FTZs are more commonly known as “free trade zones” internationally and “foreign trade zones” in the United States. (Note for the purposes of this article, the focus will be specific to U.S.-based companies.) They are designated areas that exist within a country, yet are considered to be outside of it. Therefore, material in the zone is not subject to duties and taxes until it’s moved outside the zone for consumption.
Brought about with the Foreign Trade Zones Act of 1934, savvy companies have been using FTZs to save money on duties, tariffs, merchandise processing fees (MPFs) and more for nearly a century. Unfortunately, many others still avoid including FTZs in their supply chain strategy due to concerns over complexity. Following are proven methods for overcoming the hurdles.
Benefits of FTZs
- Duty deferral. Because FTZs are considered outside of the United States, companies don't pay duties on goods imported to zones until they enter the U.S. market. This improves cash flow and allows for tax-free inventory storage.
- Duty reduction. Instead of paying duties on individual imported parts, companies only pay on finished items entering the U.S. market. This reduces the number of items that incur duties, and finished products have a lower duty rate than individual parts.
- Duty elimination. Sometimes finished products entering the market from FTZs are entirely duty-free. For instance, instead of paying 4.3% on a motor and wheels and 3.4% on a lithium ion battery for a vacuum, companies could pay no duties on the finished vacuum.
- MPF bundling. When goods are imported, each import incurs an MPF, currently rated at 0.3464% of the cargo’s value. The minimum fee is $27.75 and the maximum fee is $538.40. But when goods enter from an FTZ, MPFs can be bundled into weekly fees that are capped at $538.40. For companies with high-value or high-volume shipments, this can result in massive savings.
FTZ setup and management
The process of setting up an FTZ at any supply chain organization can be daunting. Filing to have an existing company declared an FTZ requires submitting complex application paperwork to the U.S. Department of Commerce’s International Trade Administration, paying a $3,200 fee, and even publishing a notice in a local newspaper. But prior to taking those steps, a business first needs to determine if the benefits outweigh the costs for their particular situation.
Ongoing management of FTZs also requires meticulous recordkeeping. FTZ operators must document all items currently in a zone, as well as all those transferring from another.These records must specify the following by zone lot number or unique identifier:
- Location of merchandise
- Zone status
- Cost or value of merchandise
- Beginning balance, cumulative receipts and removals,
adjustments and current balance on hand by date and quantity
- Destruction of merchandise
- Scrap, waste and by-products
Paperwork also must demonstrate that products leaving the zone entered in compliance with U.S. Customs and Border Protection (CBP)-authorized inventory methods. Failure to do so can jeopardize FTZ status and lead to regulatory action. On top of this, FTZ operators are required to prepare annual reconciliation reports. These contain information regarding merchandise on-hand at the beginning of the year, transfers made throughout the year, inventory at the end of the year and more. Plus, they need to be available at all times for spot-checks and audits.
To address these and many other challenges, one option is to partner with an FTZ expert, who can perform cost-benefit analyses, submit paperwork and even manage the entire application process. Of equal importance is having the right tools in place to significantly reduce administrative hours and grow margins. Here are a few features to look for in FTZ management software:
- Integration with CBP’s ACE system. ACE is the means by which the trade community enters import and export data and interacts with CBP personnel. When researching FTZ management software, it’s imperative to make sure that the software’s inventory control and record keeping system (ICRS) integrates with ACE. Otherwise, FTZ operators will waste time duplicating work.
- Proactive notifications. FTZ software can send notifications and alerts regarding upcoming reports and CBP deadlines. Many innovative solutions allow for user customization in order to send emails, texts and reports to the appropriate personnel, ensuring that all relevant parties are kept informed.
- Advanced built-in reporting. Having visibility into operations shouldn’t mean scrolling through endless spreadsheets. With built-in reporting features, FTZ software enables operators to quickly visualize inventory flow. Furthermore, built-in reporting ports audit readiness by storing key documents and backing up essential data.
Old practice, new strategies
Like any government program, FTZs brings with them no shortage of paperwork and regulations, but they're also full of innovative opportunities and solutions for organizations throughout the world. Follow the strategies in this article to discover what they can do for your supply chain.