Legal Aspects of International Sales

Foreign-Trade Zones:Foreign-Trade Zones:Creating Profit thru SavingsCreating Profit thru Savings

Presented by:

Jim Chester Jim Chester J.D., LL.M, CHB, CCSJ.D., LL.M, CHB, CCS

Chair – International Business & Trade Practice Chair – International Business & Trade Practice

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Foreign-Trade Zones (FTZs)Foreign-Trade Zones (FTZs)

Areas located in the United States, Areas located in the United States, but designated by the federal but designated by the federal government as lying outside the government as lying outside the U.S. Customs territoryU.S. Customs territory

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Foreign-Trade Zones (FTZs)Foreign-Trade Zones (FTZs) Created by FTZ Act of 1934Created by FTZ Act of 1934 FTZs are in all 50 states, plus Puerto RicoFTZs are in all 50 states, plus Puerto Rico FTZ received $180 billion in merchandise - FTZ received $180 billion in merchandise -

87% into Subzones87% into Subzones Employment at zone sites is approx. Employment at zone sites is approx.

350,000350,000 Exports from FTZs = $18 billionExports from FTZs = $18 billion

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Foreign-Trade Zones (FTZs)Foreign-Trade Zones (FTZs)

Currently about 250 general Currently about 250 general purpose FTZs have been granted purpose FTZs have been granted Plus over 400 special purpose Plus over 400 special purpose

“Subzones”“Subzones”

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Types of Industries Using FTZsTypes of Industries Using FTZs AutomotiveAutomotive Oil RefiningOil Refining PharmaceuticalsPharmaceuticals ComputersComputers TelecommunicationsTelecommunications Other High-TechOther High-Tech

ChemicalsChemicals ShipbuildingShipbuilding ApparelApparel AerospaceAerospace MedicalMedical Other Consumer Other Consumer

ProductsProducts

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General Purpose FTZsGeneral Purpose FTZs

Granted to a public, non-profit entityGranted to a public, non-profit entity

Many possible users and usesMany possible users and uses

Must be within 60 miles (or 90 minutes Must be within 60 miles (or 90 minutes drive) of Customs Port of Entrydrive) of Customs Port of Entry

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Dallas Area FTZsDallas Area FTZs General Purpose FTZsGeneral Purpose FTZs

D/FW Airport (39)D/FW Airport (39)

Midlothian (113)Midlothian (113)

Dallas (168)Dallas (168)

Alliance Airport (196)Alliance Airport (196)

Durant, OK (227)Durant, OK (227)

Waco (246)Waco (246)

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FTZ SubzonesFTZ Subzones

Cannot be accommodated within existing Cannot be accommodated within existing General Purpose FTZGeneral Purpose FTZ

Attached to General Purpose FTZAttached to General Purpose FTZ

Typically designated for a single company’s Typically designated for a single company’s operations operations

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Dallas Area FTZsDallas Area FTZs

SubzonesSubzones

General Motors (Arlington)General Motors (Arlington)

Sanden International (Wylie)Sanden International (Wylie)

Pier 1 Imports (Mansfield)Pier 1 Imports (Mansfield)

Fossil Partners (Richardson)Fossil Partners (Richardson)

Zale Corp. (Irving)Zale Corp. (Irving)

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FTZ Benefits - Domestic EconomyFTZ Benefits - Domestic Economy

Job creation/preservationJob creation/preservation Economic GrowthEconomic Growth

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FTZ Benefits - Private IndustryFTZ Benefits - Private Industry No duties are owed until goods are No duties are owed until goods are

shipped from FTZ into Customs territoryshipped from FTZ into Customs territory

No duties incurred for goods exportedNo duties incurred for goods exported

Duties reduced or eliminated on Duties reduced or eliminated on materials subject to defect, damage, materials subject to defect, damage, obsolescence, waste and scrapobsolescence, waste and scrap

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Choice of paying duty on raw materials Choice of paying duty on raw materials or on final products, whichever is loweror on final products, whichever is lower

Can hold quota merchandise in FTZ Can hold quota merchandise in FTZ until window opens (limited)until window opens (limited)

No hassle of Customs clearance and No hassle of Customs clearance and duty drawbackduty drawback

Materials consumed in FTZs not subject Materials consumed in FTZs not subject to dutiesto duties

FTZ Benefits - Private IndustryFTZ Benefits - Private Industry

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Most FTZ merchandise exempt from Most FTZ merchandise exempt from local and state local and state ad valoremad valorem taxes taxes

Can transfer goods to other zones Can transfer goods to other zones without paying dutywithout paying duty

Ability to take advantage of special Ability to take advantage of special Customs programs (e.g., weekly entry Customs programs (e.g., weekly entry procedure)procedure)

FTZ Benefits - Private IndustryFTZ Benefits - Private Industry

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FTZ Administration: FTZ BoardFTZ Administration: FTZ Board

Agency within the Department of CommerceAgency within the Department of Commerce Comprised of the Secretary of Commerce Comprised of the Secretary of Commerce

and Secretary of the Treasury.and Secretary of the Treasury. Day-to-day administration by Executive Day-to-day administration by Executive

SecretarySecretary Issues and administers FTZ grants pursuant Issues and administers FTZ grants pursuant

to its regulations (15 CFR Part 400)to its regulations (15 CFR Part 400)

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FTZ Administration: CustomsFTZ Administration: Customs Customs & Border Protection (CBP/Customs) Customs & Border Protection (CBP/Customs) Part of Department of Homeland SecurityPart of Department of Homeland Security Local representative of FTZ BoardLocal representative of FTZ Board Supervise FTZ operational activities pursuant to Supervise FTZ operational activities pursuant to

Customs’ FTZ regulations (19 CFR Part 146)Customs’ FTZ regulations (19 CFR Part 146)

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Establishing an FTZEstablishing an FTZ

Application to FTZ BoardApplication to FTZ BoardMust show “public benefit” from FTZMust show “public benefit” from FTZApproval takes approximately 1 yearApproval takes approximately 1 year““Grantee” receives the grant of authority Grantee” receives the grant of authority

to establish the FTZto establish the FTZGrant defines FTZ scope and activityGrant defines FTZ scope and activity

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Establishing an FTZEstablishing an FTZ Activation by U.S. CustomsActivation by U.S. Customs

““Operator” activates the zone by Operator” activates the zone by getting Customs approval of getting Customs approval of proceduresprocedures

Operator must post a special “FTZ Operator must post a special “FTZ Operating Bond”Operating Bond”in addition to the import bond, if in addition to the import bond, if

applicableapplicable

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FTZ Operations: TerminologyFTZ Operations: Terminology EntryEntry

Customs EntryCustoms EntryGoods are imported and duties are assessedGoods are imported and duties are assessed

Admission Admission Goods brought onto FTZGoods brought onto FTZNo Customs entryNo Customs entry

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FTZ Operations: AdmissionsFTZ Operations: Admissions Customs Form 214Customs Form 214

Declare status of the goodsDeclare status of the goodsDomesticDomesticPrivileged ForeignPrivileged ForeignNon-Privileged Foreign Non-Privileged Foreign

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FTZ Operations:FTZ Operations:Domestic GoodsDomestic Goods

U.S. origin goods, or goods that have U.S. origin goods, or goods that have already been entered into U.S. already been entered into U.S. Customs territory and duty (if any) has Customs territory and duty (if any) has been paid.been paid.

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FTZ Operations:FTZ Operations:Privileged Foreign (PF) GoodsPrivileged Foreign (PF) Goods

Locks-in the duty on the raw materials Locks-in the duty on the raw materials on the date they are admitted into the on the date they are admitted into the zonezone

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FTZ Operations:FTZ Operations:PF Duty Savings ExamplePF Duty Savings Example

ABC, Inc., admits three components into an ABC, Inc., admits three components into an FTZFTZ

If duties were assessed on the components, If duties were assessed on the components, they would total $200they would total $200

Once the components are assembled into the Once the components are assembled into the final product, they are imported into the U.S.final product, they are imported into the U.S.

Duties on the final product total $1,000Duties on the final product total $1,000 ABC, Inc., pay only $200 in dutiesABC, Inc., pay only $200 in duties

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FTZ Operations: Non Privileged FTZ Operations: Non Privileged Foreign (NPF) GoodsForeign (NPF) Goods

Duty will be assessed on the finished Duty will be assessed on the finished products as a whole, not on the raw products as a whole, not on the raw materials materials Inverted tariffInverted tariff

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FTZ Operations:FTZ Operations:Inverted Tariff (NPF) ExampleInverted Tariff (NPF) Example

ABC, Inc., admits three components into an ABC, Inc., admits three components into an FTZ FTZ

If duties were assessed on the components, If duties were assessed on the components, they would total $1,000they would total $1,000

Once the components are assembled into the Once the components are assembled into the final product, they are imported into the U.S.final product, they are imported into the U.S.

The final product qualifies for duty-free entryThe final product qualifies for duty-free entry

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FTZ Operations:FTZ Operations:Zone Restricted GoodsZone Restricted Goods

Goods admitted onto the FTZ for Goods admitted onto the FTZ for use only in the FTZuse only in the FTZ

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Activity in the FTZActivity in the FTZ MixingMixing AssemblyAssembly DisplayDisplay StorageStorage TestingTesting RepairingRepairing ProcessingProcessing

SalvageSalvage LabelingLabeling DestructionDestruction RepackagingRepackaging CleaningCleaning SamplingSampling Manufacturing (1949)Manufacturing (1949) RefiningRefining

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Activities Prohibited in FTZsActivities Prohibited in FTZs

Retail TradeRetail Trade Living in the FTZLiving in the FTZ Any other activities prohibited by Any other activities prohibited by

US lawUS law

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Cost of FTZsCost of FTZs General Purpose ZonesGeneral Purpose Zones

Little Up-front costLittle Up-front cost Ongoing (mostly out-source)Ongoing (mostly out-source)

E.g., Document and storage costs of FTZ operator E.g., Document and storage costs of FTZ operator

SubzonesSubzones Up-front cost (application, activation, software)Up-front cost (application, activation, software)

$100k - $200k (some savings if more than one zone at a $100k - $200k (some savings if more than one zone at a time)time)

Ongoing -- depends on in-house v. outsourceOngoing -- depends on in-house v. outsource

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Questions?Questions?

Chester/Associates, PLLCChester/Associates, PLLC6060 NCX< Suite 5606060 NCX< Suite 560Dallas, Texas 75206Dallas, Texas 75206

www.tradelawfirm.comwww.tradelawfirm.com

Jim ChesterJim ChesterEmail [email protected]

214.800.2845