duties, FTZ, free-trade zones

There are many advantages for manufacturers and distributors to use a Foreign-Trade Zone (FTZ). Perhaps the most compelling reason is to eliminate and reduce duties. Here are five ways leveraging an FTZ allows companies to reduce their duty obligations.

Relief From Inverted Tariffs

When a component or raw material is subject to a higher duty rate than the end product, inverted tariffs occur. The Foreign-Trade Zone program allows companies relief from inverted tariffs. Without the help of an FTZ, importers of certain finished goods pay a lower duty rate than a US-based manufacturer of the same product. This puts the domestic manufacturer at a disadvantage to the importer. 

For example, a manufacturer imports a motor that carries a 4 percent duty rate. The manufacturer must pay those duties upfront. The manufacturer uses the motor as a component in a vacuum cleaner. However, vacuum cleaners are duty free. 

Under such circumstances, the US based manufacturer is at a disadvantage to a competitor that imported finished vacuum cleaners from overseas. The Foreign-Trade Zones act was created to eliminate this competitive disadvantage to US manufacturers. The tax relief is designed to create a level playing field.

By leveraging an FTZ, the manufacturer would not have paid any duties on imported motors. When the finished product — vacuum cleaners — enter US commerce, they are duty free.

Duty Deferral

By leveraging an FTZ, companies can defer duty payments on goods brought into a zone. Duties are only paid when the merchandise enters into US commerce. As a result, duty deferral frees up cash flow.

This is particularly advantageous to companies with high volume imports or merchandise that is subject to high duty rates, such as textile products. The concept of this benefit is similar to free trade zones in other countries. 

Duty Elimination

Enterprises can use an FTZ  to eliminate duties on waste, scrap, and yield loss. Without the help of a zone, all material imported into the United States is dutiable. An importer leveraging an FTZ pays the customs duty only on the merchandise that subsequently enters the domestic market from a zone. 

Irrecoverable yield loss or merchandise that is scrapped or destroyed in the FTZ is not subject to duty payment. Duty is only paid on the end product. 

Duty Exemption on Re-Exports

Typically, importers are required to pay custom duties on goods at the time of entry to US commerce. However, Foreign-Trade Zones are legally outside of US commerce. Consequently, companies importing goods or raw materials owe no customs duty unless and until these leave the zone for the domestic market. If the zone user exports the foreign goods from the ftz, no duty is ever paid.

Zone-To-Zone Transfers

The FTZ program enables a vendor located in one FTZ to transfer merchandise to a company located in another zone. The vendor can move those goods to the purchasing company’s FTZ with no payment of duties required.

Manufacturers whose final products have a lower duty rate than the raw materials or components can receive those items from another zone duty unpaid. This can reduce or eliminate the raw material and component duty rates. Therefore, US suppliers can be more competitive than they otherwise would be were they to pass their duty costs on to their US-based customers.

How QAD Can Help

The Foreign-Trade Zones program offers significant duty savings. It also eliminates the need for more onerous duty reduction programs, such as duty drawback. As a result, companies leveraging FTZ operations free up cash flow and gain a competitive advantage. 

Should your company be considering leveraging an FTZ, QAD’s experts can assist in a number of ways. Firstly, we would work with you to undertake a cost-benefit analysis. This will calculate the cost savings a company could expect to obtain by using an FTZ.

Once you have decided to proceed, QAD works with you to ensure that your application to receive zone status is approved by the FTZ Board.  

Furthermore, we offer a best-in-class advanced Inventory Control Recordkeeping (ICRS) software solution. This was designed by FTZ practitioners and zone users to simplify compliance and recordkeeping. The software solution accurately tracks and records FTZ activities, and includes reporting for regulatory and financial purposes.

A thoughtful and application-centric approach to FTZs can help companies realize the tangible benefits of duty elimination and deferral. Companies and leaders just need to engage with the  focus on the job at hand.

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