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Trading “Freely”

By Sonjui L. Kumar and Allison Weiss Email By Sonjui L. Kumar and Allison Weiss
September 2011
Trading “Freely” Have you considered whether your business could benefit from operating within a foreign trade zone? Foreign Trade Zones or Free Trade Zones (the terms are interchangeable) are areas that are set up by local governments to encourage businesses to locate within their jurisdiction in order to create jobs and increase economic growth.

A foreign-trade zone (FTZ) in the United States is a geographical area in (or adjacent to) United States ports of entry, where commercial merchandise—both domestic and foreign—receives the same Customs treatment it would if it were outside the commerce of the United States. All kinds of goods and merchandise can be held in an FTZ without being subject to customs duties or local property taxes. The purpose of setting up an FTZ is to encourage companies that participate in international trade to bring their jobs to local communities and to entice companies to maintain or expand their operations in the United States, instead of going abroad, by making it cheaper and more efficient to produce goods here.

If a business is engaged in the import or export of goods, or other activities in the international market, it may be able to benefit from operating in an FTZ. The main benefit is that the business can usually eliminate or defer any customs duties and exempt their goods from certain taxes. A manufacturing company that is not in an FTZ may find itself at a disadvantage compared to its foreign competitors. Generally, a U.S. producer has to pay taxes on the parts, materials and components that are incorporated into their goods, as well as on the final product. The FTZ program corrects this imbalance by treating products made in the zone, for the purpose of tariff assessment, as if it were manufactured abroad. This helps U.S. businesses by creating an even playing field with foreign competitors and only taxing the finished product that is distributed in the United States. Goods that are distributed in foreign markets from an FTZ are never subject to U.S. customs or taxes.

There are two different kinds of trade zones that operate in the United States—General Purpose Zones and Subzones. General Purpose Zones involve public facilities that can be used by more than one business. These zones are typically located near airports and seaports. Subzones are free trade zones that are not near the traditional ports of entry and are designed to accommodate a certain type of industry only. They typically only involve one company or one industry, and the business conducted on these sites is more extensive.

For example, the United States has a Subzone for oil refineries because this type of business could not be moved to a traditional free trade zone. There are currently 256 General Purpose Free Trade Zones and 498 Subzones throughout the United States. Foreign trade zones located in the southeast include Foreign Trade Zone number 26, located near the Hartsfield Jackson International Airport in Georgia, Foreign Trade Zone number 25, located near Port Everglades in Florida, and Foreign Trade Zone number 21, located near Port Charleston in South Carolina. FTZs are governed by the Foreign Trade Zone Board through a local director. The Foreign Trade Zones Board may exclude from a zone any merchandise that is in its judgment detrimental to the public interest, health, or safety. The Board may also place restrictions on certain types of merchandise, which would limit the zone status allowed, the kind of operation on the merchandise in a zone, the entry of the merchandise into the commerce, or similar transactions or activities.

Free trade zones offer other benefits such as storage for goods, heightened security and insurance on goods, and state of the art operating facilities. Many of these free trade zones allow you to store your goods indefinitely. Merchandise may be admitted into a free trade zone without going through the formal customs process and entry procedures. Also, businesses don’t have to pay import duties on the goods when they come into the United States. Customs duties and excise taxes are due only at the time they leave the free trade zone and go into the U.S. market. If the merchandise never enters U.S. commerce, then no duties or taxes are paid on those items. The goods may also still enjoy deferred taxing when transferred from zone to zone since they are still not entering the United States marketplace. While goods are being held in an FTZ, they can be assembled, tested, repackaged, or destroyed. They can also be cleaned, sampled, relabeled, salvaged, or processed.

The FTZ program was designed to promote American competitiveness by encouraging companies to maintain and expand their operations in the United States. Take advantage of it if you can.

[Business Insights is hosted by the law firm of Kumar, Prabhu, Patel & Banerjee, LLC. Sonjui L.Kumar is a founding member and partner in the firm. Her areas of practice include general corporate law, complex commercial transactions, and trust and estate planning.]

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