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:
- Deferral of Duty
- One time savings: Average inventory of $5,000,000 x 10.17% tax (duty + fee)
=$508,500 duty expense/qtr.
- Time Value of money interest expense = $508,500 x 12% = $61.020
- Exports: $20,000,000= annual inventory
x duty rate 10.17% =$2,034,000 x 17% re-exported = $345,780
- Inventory tax: $5,000,000 average inventory on hand x 2.3% tax = $115,000
- 4. Waste I Scrap I Destroyed: $20,000,000 x 10.17% x 2% = $40,000
- 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