Free Trade Zones for Your Business

by Joshua Irvine on Dec. 30, 2014

International International Trade 

Summary: If you pay import/export tariffs, then this article may be helpful to your business profitability

Foreign Trade Zone (“FTZ”) General Overview

 

1.      General: FTZs exist as a means through which U.S. and foreign companies can become more competitive in their individual markets through a reduction, delay or exemption from tariffs, duties, taxes or related costs affecting business

 

2.      Permitted Activities in the FTZ: Merchandise in a zone may be assembled, exhibited, cleaned, manipulated, manufactured, mixed, processed, relabeled, repackaged, repaired, salvaged, sampled, stored, tested, displayed and destroyed.  However, any activity involving the substantial transformation of a foreign article or activity involving a change in the condition of the article which results in a change in the customs classification of the article or in its eligibility for entry for consumption is “production activity” and must be specifically authorized by the FTZ Board. All retail trade is prohibited in an FTZ.

 

3.      FTZ Board:  The Board is comprised of the Secretary of Commerce, the Secretary of the Treasury and the Commissioner of U.S. Customs and Border Protection (“CBP”), with the Secretary of Commerce as Chair.

 

4.      Application Process:  4 main stages: (1) Pre-docketing (preparing application), (2) Docketing (publishing application on Federal Register), (3) Review (Internal FTZ process) and (4) Interagency Clearance (review at CBP and Dept. of Treasury).  While the process is shorter in time for a subzone application, the stages are the same.

 

Subzone Overview

 

1.      General: To qualify as a subzone, the potential facility generally must exist within (1) the limits of a CBP port of entry, (2) 60 statute miles from the outer limits of a CBP port of entry or (3) 90 minutes’ driving time from the outer limits of a CBP port of entry.  There is one exception to this geographic rule, but it is easier to fit in the above 3 categories.

 

2.      Subzone site: If a company is interested in pursuing FTZ designation for its specific facility on a case-by-case basis, the facility should consult legal and/or tax professionals to analyze the business opportunity and burden posed by obtaining subzone approval.  Depending on the specific procedure used for application to be a subzone, approval can take 1-5 months.

 

3.      Fees: For subzone applications, there is a two-tier structure, based manufacturing needs and number of intended product types. For non-manufacturing/processing or manufacturing only 1-2 products, the application fee is $4,000.  For manufacturing/processing 3+ products, the application fee is $6,500.  If the local FTZ site reorganizes as an Alternative Site Framework (“ASF”), then no fees will apply.

 

4.      Activation on Approved subzone: Once approved, the operator of the subzone must apply for “activation” and submit annual reports to the FTZ board on the previous FY activity within the subzone.  If a subzone is approved, but never activated for 5 years, then the approval will lapse, subject to an 18 month re-instatement period.

 

Analyzing whether it makes sense to apply for a subzone designation requires considering various legal, business and tax concerns.  Don’t hesitate to contact the law firm above for a free discussion of relevant concerns.  Further, to assist with some of the financial concerns, the US Department of Trade has an excel calculator to project future duty savings from which your company could benefit.  See http://www.enforcement.trade.gov/ftzpage/info/toolbox.html

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