FTZs are treated, for the purposes of the tariff laws and Customs entry procedures, as being outside the Customs Territory of the United States. Under FTZ procedures, foreign and domestic merchandise may be admitted into zones for operations such as storage, exhibition, assembly, manufacture and processing, without being subject to formal Customs entry procedures, the payment of Customs duties or the payment of federal excise taxes.
When merchandise is removed from a FTZ, Customs duties may be eliminated if the goods are then exported from the United States. If the merchandise is formally entered into U.S. commerce, Customs duties and excise taxes are due at the time of transfer from the FTZ.
For merchandise that is manufactured in a FTZ with permission of the FTZs Board, the importer may elect to pay Customs duty at the lower rate of either the finished product or its foreign components. In this manner, use of a FTZ zone can result in the reduction of Customs duty owed by companies that manufacture products in an FTZ.
Regulatory Agencies Involved in the Foreign Trade Zone Program
The legal authority to establish FTZs is found in the U.S. FTZs Act of 1934 (19 U.S.C. 81a-u) and its implementing FTZs Board Regulations (15 CFR Part 400) and U.S. Customs Service Regulations (19 CFR Part 146). Designation as a FTZ is granted by the U.S. FTZs Board, which is an independent agency housed within the U.S. Department of Commerce. The Board consists of the Secretary of Commerce and the Secretary of the Treasury. An Executive Secretary administers the day-to-day activities of the Board and supervises the FTZ's Board Staff.
The other important federal agency involved in the FTZ program is the U.S. Customs Service. As the local representative of the Foreign Trade Zones Board, the Customs Port Director has oversight responsibilities for zones located within his or her area of jurisdiction. These responsibilities include: controlling the dutiable merchandise moving to and from zones, collecting revenue owed to the U.S. government, and ensuring that there is no evasion or violation of U.S. laws and regulations governing imported and exported merchandise.
Types of Foreign Trade Zones
There are two types of FTZs. A general-purpose zone (GPZ) is established for multiple activities by multiple users. A GPZ must be operated as a public utility and be located within 60 statute miles or 90 minutes driving time from the outer limits of a U.S. Customs port of entry. GPZ projects may consist of one or multiple sites, e.g., a single building, an industrial park, a deep water port, or an international airport. While activities such as storage, inspection and distribution are permitted at all FTZs, processing and manufacturing require special permission from the FTZs Board.
In instances where a firm wants FTZ status for its own plant or facility, or when the existing GPZ cannot accommodate the firm's proposed activity, the designation of subzone may be granted. There is no legal difference in the types of activity that may be undertaken in GPZs or subzones. Typically, subzones are designated for an individual company's manufacturing operations. Subzones can be located anywhere within a State, as long as a sponsoring grantee of a GPZ exists in the State and the U.S. Customs Service can fulfill its proper oversight functions at the proposed location of the subzone.
Benefits of the U.S. Foreign Trade Zones Program
It is the intent of the U.S. FTZ program to stimulate economic growth and development in the United States. In an expanding global economy there is increased competition among nations for jobs, industry and capital. The FTZ program was designed to promote American competitiveness by encouraging companies to maintain and expand their operations in the United States.
The FTZ program encourages U.S.-based operations by removing certain disincentives associated with manufacturing in the United States. The duty on a product manufactured abroad and imported into the U.S. is paid at the rate of the finished product rather than that of the individual parts, materials or components of the product. A U.S.-based company finds itself at a disadvantage vis-à-vis its foreign competitor when it must pay the higher rate on parts, materials or components imported for use in the manufacturing process. The FTZ program corrects this imbalance by treating a product made in a U.S. FTZ, for purposes of tariff assessment, as if it were produced abroad.
Benefits for the Community
When companies are persuaded that they can increase their cash flow, save taxes and improve their bottom line by locating their operations in U.S. FTZs, communities benefit in several important ways. Economic growth and development are stimulated because jobs are retained and created in the community. The FTZ program impacts indirect employment as well, because a business location not only creates jobs specific to itself, but also creates opportunities for suppliers and service providers in the community. An FTZ project can be a valuable asset when a community is trying to attract new business investment to its area. Finally, a community with a FTZ may experience an improved infrastructure and expanded tax-base as a result of higher employment and the influx of new businesses. For all of these reasons, more than 200 communities throughout the United States support and rely on the benefits that the FTZ program offers public as well as private entities.
Approved General-Purpose Zones and Subzones
Benefits for Business
For U.S.-based companies involved in international trade, the FTZ program provides a means of improving their competitive position vis-à-vis their counterparts abroad. The fundamental benefit offered by the FTZ program to U.S.-based companies is the ability to defer, reduce or even eliminate Customs duties on products admitted to the zone.
Deferral of Duties:
Customs duties are paid only when and if merchandise is transferred into U.S. Customs territory. This benefit equates to a cash flow savings that allows companies to keep critical funds accessible for their operating needs while the merchandise remains in the zone. There is no time limit on the length of time that merchandise can remain in a zone.
Reduction of Duties:
In a FTZ, with the permission of the FTZs Board, users are allowed to elect a zone status on merchandise admitted to the zone. This zone status determines the duty rate that will be applied to foreign merchandise if it is eventually entered into U.S. commerce from the FTZ. This process allows users to elect the lower duty rate of that applicable to either the foreign inputs or the finished product manufactured in the zone. If the rate on the foreign inputs admitted to the zone is higher that the rate applied to the finished product, the FTZ user may choose the finished product rate, thereby reducing the amount of Customs duty owed.
Elimination of Duties:
No Customs duties are paid on merchandise exported from a FTZ. Therefore, duty is eliminated on foreign merchandise admitted to the zone but eventually exported from the FTZ. Generally, Customs duties are also eliminated for merchandise that is scrapped, wasted, destroyed or consumed in a zone.
Elimination of Drawback:
In some instances, Customs duties previously paid on exported merchandise may be refunded through a process called drawback. The drawback law has become increasingly complex and expensive to administer. Through the use of a FTZ, the need for drawback may be eliminated allowing these funds to remain in the operating capital of the company.
Labor, Overhead and Profit:
In calculating the dutiable value on foreign merchandise removed from a zone, zone users are authorized to exclude zone costs of processing or fabrication, general expenses and profit. Therefore, Customs duties are not owed on labor, overhead and profit attributed to production in a FTZ.
By federal statute, tangible personal property imported from outside the U.S. and held in a zone, as well as that produced in the U.S. and held in a zone for exportation, are not subject to State and local ad valorem taxes.
U.S. quota restrictions do not apply to merchandise admitted to zones, although quotas will apply if and when the merchandise is subsequently entered into U.S. commerce. Merchandise subject to quota, with the permission of the FTZs Board, may be substantially transformed in a FTZ to a non-quota article that may then be entered into U.S. Customs territory, free of quota restrictions. Quota merchandise may be stored in a FTZ so that when the quota opens, the merchandise may be immediately shipped into U.S. Customs territory.
An increasing number of firms are making use of the ability to transfer merchandise from one zone to another. Because the merchandise is transported in-bond, Customs duty may be deferred until the product is removed from the final zone for entry into the U.S. Customs territory.
Additional benefits, sometimes referred to as intangible benefits, have begun to play a greater role in a company's evaluation of the FTZ program. Many companies in FTZs find that their inventory control systems run more efficiently, increasing their competitiveness. FTZ users also find that in meeting their FTZ reporting responsibilities to the U.S. government, they are eligible to take advantage of special Customs procedures such as direct delivery and weekly entry. These procedures expedite the movement of cargo, thereby supporting just-in-time inventory methodologies.
Redevelopment efforts at March Air Reserve Base received a major boost Tuesday when the federal government agreed to establish a 2,480-acre foreign trade zone on the site of the downsized military base, as Foreign Trade Zone No. 244. The federal designation will allow businesses located within the trade zone to avoid or defer paying customs duties on products shipped to the base from overseas. Foreign trade zones are considered prime assets in the race to attract large manufacturing and distribution businesses.
Initially, the zone will be used by Philips Consumer Electronics, which recently moved into a new $7 million warehouse at March. But officials say they are confident that the trade-zone designation will help attract even more companies that do business overseas. "It really heightens our ability to market March," said Riverside Mayor Ron Loveridge, a commissioner with the March Joint Powers Authority, a government agency that guides reuse efforts at the base. "It increases the hand we can play in attracting new businesses."
The foreign trade zone concept, created by Congress in 1934, is designed to help U.S. businesses compete with foreign companies. The trade zones allow manufacturing and warehousing operations to be set up in the United States without being subject to U.S. Customs laws. Companies benefit from this by avoiding tariffs on imported products or delaying such payments until the final product is shipped to a domestic buyer. Products that are sent out of the country pay no tariff at all.
Nationwide, there are now 244 federally-designated foreign trade zones and more than 400 smaller sub-zones. Their primary role is to keep businesses and jobs from fleeing to other countries. "The basic idea is to encourage domestic economic activity that, for tariff or logistical reasons, might otherwise be most cost effectively done overseas," said Greg Jones, an Alabama trade consultant and former president of the National Association of Foreign Trade Zones.
"It's a way to help U.S.-based operations adjust to a changing trade environment," Jones said.
In Southern California, full-scale trade zones are located at the ports of Los Angeles and Long Beach, as well as at Palm Springs International Airport and along the Mexican border in San Diego. Smaller sub-zones are located at Ontario International Airport and San Bernardino International Airport, among other sites. The U.S. Department of Commerce awards foreign trade zone designations, but many of them never get off the ground. In 1998, for instance, only 145 zones were actively importing products from overseas. Locally, the trade zones located in San Bernardino and Palm Springs have yet to attract any businesses capable benefiting from the designation. But officials from both airports say they are optimistic about their prospects.
In 1998, the most recent year that data is available, the nation's 145 active foreign trade zones imported $157 billion worth of goods, most of which were later distributed within the United States. About $17 billion of goods were re-exported to other nations, according to the Commerce Department.
Visit the following website for general FTZ information - http://ia.ita.doc.gov/ftzpage/tic.html