Duty deferral opportunities across the globe

Trade compliance teams can leverage a variety of duty optimization programs to reduce spend

In the mainstream press, global trade coverage often focuses on new or renegotiated free trade agreements (FTAs), which are trade treaties between two or more countries. FTAs allow goods and services to flow between countries without burdensome tariffs or other restrictions and generally create a more favorable trade environment for participation in the global marketplace. Although under-utilized, FTAs are an effective way for importers and exporters to lower duty spend and improve sourcing stability.

But duty savings don’t begin and end with FTAs. Multinational corporations have a variety of duty deferral opportunities available to them around the globe – including U.S. drawback, U.S. foreign-trade zones, IMMEX/maquiladoras, EU customs regimes, China processing trade regimes, and more.

By taking advantage of these customs programs, importers and exporters can reduce or eliminate duties and ease the clerical burden of going through customs.

Duty deferral in the United States: Foreign-trade zones

In the United States, foreign-trade zones (FTZs) are secure areas under U.S. Customs and Border Protection supervision, wherein foreign and domestic merchandise can be imported and exported without having to go through normal customs procedures.

Instituted by the Foreign Trade Zones Act of 1934, FTZs are often warehouses or industrial parks located near established trade routes, such as ports of entry, international airports, and state borders. Multiple companies can use an FTZ at the same time, but individual companies can also apply for a “sub-zone” designation that allows them to make exclusive use of a specific area to, let’s say, build a manufacturing plant or conduct proprietary product testing. 

In addition to making U.S. companies more globally competitive, foreign-trade zones provide fewer incentives for companies to move operations overseas and give U.S. companies greater access to global markets. At the local level, they also provide well-paying jobs and give local communities a tool for attracting foreign investment.

How do foreign-trade zones work?

Almost any legal merchandise – including parts and raw materials – can be funneled through an FTZ, unless they are prohibited by law. And within an FTZ, companies can do almost anything with those products and materials except sell them (retail trade within an FTZ is prohibited).

That said, the range of allowable activities in a foreign-trade zone is extremely broad. For example, merchandise and materials in a foreign-trade zone can be:

  • Repackaged
  • Stored (such as in a warehouse)
  • Destroyed
  • Tested
  • Salvaged
  • Mixed
  • Sampled
  • Processed
  • Graded
  • Relabeled

With special permission, companies can also exhibit, manufacture, assemble, or manipulate goods prior to exporting them.

For companies, the main benefits of using FTZs are cost savings from duty exemptions and relief from various customs processing and brokerage fees. But there are other benefits as well, including:

  • Lower security and insurance costs
  • Streamlined supply chain operations and logistics
  • No time constraints on storage
  • Improved inventory control
  • Better border compliance
  • Fewer penalties and supply disruptions
  • Relief from property and inventory taxes
  • Inverted tariffs (when the tax on a finished product is less than the tax on its individual parts)

As of 2019, there are 348 officially sanctioned FTZs active in all 50 U.S. states, and there are hundreds of similar duty deferral programs operating in countries around the world. FTZs are the United States’ version of what are known internationally as free trade zones. Different countries have different rules, however, based on what authorities have determined is the most beneficial arrangement for companies in those countries.

Duty deferral in the European Union: Customs regimes and special procedures

Global trade in the European Union (EU) is governed by the Union Customs Code (UCC), the purpose of which is, according to the European Commission, to facilitate “simplicity, service, and speed.” The EU’s system differs from the U.S. in that trade is addressed under the banner of special procedures, which covers four basic categories:

  • Storage
  • Specific Use
  • Processing
  • Transit

The special procedure for “storage” allows for the importing and storage of non-Union goods into the EU, and delays payment of customs duties and import value-added taxes (VAT) until the goods are used. Goods can be stored in public customs warehouses or, with the proper authorization, a private warehouse.

The EU also operates separate free zones, which are special areas where companies can temporarily park goods free of import duties, VAT, and other charges. When the goods are ready to be moved, they can be re-exported, moved to another customs procedure, or released into free circulation within the EU.

Yet another way the EU parses its special procedures for duty relief is through the determination of goods for special use. The special use provision is intended for goods brought into the EU that are going to then be re-exported, or goods that are imported for a specific “end use,” such as tools to repair a turbine. The catch under a special use provision is that the goods themselves cannot undergo any changes.

The EU also has specific rules about the processing of goods. For example, the rules for inward processing apply to non-Union goods that are brought into the EU for manufacturing purposes. If the resulting goods are sold in the EU, they receive a preferential duty rate.

The EU’s outward processing designation is for EU goods that are temporarily exported outside the EU for manufacturing. Again, import duties are reduced or eliminated if the resulting goods are sold in the EU.

In practice, EU import/export activity is channeled through special inwards processing, manufacturing, and customs warehousing procedures, where different kinds and levels of import/export activity can take place simultaneously, depending on which activities have been authorized – so accurate documentation and recordkeeping are paramount.

Duty deferral in Mexico: IMMEX/maquiladora

In Mexico, duty-free import/export activity is managed under the IMMEX “maquiladora” program. A maquiladora is a foreign-owned company operating in Mexico that exports its products back to other countries. Under the IMMEX program, foreign businesses of all kinds have the opportunity to pay little or no duty on imported goods, parts, and raw materials, provided the resulting products are exported within a time frame determined by the Mexican government.

The IMMEX program is unique in that it allows companies from anywhere in the world to take advantage of its benefits, essentially turning the entire globe into a giant warehouse for manufacturers operating in Mexico.

The money companies can save through the IMMEX program is significant. For example, Mexico’s value-added tax (IVA) is 16% for most products, which companies operating under IMMEX do not have to pay. Other duties excused under IMMEX include a special IEPS tax on products and services, a general import tax (IGI), and a variety of compensatory fees.

IMMEX companies fall into five classifications (parent company, industrial, services, storage, and outsourcing), and their activity is categorized into three types of imports:

  • Elaboration: When the imported item will be part of another product without changing its essential characteristics, such as when a processing chip is imported to be part of a computer.
  • Transformation: When the imported item undergoes a change, and the change isn’t just physical – such as chemicals that are combined to make a medicine.
  • Repair: When the imported item will be used to replace a broken part, such as an airline manufacturer that imports a new part to repair an airplane.

Mexican authorities offer companies two ways to participate in the IMMEX program. One is to pay a fee for a guarantee that temporarily allows a company to import goods duty-free. If the value of the resulting exported products exceeds the amount of the guarantee, the guarantee money can be recovered, much like a deposit.

The more common route is through certification, which must be obtained prior to importation. Certifications are split into three categories – A, AA, AAA – and each category has a specific set of requirements that must be met.

Companies seeking import certification in Mexico should be advised that Mexican authorities require companies to file regular annual reports that divulge the details of their operation with absolute transparency. Those same authorities can also audit a company at any time, so imports, production orders, inventory transactions, and exports must be accurately tracked and provable at any given time. Organization and discipline are essential. Foreign companies operating in Mexico must be able to run reports, more or less instantaneously whenever they are requested, and to keep current with a broad range of regulations that are continuously changing.

Duty deferral in China: Processing trade regimes

China’s version of IMMEX is known as processing trade regime, or PTR. More than 20% of foreign trade goes through PTR, the benefits of which are duty-free imports, license exemptions, and the credibility that comes with being a PTR-approved company.

Under PTR, approved companies are issued a handbook, which is essentially a ledger that companies must use for inventory management. Crucially, companies must keep track of the materials they import and the rate at which those materials are consumed in the manufacturing process. Prior to export, in a process called reconciliation, companies must use their handbook to prove that they used all the materials they imported, and that the rate of consumption matches the amount of materials in the exported product. If the rates don’t match and the company cannot explain why, a company may be on the hook for customs duties and fines. In cases where excessive tax evasion is proven jail time is possible.

There are three types of handbooks: paper, e-handbook, and e-paper handbook. Though paper handbooks are still offered, most companies use e-handbooks or e-paper handbooks. The difference between the two is that e-handbooks are designed to be used by companies with enterprise resource planning (ERP) systems, and e-paper handbooks are for companies that have standard computer systems.

Unlike paper handbooks, e-handbooks allow companies to submit declarations directly to China Customs, but the final result is the same. Before exporting their goods, companies must reconcile their importation and consumption of materials during the manufacturing process, which includes scraps, damaged materials, or other forms of waste.

In the final reckoning with customs, companies must prove that their physical inventory matches customs inventory records, and that both of these match inventory records recorded in the company’s ERP or computer records. If there are gaps, those gaps must be explained.

Because accuracy is so important, most companies using e-handbooks are shifting to automated inventory systems that keep track of all materials and usage in real time, and which can alert companies to any discrepancies before authorities start asking questions. If inventory gaps can be identified in advance, companies can prepare an explanation and avoid the consequences of being caught by surprise.

Global trade management software can help you take advantage of duty deferral programs around the world

No matter how they are managed, duty deferral programs around the world offer companies a way to reduce or eliminate customs duties and contain import/export costs.

The common denominator in every country is that companies must keep meticulous records of their activities or risk disruptions and penalties from local customs officials. The universal need for accuracy and transparency is why most large companies are switching to automated customs duty management software such as Thomson Reuters ONESOURCE Global Duty Optimization, which provides all the tools necessary to remain tax compliant in any part of the world. 

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