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The ABCs of the FTZ Program
Lesley Couch Director, Foreign-Trade Zone Services
© STTAS 2012 1
Agenda
• Benefits Calculator
• Examples of Real-World Scenarios
• Costs of entering the Program
• Application Types
• Activation Criteria
• Operational Issues
© STTAS 2012 2
What is an FTZ?
Usually located in or near Customs Ports of
Entry at industrial parks or terminal warehouse
facilities
An FTZ site or park is a specially designated
and secured area operating under U.S.
Customs supervision
Almost any type of good may be brought in duty
free for any kind of manipulation.
© STTAS 2012 3
Establishment of FTZs
Foreign-Trade Zones were established:
To encourage and expedite U.S. participation in
international trade
To increase global competitiveness of U.S. based
companies
To expedite exportation of domestic goods with
foreign and domestic content
To defer payment of duties until goods enter into the
commerce of the U.S.
© STTAS 2012 4
Level Playing Field
© STTAS 2012 5
FTZ
FTZs are on level playing
field with foreign
competitors. By being
outside the US territory,
FTZs are not restricted by
duties/taxes, but can invest
resources in the US and add
jobs. Imports to the
Zone Shipments
into US
territory Exports
Exports
What can you do in an FTZ?
© STTAS 2012 6
What is Prohibited in FTZs?
© STTAS 2012 7
•Retail Sales
•Activity Outside Grant of
Authority
8
Would I benefit from FTZs?
Consolidated Entries into US Commerce
Inverted Tariff
Duty Deferral
Re-exporting
Scrap
Drawback
State Inventory/Property Taxes
Supply Chain Velocity
8 © STTAS 2012
Savings Formulas
© STTAS 2012 9
Duty Savings from Inverted Tariff Benefits* (Value, dutiable imports) X (Weighted avg duty rate of components – weighted avg duty rate of Finished Good)
*requires approval by FTZ Board
Duty Savings as a Result of Exports (Value, dutiable imports) X (% re-exported) X (weighted average duty rate)
Duty Savings on Reject or Scrap (Value, dutiable imports) X (% reject or scrap) X (weighted average duty rate)
Savings from Ongoing Duty Deferral (Value, dutiable imports ÷ inventory turns per year) X (weighted average duty rate) X (opp. cost of capital)
MPF Savings Under Weekly Entry Process (Average MPF per entry X entries per year) - (52 weeks X $485 maximum MPF per entry)
Brokerage Fee Savings under Weekly Entry Process (Average Brokerage Fee per entry X entries per year) - (Average Brokerage Fee X 52)
Example 1: Large DC
• Gadgets, Inc.—A large electronics retail
chain
• Average duty rate, 2.8%
• DC supplies all 400 stores in the US
• Imports approx. $200 million each year
• Inventory turns 4 times/year
• Processes 3,000 entries per year
• Does an FTZ make sense?
© STTAS 2012 10
Gadgets, Inc. Assumptions
Assumptions: Value of Dutiable Imports, Annual 200,000,000 Weighted Average Duty Rate 2.8%
Percent Scrap or Rejected Merchandise 0.25% Percent of Merchandise Re-exported 2%
Inventory Turns per Year 4.00 Opportunity Cost of Capital 4%
Average MPF per entry 140.00 Average number of entries per year 3,000.00 Annual Growth Rate 3%
Number of Activated Distribution Centers 1.00 One IOR per facility
© STTAS 2012 11
Plug ‘N’ Chug
© STTAS 2012 12
FTZ Benefits & Expenses By Type Year 1 Year 2 Year 3 Year 4 Year 5 5-Year Total
FTZ Benefits
Re-Exports 112,000.00 115,360.00 118,820.80 122,385.42 126,056.99 594,623.21
Reject and Scrap 14,000.00 14,420.00 14,852.60 15,298.18 19,887.63 78,458.41
Ongoing Duty Deferral 56,000.00 57,680.00 59,410.40 61,192.71 63,028.49 297,311.61
MPF Savings 394,780.00 407,380.00 420,358.00 433,725.34 447,493.70 2,103,737.04
Brokerage Savings 368,500.00 379,750.00 391,337.50 403,272.63 415,565.80 1,958,425.93
Total FTZ Savings 945,280.00 974,590.00 1,004,779.30 1,035,874.28 1,072,032.62 5,032,556.19
FTZ Expenses
Internal FTZ Operations Expenses 200,000.00 103,000.00 106,090.00 109,272.70 112,550.88 630,913.58
Grantee Fees 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 50,000.00
Total Expenses 210,000.00 113,000.00 116,090.00 119,272.70 122,550.88 680,913.58
NET BENEFITS 735,280.00 861,590.00 888,689.30 916,601.58 949,481.73 4,351,642.61
Example 2: Fleece Jackets
• ABC Clothing has an existing zone in
Dallas, TX
• Import fleece shirts/jackets year round
• Seasonal: In storage for 9 months of year
• Not enough capacity to store at the FTZ
• A GPZ at the port can store until needed
© STTAS 2012 13
Example 3: Small 3PL, Pick&Pack Ops
• Small Public Warehouse FTZ Operator
• Customer has new, low-priced Tablet PC
• 3PL installs battery, adds leather cover and
reboxes the “Set”
• FTZ Use for “inverted tariff” on the batteries and
the Leather cases
• For every $1mil in leather cases, saves the
company $200,000
• For every $1mil in batteries, saves the company
$49,000
© STTAS 2012 14
Example 4: Enable Compliance
• Acme Inc manufactures mp3 players in the US,
CN, and MY.
• The US location repairs all mp3 players globally
• The country of origin is not known at time of
import from overseas
• Received at a small public warehouse FTZ
operator
• Serial number is scanned; Country of origin is
determined; product is labeled
© STTAS 2012 15
Costs: How to calculate? (+ or - 30%)
• Personnel: 1 person, full time. Backup (part
time) trained to be fully operational. $60,000
– Operations can also be outsourced to a 3rd party
administrative company
• Software: Internal modifications or Bolt-On
System. Initial Investment $100,000, $25,000
per year.
• Security: $15,000 additional investment
• Management: Budget 1/20th time allocation
© STTAS 2012 16
Additional Costs
• Bonds: Budget $2,500 - $5,000
depending on issues
• Grantee Fees: Ask for Operator’s
Agreement from the local Grantee
• Networking/Education: $5,000
– Membership with NAFTZ
– Attendance at conference
• Recommendation: Keep Costs High,
Benefits Low
© STTAS 2012 17
Application Types
• Subzone: For special purpose sites where distance or
circumstances require it
• ASF Usage Driven: Only allowed in zones reorganized
under Alternative Site Framework (ASF), but becoming
more popular.
• Expansion or Magnet Site: “Industrial Parks” that have
overlaid zone status on buildings and land, so that
customers may use Zone status more quickly.
• Production: Any change in HTS must have prior
authorization from FTZ Board. New regulations in effect
May 2012 reduces the wait time for approval.
© STTAS 2012 18
Activation Criteria
• Application is only one phase of project
• Activation with local CBP port can be
lengthy
• Activities can run in parallel
© STTAS 2012 19
Activation
© STTAS 2012 20
Security Review
• Fencing
• Guard Shack
• Employee Card Readers
• CC Video
• Signage
Systems Implementation
• Interface with ERP
• User Training
• Electronic Submission to CBP
Written Request
• Operator’s Procedures Manual
• Blueprint
• Grantee Letter of Concurrence
• Background Checks
FTZ Operator’s Bond
FIRMS Code Creation
21
Inventory Layering
21
Date 214# SKU Country of
Origin
Quantity Unit
Value
HTS#
5/1/2012 00001 12345 ID 200 17.00 9022.30.0000
On 5/1/2012, you receive your first import of 200
X-ray tubes, Sku 12345, from Indonesia.
© STTAS 2012
22
Inventory Layering
22
On 5/12/2012, you receive the second shipment
of X-ray tubes, Sku 12345, this time from China.
The quantity is 350 for a lower unit price.
© STTAS 2012
Date 214# SKU Country of
Origin
Quantity Unit
Value
HTS#
5/1/2012 00001 12345 ID 200 17.00 9022.30.0000
5/12/2012 00002 12345 CN 350 16.50 9022.30.0000
23
Inventory Layering
23
On 5/17/2012, you have your first shipment of
this sku, for a quantity of 150.
Following FIFO, the oldest layer is decremented
by this quantity. This is the layer reported on the
7501.
© STTAS 2012
Date 214# SKU Country of
Origin
Quantity Unit
Value
HTS#
5/1/2012 00001 12345 ID 200 50 17.00 9022.30.0000
5/12/2012 00002 12345 CN 350 16.50 9022.30.0000
24
Special Entry Considerations
Special Program Declarations or “SPI Codes”
Cotton Fees
AntiDumping/Countervailing Duties
PGA reporting
Fish & Wildlife
FDA
ATF/TTB
24 © STTAS 2012
Contact Information
25
Sandler & Travis Trade Advisory Services, Inc.
505 Sansome Street, Suite 1475
San Francisco, CA 94111
Lesley Couch, Director of FTZ Services
(248) 699-1586 (Direct Line)
lcouch@strtrade.com
© STTAS 2012
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