repack, assemble, distribute, sort, grade, clean, mix with foreign or domestic merchandise, or manipulate the merchandise within the FTZ. Foreign production equipment such as machinery or parts for specific equipment to manufacture merchandise may be brought into an FTZ. No duty shall be assessed on imported production equipment until it is completely assembled, installed, tested, and used in the production for which it was intended.
A business that manufacturers in an FTZ does not pay duty on waste, scrap, and yield loss. For example, a plastic facility manufacturing polysulfone which carries a 5% duty, imports and uses the raw material polypropylene with a 5% duty. During the production process, 10% of the raw material polypropylene is scrapped and considered obsolete. If this business operates outside an FTZ, they will pay $50,000 in duty on $1,000,000 of imported polypropylene. If the business utilizes the FTZ, no duty is owed on the polypropylene when it is brought into the zone. In addition 10% or $100,000 of the polypropylene is lost during the production cycle. Assuming all of the end product is sold in the U.S., the 5% duty totals only $45,000. This is a savings of 10% in duty.
An additional benefit of an FTZ is protection against theft. After the merchandise has been manipulated or manufactured in an FTZ, the merchandise will be taken under the supervision of the Secretary of the Treasury. As long as the tariff classification has not changed since entry or during the manufacturing process, a customs officer will take the merchandise under supervision within the foreign trade zone. The customs officer will determine the declared value and exempt the duty or excise tax on the merchandise while in the foreign trade zone.
There are several benefits to utilizing a foreign trade zone. The bottom line? The use of an FTZ can increase cash flow and profitability, under the right circumstances.
