Foreign Trade Zones and Why You Should Use Them
A Foreign Trade Zone (FTZ) is a designated space that exists “outside the customs territory of the US.” This is a very technical way of saying that you may not have to pay duty for goods in that space. At least not right away. These spaces are approved and monitored by the FTZ board and the US Customs and Border Protection. Tight inventory controls are used to monitor items entering or exiting the zone. A few examples of uses of foreign trade zones are:
- Duty and Tax Deferral
- Elimination of duty on goods that are re-exported, defective or rejected
- Assembly, repackaging, and light production (at the approval of the FTZ Board)
The benefits of an FTZ vary depending on how it’s leveraged. Duty deferral and elimination are the most common. Imagine that you are a manufacturer that uses some foreign components in your product. You may get a better price for those components if you buy them in larger quantities. However, if the duty or tax rate is very high, you can defer some of that cost by placing the goods in an FTZ until you are ready to use them. This allows you to incur some of the costs closer to the time of being able to invoice your customer. Additionally, if any of the parts are defective, you can destroy them or re-export them without having to pay duty on those parts that you cannot use.
Next, let’s talk about production. Imagine that you import something that has a duty rate of 10% but you use it to make something that would have a duty rate of 5%. With approval from FTZ Board, your finished product produced within the FTZ may be entered at the lower duty rate. This is a more complicated example, but it illustrates how FTZs are used to improve the competitiveness of US businesses.