Foreign-Trade Zones – What Should You Know?
Foreign-Trade Zones (FTZs) are designed to generate economic growth and development in the United States by encouraging firms to site and expand their U.S. operations within the zones. Rules related to FTZs are designed to put U.S. manufacturers on equal footing with foreign competitors through special rules related to tariffs and excise taxes.
FTZs are secure areas where foreign and domestic goods can be moved in and out. They are generally located in or near U.S. ports of entry. FTZs are authorized by the Foreign-Trade Zones Board and are supervised by U.S Customs and Border Protection (CBP).
A robust set of activities are permitted within FTZ including the processing, assembly and manufacturing of goods and the storage and exhibition of merchandise. FTZs are operated by qualified public and private corporations. As the zones are seen as providing a public good, they are run as a public utility and the rates charged for services within the zones are regulated and publicly available.
While activities within FTZ are subject to local, state and federal laws, special rules related to tariffs and other ad valorem taxes apply. These rules allow importers to defer the payment of duties and take advantage of inverted tariffs and they allow exporters to accelerate their drawback of duties previously paid on goods imported into the U.S. as well as federal excise taxes related to those goods.
Foreign merchandise, brought directly into FTZs by importers, is not subject to duty or excise taxes upon entry.. The importer is free to process, assemble or manufacture goods using the foreign merchandise that they have imported. They can then choose to pay duty based on the rate applicable to the merchandise that they imported or to the finished product they produced within the FTZ. Furthermore, the payment of duty and excise tax is deferred until the finished products leave the FTZ and enter territory under CBP jurisdiction for domestic consumption. If exported from the FTZ, the finished products exit the zone duty and excise tax free.
Another benefit afforded to importers pertains to quotas. If a quota for a particular type of merchandise has been filled, an importer may bring the merchandise into a FTZ and hold it there until the quota opens or is removed. Except for certain textile products, the importer may also use the merchandise subject to the quota to produce another product that is not subject to the quota. Merchandise entering a FTZ can remain within the zone indefinitely without paying duty or excise taxes, but will be subject to storage charges. However, merchandise that is prohibited from being imported into the U.S. is also prohibited from entering FTZs.
Domestic merchandise brought into a FTZ for export can be considered as having been exported. Consequently, upon admission of the goods, exporters can submit their drawback filings in order to accelerate the process of recouping prior duties paid on imported inputs and can also initiate the process of securing excise tax rebates.
If you have any questions regarding FTZs, please contact your WithumSmith+Brown professional, a member of WS+B’s International Services Group or email us at [email protected].
By Richard Ingunza | 212.751.9100 | [email protected]
