What, Why and How's of FTZ
Q What is a Foreign-Trade Zone?
Simply, it is a secured place authorized by the federal government, considered to be outside the Customs territory of the United States although they are still under U.S. Customs supervision and control.
Normally, when foreign cargo lands on U.S. soil, it is subject to clearance through US Customs and the payment of U.S. Customs duty. Many firms use Foreign-Trade Zones to postpone and, in the case of reexport cargo, avoid the imposition of duties, taxes, bonds, quotas and certain other requirements.
Domestic and foreign merchandise may be stored within a Foreign-Trade Zone. It may be manufactured, displayed, sold or altered in almost any way that isn’t prohibited by U.S. law.
As long as the merchandise remains in the Zone, it is not subject to U.S. Customs laws governing the entry of goods into Customs territory or payment of duty on those goods. In addition, Zone users can legally minimize the payment of U.S. Customs duties by either paying duty based on the classification of the merchandise at time of admission to the Zone or by paying duty based on the classification of the merchandise when it subsequently enters U.S. Customs territory. Merchandise subject to quotas may be admitted to a Zone without regard to those quotas. And no duty is assessed on domestic merchandise that enters Customs territory from a Zone.
Even though Hawaii’s FTZ is considered to be outside the Customs territory of the United States, it is on U.S. soil. For that reason, goods and activities in the Zone are subject to federal, state and local laws and regulations. Articles prohibited by law are not allowed admission, nor are articles that violate copyright, trademark or patent laws. Animal quarantine restrictions apply as well.
There are two types of FTZs in Hawaii: general purpose zones and special purpose subzones. General purpose zones operate as public utilities providing a variety of services to many users. Special purpose subzones are single-use facilities which cannot be accommodated within the general purpose zone.
Q Why do companies use Foreign-Trade Zones?
By using a Foreign-Trade Zone, a company can gain a competitive edge over foreign-based competitors. This is done through the reduction of certain operational costs that are incurred when conducting international business.
Q How do firms benefit from using a Foreign-Trade Zone?
- Duty Deferral and Avoidance:
By using Foreign-Trade Zones, firms defer payment of duty until merchandise enters U.S. Customs territory. Foreign merchandise transiting U.S. ports for foreign designations avoids the payment of U.S. Customs duties and taxes through the use of Foreign-Trade Zones. Merchandise can be inspected and sorted in Foreign-Trade Zones with only the saleable portion entering U.S. Customs Territory. Duty deferral or avoidance results in substantial cash savings.
- Taking Advantage of the Tariff Schedule:
The Tariff Schedule of the United States ( also known as the Harmonized Code) adopted in 1989 provides many new opportunities for FTZ users. Products manufactured from foreign-sourced components within an FTZ may be subject to a lower rate of duty than the sum of the parts with which they are made. This also applies to the assembly of sets or kits. Pineapple canneries and can-making companies, animal-feed mixing operations, and automobile factories and polyethylene terephthalate (PET) plastic production plants are some operations which gain tariff advantages from being within FTZs.
If, on the other hand, the finished product of a manufacturing operation is subject to a higher rate of duty, the importer may apply to have the imported components designated as Privileged Foreign status merchandise and thus subject to the lower rate of duty that applies to those components. Oil refineries in FTZs operate in this manner.
- Import Quotas:
In some cases, quota restrictions apply at the time merchandise seeks entry into U.S. Customs territory. Merchandise which would be denied entry because of quotas may be stored, and in some cases, altered and manufactured in Foreign-Trade Zones. Merchandise may be held in storage awaiting the beginning of a new quota period. Merchandise, in some instances, may also be altered or manufactured into a product not subject to quota limits. Quota merchandise can be processed in Foreign-Trade Zones for export markets. This is particularly advantageous to food processors manufacturing for export markets.
- “Made in U.S.A.”:
Products that are manufactured in FTZs may, if certain requirements are met, qualify for “Made in U.S.A.” labels, even if the finished product incorporates foreign components.
- Avoiding Drawback Costs and Delays:
Drawback procedures can be quite restrictive. They allow a manufacturer to receive a 99 percent refund of the duty paid on an imported component incorporated into subsequently-exported products. The manufacturer, however, must declare at the time of importation what will be subsequently exported in manufactured form to qualify for drawback. Zone users avoid these upfront costs and re-payment delays.
- Avoiding Bonded Warehouse Limitations:
Importers who store their merchandise in bonded warehouses must post a bond, and their goods may be stored for a maximum of five years. Importers who use FTZs post no bonds and their merchandise may remain in the Zone indefinitely. Manufacturing, processing or altering goods in Customs bonded warehouses are limited. In Foreign-Trade Zones, similar restrictions do not apply.
- Avoiding Certain State and Local Taxes:
Goods which are in a Zone for a bona fide Customs reason are exempt from State and local ad valorem taxes.Moreover, customers of Hawaii’s Foreign-Trade Zone No. 9 enjoy excellent security, the convenience of warehouse inventory reports and release receipts, the assistance of knowledgeable personnel, and highly professional service in all aspects of the Foreign-Trade Zone operations. The FTZ’s goal is to serve your needs effectively, efficiently and economically.
Q What happens in Foreign-Trade Zones?
Storage and distribution. Merchandise that is admitted into an FTZ may be stored indefinitely. It may be unpacked, repacked, displayed, assembled, disassembled, sorted, graded, cleaned, relabeled or even destroyed. It may be distributed as is or combined with other foreign or domestic merchandise. Only when merchandise is taken from an FTZ into U.S. Customs territory is it subject to customs duties and quotas. If the merchandise is shipped to a foreign port, no duties or taxes are collected. Goods may also be transferred directly from one FTZ to another without being subject to Customs duties or quotas.
Manufacturing. Goods may also be manufactured in an FTZ except when specifically limited by law. Products may then be exported or sent into U.S. Customs territory. When products enter Customs territory, they are subject to Customs duties; if they are shipped to foreign points, they are not. All new manufacturing operations are subject to the approval of the Foreign-Trade Zones Board and the District Director of Customs.
Note: machinery or supplies of foreign origin used in the manufacturing process are subject to duty when admitted to an FTZ. In the particular case of imported textiles subject to quota, manufacturing is permitted only if the finished products are exported.
Status designations of merchandise. At the time merchandise is admitted into a Foreign-Trade Zone, the owner applies for one of four status designations. Firms may use this status designation to legally minimize payment of U.S. Customs duties.
- Domestic Status is granted to goods that are grown, produced or manufactured in the United States provided all applicable internal revenue taxes have been paid, to goods that have been previously imported on which duties and taxes have been paid, and to goods that have been previously entered free of duties and taxes. Identifiable Domestic status merchandise may be returned to the Customs territory free of quotas, duties or taxes.
- Non-privileged Foreign (NPF) Status applies to merchandise of foreign origin. It can also apply to certain domestic merchandise which, by reason of non-compliance with FTZ regulations, has lost its Domestic status. Recoverable waste generated in a manufacturing process may also be granted Non-privileged Foreign status. Non-privileged Foreign status allows Zone users to pay duty based on the character, condition and quantity of the merchandise at the time it enters Customs territory.
- Privileged Foreign (PF) Status Merchandise applies to merchandise of foreign origin when classified and appraised with duties liquidated and taxes determined, as of the date the application for this status is approved. Privileged Foreign status allows the importer to alter or manufacture merchandise into new products without changing, for duty-assessment purposes, the original product classification. Privileged Foreign status cannot be changed even though the form of the merchandise has been changed. This status, however, cannot be granted to Non-privileged Foreign merchandise which has previously been manufactured in a Zone.
- Zone-Restricted (ZR) Status is granted to either domestic or foreign merchandise that is admitted to a Zone for the purpose of eventual exportation or destruction. This status may not be changed once it has been granted. Zone-Restricted merchandise may not enter U.S. Customs territory for domestic consumption unless determined to be in the public interest by the Foreign-Trade Zones Board.
Where and Who are FTZs
Q Where are Hawaii’s Foreign-Trade Zones?
There are currently 12 sites on Oahu, Maui, and Hawaii that have received FTZ designation. Of the 12 sites, three general-purpose zone sites and three special-purpose subzone sites are active. Link to Map
FTZ No. 9 is headquartered at Pier 2 on 7 paved acres including 300,452 square feet of covered space in Honolulu Harbor. The pier and terminal facilities can accommodate four ships simultaneously.
The Zone is in the heart of Downtown Honolulu, just five miles from Honolulu International Airport, making international shipment of goods convenient and economical. (Cargo unloaded at the airport-or anywhere within the port of Honolulu-maintains its foreign identity and duty-free status when it is transferred to Zone No. 9 by bonded carrier).
FTZ No. 9’s expansion sites on Oahu include: 1,051 acres in Campbell Industrial Park in Ewa, 109 acres in Mililani Technology Park in central Oahu, the Hawaii Convention Center, aircraft fueling facilities at Honolulu International Airport, and Unicold’s cold storage complex.
FTZ No. 9’s expansion sites on the neighbor islands include 59 acres in Maui Research and Technology Park, Kihei, Maui; 31 acres on the island of Hawaii adjacent to Hilo International Airport, and the Natural Energy Labs of Hawaii Authority (NELHA) area adjacent to the Kona airport.
Three active special-purpose subzones are situated throughout the State of Hawaii where petroleum refining and synthetic natural gas production create products for the domestic and export markets.
Q Who runs the Foreign-Trade Zone?
The Foreign-Trade Zone program in Hawaii is operated by the Hawaii State government, Department of Business, Economic Development and Tourism, Foreign-Trade Zone Division, in an effort to encourage international business and economic development. As Grantee, the Foreign-Trade Zone Division oversees all aspects of the FTZ project in Hawaii. Inspectors from the Honolulu District of the U.S. Customs Service supervise and audit all Zone activities.