Despite the savings garnered by utilizing an FTZ, setting up and managing a foreign-trade zone is often a daunting process, but innovative software solutions can now help.
The Benefits of FTZs
To review, FTZs are areas within the U.S. that are considered outside the country by U.S. Customs and Border Protection (CBP) for duty purposes. This brings with it a host of benefits, including:
- Duty deferral — Because FTZs are considered outside the U.S., companies do not pay duties on imported goods until they leave the zone and enter the U.S. market. This helps improve cash flow and allows for tax-free storage of inventory.
- Duty reduction — Instead of paying duties on individual imported parts, companies pay duties on finished items entering the U.S. market. Not only does this reduce the number of items which incur duties, but oftentimes the finished product will have a lower duty rate than the individual parts, resulting in even greater savings.
- Duty elimination — Not only do finished products occasionally have lower duty rates than their constituent parts; sometimes they’re duty-free entirely. For instance, in the case of a vacuum, instead of paying 4.3 percent on the motor and wheels, plus 3.4 percent on the lithium-ion battery, the manufacturer could pay zero duties on the finished vacuum.
- Merchandise Processing Fee (MFP) bundling — When goods are imported into the U.S., each import incurs an MPF, currently (2022) rated at 0.3464 percent of the cargo’s value. The minimum is $27.75, and it’s capped at $538.40. In an FTZ, MPFs can be bundled into weekly fees at a maximum rate of $538.40. For companies with high-value or high-volume shipments, this can result in massive savings.
FTZs having been helping savvy companies save money on duties, tariffs, merchandise processing fees (MPF), and more for nearly a century.
Setting Up an FTZ
With all these benefits, it can be difficult to understand why more companies aren’t filing for their existing facilities to be declared FTZs. However, once again, the process can be daunting for those attempting it manually and without expert guidance. Setting up an FTZ requires submitting complex application paperwork to the U.S. Department of Commerce International Trade Administration, paying a $3,200 fee, and even publishing a notice in a local newspaper. Not to mention, prior to all of this, companies first need to determine if the benefits cover the cost for their unique situation.
Rather than giving up before ever getting started, companies are turning to FTZ providers who can perform cost/benefit analyses, submit paperwork, and manage the entire application process. By partnering with FTZ experts, companies gain access to a wealth of experience which streamlines the application process and maximizes the benefits.
Managing an FTZ
Setting up an FTZ may be a major hurdle, but it’s not the only one. Ongoing management of FTZs requires meticulous recordkeeping. FTZ operators must keep records of all items currently in the zone as well as all items transferring from the zone. These records must specify by zone lot number or unique identifier: FTZ operators must keep records of all items currently in the zone as well as all items transferring from the zone.
- Location of merchandise
- Zone status
- Cost or value of merchandise
- Beginning balance, cumulative receipts and removals, adjustments, and current balance on hand by date and quantity
- Destruction of merchandise
- Scrap, waste, and byproducts
When tracking inventory, the paperwork trail must be able to demonstrate that the products leaving the zone entered the zone in compliance with U.S. CBP authorized inventory methods. Failure to do so can jeopardize FTZ status and lead to regulatory action.
On top of this, FTZ operators are required to prepare annual reconciliation reports. These reports contain information regarding all merchandise on hand at the beginning of the year, transfers made throughout the year, inventory on hand at the end of the year, and more — and the reports need to be available at all times for spot checks and audits.
Without the right tools, the management needs of an FTZ can increase administrative hours and cut into margins. However, existing software tools make managing an FTZ considerably easier. Here are a few features to look for in FTZ management software:
- Integration with CBP’s ACE system — CBP’s ACE system is the means by which the trade community enters import and export data as well as interacts with CBP personnel. When looking for FTZ management software, it’s imperative to make sure that the software’s inventory control and record keeping system (ICRS) integrates with ACE. Otherwise, FTZ operators will be duplicating work and spending excess time on reporting. With the right solution, operators will extend the power of ACE with automated country code updates, HTSUS updates, Lacey Act APHIS declarations, and much more.
- Proactive notifications — FTZ software can send notifications and alerts regarding upcoming reports and CBP deadlines. The most innovative solutions will allow for user customization to send emails, texts, and reports to the appropriate personnel, ensuring that all parties are up to speed and ready for whatever’s next.
- Advanced built-in reporting — Having visibility over operations shouldn’t mean scrolling through endless spreadsheets. With built-in reporting features, FTZ software allows operators to quickly visualize the flow of inventory. Furthermore, this built-in reporting helps operators ensure audit-readiness at any time by storing documents and backing up all data.
Existing software tools make managing an FTZ considerably easier.
Old Tricks, New Methods
Sometimes, the best way forward isn’t blazing a new trail, but learning to travel well-worn paths in new ways. For nearly a century, FTZs have been a readily available way for U.S. companies to obtain massive savings and enhance supply-chain operations, but, at times, the path looked daunting. Today, companies can travel the path more easily than ever by partnering with FTZ software providers and experts to be on their way to finding a competitive advantage.
Brent Dawkins, Director, Product Marketing, QAD
Brent Dawkins is QAD’s director of Product Marketing with over 20 years of manufacturing and supply chain experience.