FOREIGN TRADE ZONE BENEFITS

TEN GOOD REASONS TO CHOOSE A FOREIGN TRADE ZONE

  • Defer Customs Duties and User Fees
    • Onetime cash flow savings, and
    • Time value of money or interest expense is saved
  • Avoid Duty (or eliminate drawback expense) on exported merchandise
  • Inverted tariff opportunities (manufacturing)
  • Eliminate duty on reportable loss, scrap and goods destroyed inside the zone
  • Eliminate state and local inventory taxes
  • Eliminate or defer excise taxes
  • Exhibit merchandise duty free
  • Expedite drawback and TIB claims - storage only
  • Reduce insurance expenses
  • Increased export marketing opportunities and sourcing alternatives
Let us examine some of these benefits in detail by using the following example; A to Z Products Inc., a Widget Manufacturer, imports $20,000,000 of merchandise each year, and pays a Duty rate of 10% + .17% user fee. His cost of capital is 12%. Inventory cycles or turnover are approximately 4 times/year and average imported inventory is $5,000,000. A to Z exports 17% of their product and is not currently employing drawback methods. Waste, scrap and destroyed goods average 2% per year and the company pays Inventory tax of 2.3% per year. Additionally, widgets have an inverted tariff since 1/2 of the imported parts have a 10% duty rate compared to the 3.7% rate on finished products. Let's look at the potential FTZ savings.

Savings

Benefits:

  1. Deferral of Duty
    1. One time savings: Average inventory of $5,000,000 x 10.17% tax (duty + fee)
        =$508,500 duty expense/qtr.
    2. Time Value of money interest expense = $508,500 x 12% = $61.020

  2. Exports: $20,000,000= annual inventory
      x duty rate 10.17% =$2,034,000 x 17% re-exported = $345,780

  3. Inventory tax: $5,000,000 average inventory on hand x 2.3% tax = $115,000

  4. 4. Waste I Scrap I Destroyed: $20,000,000 x 10.17% x 2% = $40,000

  5. 5. Duty Reduction (Inverted Tariff):Reduce 1/2 imported parts from 10% to 3.7%
      $20,000,000 x 1/2 x 10% = $1,000,000
      $20,000,000 x 1/2 x 3.7%=   $ 370,000
                                        saved = $630,000

Estimated Expenses:

    Customs charges (currently not in effect, but being considered by Customs) $19,000
    Zone Fees (variable, this is a estimate) $60,000
    Additional internal clerical and inventory control expenses. $50,000
    Total Estimated expenses $129,000
    Net PROFIT To Zone User $1,063,430
    One Time Cash Flow Benefit: $508,500