Foreign
Trade Zones
A foreign-trade zone is an area that is located
within the United States but is considered outside of the customs territory of
the United States. The United States version of the "free port,"
foreign trade zones operate as public utilities pursuant to a grant from the
Foreign Trade Zones Board. Authorized by the Foreign Trade Zones Act of 1934
(the "Act"), Foreign Trade Zones are designed to increase the use of
American labor and increase capital investment in the United States by allowing
activity to occur in the United States prior to the application of U.S. customs
laws, thereby equalizing the customs treatment of the activity with similar
activities occurring offshore or overseas. Foreign trade zone operations are
governed by the Act and regulations issued by the Department of Commerce and
the Department of the Treasury (collectively the "Regulations").
Types of Zones
Although
not specifically referenced in the Act, two distinct types of zones have
developed and have been separately noted in proposed foreign trade zone
regulations:
Overview of Economic Benefits
A business operating in a foreign-trade zone may
receive a number of economic benefits:
Duty
Deferral
One of the primary benefits is duty deferral,
the ability to avoid paying duties on imported merchandise until the
merchandise leaves the foreign-trade zone and enters the commerce of the United
States. Merchandise imported into and re-exported from a foreign-trade zone is
not subject to duty.
Lower
Duty Rates
Lower duty rates are also achievable
through foreign-trade zones. As more fully discussed below, a foreign-trade
zone user that assembles or manufactures in a zone may elect to pay duty on
imported components either at the duty rate applicable to the components or at
the duty rate applicable to the finished product. U.S. added value is not
subject to duty at all. In an inverted tariff situation, that is, a situation
in which the duty rate on the finished product is lower than that on the
imported components, the foreign-trade zone results in a lower overall duty to
the foreign-trade zone user.
Quota
Restrictions Avoidance
Quota restrictions generally may be avoided by
admitting goods into a foreign-trade zone. Over-quota merchandise may usually
be held in a zone until the next quota period begins and may often be used as a
component part of a product that is not over-quota. Similarly, some marking
restrictions may also be avoided by bringing goods into a foreign-trade zone.
Export
Savings
Domestic goods moved into a zone for export are
treated as exported when they enter the zone; consequently, exporters may
accelerate drawbacks by moving goods to be exported into a zone. Similarly,
imported goods that are brought into a zone to be destroyed, such as defective
products, are treated as exported and subject to drawback.
Tax
and Licensing Savings
Some savings are also available through the avoidance
of state or local laws that are inapplicable in a foreign trade zone because of
federal preemption.
For example, state and local ad valorem tax on
inventory is not applicable to foreign origin or foreign destination goods
in a foreign-trade zone. Similarly, some state licensing requirements
are not applicable to companies operating in a foreign-trade zone.
Customs Treatment
Admission
of Merchandise into a Zone;
The United States Customs Service regulations provide
that merchandise of every description may be admitted into a zone unless
prohibited by law. However, even prohibited merchandise may be conditionally
admitted subject to the regulations of the applicable federal agency. In order
to admit merchandise to a zone a special customs form 214 must be filed
with and a permit must be obtained from the District Director of Customs. The
only exceptions to the prior approval requirement are for (1) merchandise which
is temporarily deposited in a zone for manipulation; (2) merchandise which is
to be unladen from any carrier in the zone for immediate transfer into the Customs
Territory (in which case the merchandise is treated as remaining in the Customs
Territory); (3) merchandise which is transferred from Customs Territory through
a zone for immediate lading on any carrier in the zone; (4) domestic
merchandise admitted into a zone without a permit; and (5) merchandise which is
brought into the zone through compliance with direct delivery procedures by the
operator.
Direct
Delivery Procedure
Perhaps the most widely utilized of these exceptions
is the direct delivery procedure. The operator of the zone must apply for
permission to utilize this procedure with the District Director. The
application must describe the merchandise to be handled or processed and the
kind of operation which it will undergo in the zone. In order to qualify for
this procedure, the District Director must determine (1) the merchandise must
not be restricted or of a type which requires customs examination or
documentation review before or upon its arrival to a zone; (2) the merchandise
and the operations are known well in advance, are predictable and stable, and
are relatively fixed in variety by the nature of the business conducted at the
site; and (3) the operator is the owner or purchaser of the goods.
Status of Merchandise in a Zone
All merchandise located in a zone (except merchandise
which is considered still in the Customs Territory as shown above) assumes one
of four different status designations, each of which receives different Customs
treatment. The Designations are: privileged foreign merchandise, nonprivileged
foreign merchandise, domestic merchandise, and zone-restricted merchandise.
Privileged
Foreign Merchandise
Privileged foreign merchandise is subject to
appraisement and tariff classification according to its condition and quantity
at the time which the owner of the merchandise makes application for privileged
foreign status. The rate of duty in effect at the time of the application will
apply although the duty is not payable until the merchandise is removed from
the zone and placed in Customs Territory. An application for this status may be
made at any time provided that the merchandise had not been manipulated or
manufactured in such a manner so as to alter its tariff classification. If the
merchandise is exported or properly withdrawn for supplies, equipment or repair
material of vessels or aircraft, then no duties or taxes are paid.
Nonprivileged
Foreign Merchandise
Nonprivileged foreign merchandise is dutiable at the
applicable rate at the time of its transfer from the zone into Customs
Territory. This merchandise consists of one of three categories: (1) foreign
merchandise property in a zone that does not have privileged or zone-restricted
status; (2) waste recovered from any manipulation or manufacture of privileged
foreign merchandise within a zone; or (3) domestic merchandise in a zone which
has lost its identity as such. Any domestic merchandise will be considered to
have lost its identity if the District Director determines that it cannot be
identified positively as domestic merchandise on the basis of an examination of
the merchandise or consideration of any proof that may be submitted. Even
though the dutiable value of nonprivileged foreign merchandise is determined by
the condition and value of the merchandise upon its transfer from a zone, the
following items are excluded from the calculation of the dutiable value of
nonprivileged foreign (or domestic) merchandise: (1) the cost of processing in
the zone (including labor cost); (2) the general expenses and profit attributable
to one operation; (3) expenses incurred in the zone that are incidental to
placing the merchandise packed ready for transfer to the Customs Territory;
;and (4) freight, insurance and similar costs incurred after the merchandise is
packed ready for transfer to the Customs territory. As a result, the duty paid
on nonprivileged foreign merchandise is essentially computed by multiplying the
costs of the merchandise by the duty rate applicable to the merchandise in the
condition in which it leaves the zone, e.g., the cost of a component part times
the duty rate applicable to the finished product. The same appraisement method
applies to merchandise produced in a zone from a combination of privileged and
nonprivileged merchandise, whether foreign or domestic.
Domestic
Merchandise
Domestic status may be granted to merchandise: (1)
grown, produced, or manufactured in the United States on which all internal
revenue taxes, if applicable, have been paid; (2) previously imported and on
which duty and tax has been paid; or (3) previously entered free of duty and
tax. No application or permit is required for the admission of domestic
merchandise to a zone except upon order by the Commissioner of Customs.
Further, no application or permit is required for the manipulation, manufacture,
exhibition, destruction or transfer of domestic merchandise except: (1) where
it is mixed or combines with merchandise having another zone status; or (2)
upon order of the Commissioner of Customs. Domestic Merchandise may be returned
to Customs Territory free of quotas, duty or tax upon compliance with transfer
formalities.
Zone-Restricted
Merchandise
This status applies to merchandise which is taken
into a zone for the sole purpose of exportation, destruction (except
destruction of distilled spirits, wines and fermented malt liquors), or
storage. This type of merchandise may not be removed to Customs Territory for
domestic consumption unless Customs finds the return to be in the public
interest. Zone-restricted merchandise status may be requested by application at
any time, but it cannot be abandoned once it is granted. Zone-restricted
merchandise may be considered "exported" for the purpose of drawback,
warehousing, bonding and other provisions of the Tariff Act of 1930 if all applicable
Customs requirements for actual export are met.
Manipulation, Manufacture, Exhibition or Destruction
Any merchandise which is lawfully brought into a zone
may be stored, sold, exhibited, broken up, repacked, assembled, distributed,
sorted, graded, cleaned, mixed with foreign or domestic merchandise, or
otherwise manipulated or manufactured. In order to manipulate, manufacture,
exhibit or destroy merchandise within a zone, one must obtain permission to do
so from the District Director of Customs. The Secretary of the Treasury may
establish other guidelines and procedures in order to protect the revenue of
the United States.
An application to manipulate, manufacture,
exhibit or destroy merchandise within a zone must be made on Customs Form
216 by the operator of the zone and such application may contain a
"blanket" application. A blanket application is a certificate to
continue for a limited period of time the manipulation, manufacture, exhibition
or destruction of merchandise in a zone as opposed to making a separate
application for each part of an ongoing activity. A denial of an application
(or blanket application) by the District Director is appealable to the
Foreign-Trade Zones Board. If any revenue-protection considerations are
involved the Board must adhere to any determinations made by the Secretary of
the Treasury.
Disposition and Removal of Merchandise
Customs regulations contain very specific and
detailed requirements regarding the disposition or removal of merchandise from
a zone. Careful compliance with these regulations, as well as very detailed
planning, is necessary to maximize the available benefits. Examples of
disposition and removal include direct export, withdrawal as equipment,
supplies or repair material for vessels or aircraft, destruction of merchandise
either inside or outside of the zone, the transfer of merchandise from one zone
to another, or the entry of the merchandise into the Customs Territory.
Further, merchandise may be treated as removed from zone even though it remains
physically present within the zone to take advantage of favorable tariff rates
or quota restrictions. With careful planning and adequate documentation, very
favorable results can be achieved through the variety of disposition and
removal techniques which are available.
Advantages of Operating in a Foreign-Trade Zone
Duty
Deferral and Elimination
For many companies, the primary benefit of a
Foreign-Trade Zone is the deferral of duties for foreign goods stored in a
Foreign-Trade Zone prior to admission into domestic commerce and the
elimination of duties for foreign goods brought into a Foreign-Trade Zone and
re-exported. For this reason alone, many distributors of foreign goods operate
distribution facilities in Foreign-Trade Zones. Although retail trade is prohibited
in a Foreign-Trade Zone, retailers may also benefit from duty deferral by
warehousing in a Foreign-Trade Zone.
Lower
Duty Rates
A significant cost savings is available for
manufacturers or assemblers dealing with completed products that are subject to
an inverted tariff, i.e., goods in which component parts have a higher duty
rate than does the finished product. By bringing the component parts into the
Foreign-Trade Zone on a non-privileged basis and manufacturing or assembling
the finished article in the Zone, the foreign components will be subject to
duty at the lower, finished product rate.
The reverse of an inverted tariff situation may also
be avoided in a Foreign-Trade Zone. If a finished product is dutiable at a
higher rate than foreign components, the foreign components may be brought into
a Foreign-Trade Zone in privileged status, and thereby retain their identity
even after assembly with other products. Thus, when the finished product is
removed from the foreign-Trade Zone into domestic commerce, the lower duty rate
of the component product applies.
Quota
Restrictions Not Applicable
Import quotas are generally not applicable to goods
stored in Foreign-Trade Zones. If an importer of product subject to quota finds
that he has obtained over-quota merchandise, he may store the merchandise in a
Foreign-Trade Zone rather than re-exporting the merchandise, and subsequently
bring the merchandise into the domestic commerce of the United States during
the next quota period. Importers who come across bargain purchases of
over-quota merchandise may similarly store the merchandise in a Foreign-Trade
Zone until there is an available under the quota to bring the merchandise into
domestic commerce.
In some instances, products subject to a quota may be
brought into a Foreign-Trade Zone and substantially transformed into a product
that is not subject to a quota. This procedure is not always available. There
are substantial restrictions, for example, on the availability of this
procedure for textile products and with regard to products made from imported
sugar.
Obtain
Domestic Marking
Foreign components that are substantially transformed
within a Foreign-Trade Zone lose their identity as foreign merchandise. The
finished product is then marked as a U.S product. This is particularly
important for companies desiring to market U.S. products. It can also be
important when non-U.S. products are subject to use restrictions. For example,
barges manufactured by a company operating in a Foreign Trade Zone are marked
as made in the U.S., and, therefore, eligible to lade and unlade cargo at
points where lading is restricted.