Bonded Processes. Inbond Transportation/Bonded Warehouse/Foreign Trade Zone. Gateway International Foreign Trade Zone

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1 Bonded Processes Inbond Transportation/Bonded Warehouse/Foreign Trade Zone Gateway International Foreign Trade Zone

2 What is Bonded Freight Freight that has not cleared on a consumption entry is considered Bonded freight. Although in the possession of a non-government entity, it is considered to be in customs custody while under bond. Only duly authorized parties have access to the freight while it is in bonded custody.

3 Inbond Entry I.T. I.T. -- In-Transit bond Freight moves from one port to another before an entry is filed Cancelled by second entry Includes other IT IE or consumption (duty-paid entry) Carrier can only release upon proof of new entry

4 Inbond Entry I.E. I.E. -- Immediate Export Freight moves within the same port and is exported immediately. Watch for common district with separate port (ie Houston 5301 or 5309) Bonded carrier must prove export occurred

5 Inbond Entry T & E T & E -- Transportation and Export Freight moves to another port for export Truck to Canada or Mexico for export Move from one sea port to another for export Move from airport to seaport for export Bonded carrier must prove export occurred

6 How Does Bonded Entry Work? Filed by bonded carrier or customs broker Can be manual or electronic Freight moves under carriers approved customs bond and is considered to be in customs custody Closing out the bond Freight on I.T. can be cleared (consumption entry) Put in Bonded Warehouse Replaced by another I.T. for further movement Fines and penalties for failure to maintain terms of bonded freight Transportation must be completed within 30 days

7 Bonded Warehouse Entry Some processes can be performed such as packaging but no manufacturing Some processes may require manipulation permit from customs Five-year limit from date of Import (very important) Can exit the warehouse via inbond entry such as IT, IE, or T&E or consumption entry Can be transferred to other bonded warehouse

8 Bonded Warehouse Entered into custody via a type 21 (warehouse entry) OR 22 (re-warehouse entry) Harbor Maintenance Fees (HMF) and Merchandise Processing Fees (MPF) are paid upon entry but duty is deferred until withdrawal or never paid if exported (except Canada and Mexico)

9 Bonded Warehouse (cont.) Can be either a public warehouse or a private one Can be external protected area or indoor Must have limited access Must be secured by appropriate means Cannot contain non-bonded freight

10 Foreign Trade Zone Different kinds of activities can be performed with proper approval Manufacturing Processes Labeling Processes Treated as foreign soil for customs duty purposes Can leave via inbond or bonded warehouse entry or consumption entry Can be transferred to a bonded warehouse or other FTZ

11 Foreign Trade Zone Privileged Foreign Status - category of foreign status merchandise (See 19 CFR ). Such merchandise maintains its status based on its condition when it was admitted to the zone. Thus, when the merchandise is shipped from the zone and entered for consumption by CBP, it is evaluated based on the time-of-admission condition even though it may have undergone a transformation in the zone. Non-Privileged Foreign Status category of foreign status merchandise (See 19 CFR ). Such merchandise is evaluated based on its condition at the time it is shipped from the zone and entered for consumption by CBP.

12 Comparing: Bonded Warehouse to FTZ Bonded Warehouse A bonded warehouse is within U.S. Customs territory; a Customs Entry must be filed to enter goods into the warehouse. Only foreign merchandise may be placed in a bonded warehouse. Each entry must be covered by either a single entry, term bond or general term bond. Duties are due prior to release from bonded warehouses. Manufacturing is prohibited. Immediately. Not to exceed 5 years. Only cleaning, repackaging and sorting may take place and under Customs supervision. Apply fully. Applies to all foreign merchandise. FTZ A zone is not considered within Customs territory. Customs entry is not required until removed from a zone. All merchandise, whether domestic or foreign, may be placed in a zone. No bond is required for merchandise in a zone. Duties are due only upon entry into U.S. territory. Manufacturing is permitted with duty payable at the time the goods leave the Zone for U.S. consumption. Duty is payable on either the imported components or the finished product, whichever carries a lower rate. No duty on waste material or on value added in manufacturing, such as labor, overhead and profit. No duty paid on goods exported from a zone. Tariff rate and value may be determined either at the time of admission into a zone or when goods leave a zone, at your discretion. Unlimited. Sort, destroy, clean, grade, mix with foreign or domestic goods, label, assemble, manufacture, exhibit, sell, repack. Only applicable to goods actually removed from a zone for U.S. consumption. Application of Federal regulations depends on products and agency.

13 Why use the Bonded Process? There are a variety of reasons to use these processes. In some cases, the freight was never intended to stay in the United States, it is simply moving through US territory to Mexico or Canada or changing from one form of transportation to another and continuing to another country. Quota goods may be put in a bonded warehouse when the quota is full An importer may store freight waiting for an anticipated lower duty rate (one year to next) Parts may be brought in to complete a manufacturing process or to be packaged with domestic product and shipped to another location.

14 NAFTA Connection Consult your broker about special processes where NAFTA exports are concerned. Duty Deferral (a NAFTA concept) works differently than other exports and can be costly

15 Understanding Foreign-Trade Zones

16 What is a Foreign Trade Zone? A FTZ is: A designated location in the U.S. that is legally outside of U.S. customs territory Where companies can use special procedures that help encourage U.S. manufacturing and other value added activities by allowing delayed or reduced duty payments on foreign merchandise, as well as other savings The usual Custom entry process and payments of duties are not required on the foreign merchandise unless and until it enters US Customs territory for domestic consumption

17 Where are the FTZs? All 50 States + Puerto Rico 259 General Purpose Zones 471 Subzones 2,700 Firms 320,000 US Workers

18 Permissible Activities in a FTZ Merchandise admitted to a zone may be: Assembled* Processed Graded Tested Sampled Relabeled Stored Salvaged Manufactured* Repackaged Destroyed Mixed Manipulated Distributed Broken up Exhibited Sorted *The user must receive prior approval from the FTZ Board for production

19 FTZ Benefits Duty Elimination No duty is paid on foreign merchandise destroyed in the zone No duty is paid on foreign merchandise that is re-exported Duty Deferral Duties are not paid on foreign merchandise while in inventory until being withdrawn for U.S. domestic consumption. Duty Inversion/Relief from Inverted Tariff Through manufacture higher duty components can assume the identity of the finished product, for duty calculation purposes, thereby reducing the amount paid upon withdrawal for U.S. domestic consumption.

20 FTZ Benefits Expedited Procedures Companies using Zone procedures may have access to streamlined customs procedures (e.g. direct delivery ) Weekly Entry Unique ability to file a single Customs Entry for an entire week s outbound shipments (MPF savings) Ex: 1,000 customs entries $485 max = $485, customs $485 max = 25,220 Minimum Annual Savings = $459,780 No Time Limit There is no time limit placed on goods stored in the FTZ (as compared to a Bonded Warehouse) and goods can be released immediately unlike bonded storage Other Benefits Foreign goods and domestic goods held for export are exempt from state/local inventory taxes. FTZ stats may also make a site eligible for state/local benefits which are unrelated to the FTZ Act.

21 FTZ Uses Receiving / Shipping Storage Processing & Assembly/Manufacturing 80% 20%

22 FTZ Uses Reverse Logistics / Returns Management Kitting & Assembly of Gift Sets Retail Display Pallet builds Crude Oil Importing and Refining Labeling / Relabeling 80% Packing / Repacking Fuel Farms for International Flights 20%

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26 For Businesses The FTZ program helps American companies improve their competitive position versus their counterparts abroad. The FTZ program allows U.S.-based companies to defer, reduce or even eliminate Customs duties on products admitted to the zone. Deferral of Duties Customs duties are paid only when and if merchandise is transferred into U.S. Customs and Border Protection territory. This benefit equates to a cash flow savings that allows companies to keep critical funds accessible for their operating needs while the merchandise remains in the zone. There is no time limit on the length of time that merchandise can remain in a zone. Reduction of Duties In an FTZ, with the permission of the Foreign-Trade Zones Board, users are allowed to elect a zone status on merchandise admitted to the zone. This zone status determines the duty rate that will be applied to foreign merchandise if it is eventually entered into U.S. commerce from the FTZ. This process allows users to elect the lower duty rate of that applicable to either the foreign inputs or the finished product manufactured in the zone. If the rate on the foreign inputs admitted to the zone is higher than the rate applied to the finished product, the FTZ user may choose the finished product rate, thereby reducing the amount of duty owed. Elimination of Duties No duties are paid on merchandise exported from a FTZ. Therefore, duty is eliminated on foreign merchandise admitted to the zone but eventually exported from the FTZ. Generally, duties are also eliminated for merchandise that is scrapped, wasted, destroyed or consumed in a zone. Elimination of Drawback In some instances, duties previously paid on exported merchandise may be refunded through a process called drawback. The drawback law has become increasingly complex and expensive to administer. Through the use of a FTZ, the need for drawback may be eliminated allowing these funds to remain in the operating capital of the company. Labor, Overhead and Profit In calculating the dutiable value on foreign merchandise removed from a zone, zone users are authorized to exclude zone costs of processing or fabrication, general expenses and profit. Therefore, duties are not owed on labor, overhead and profit attributed to production in a FTZ. Taxes By federal statute, tangible personal property imported from outside the U.S. and held in a zone, as well as that produced in the U.S. and held in a zone for exportation, are not subject to State and local ad valorem taxes. Quotas U.S. quota restrictions do not apply to merchandise admitted to zones, although quotas will apply if and when the merchandise is subsequently entered into U.S. commerce. Merchandise subject to quota, with the permission of the Foreign-Trade Zones Board, may be substantially

27 transformed in a FTZ to a non-quota article that may then be entered into U.S. Customs and Border Protection territory, free of quota restrictions. Quota merchandise may be stored in a FTZ so that when the quota opens, the merchandise may be immediately shipped into U.S. Customs and Border Protection territory. Zone-to-Zone Transfers An increasing number of firms are making use of the ability to transfer merchandise from one zone to another. Because the merchandise is transported in-bond, duty may be deferred until the product is removed from the final zone for entry into the U.S. Customs and Border Protection territory. Other Additional benefits, sometimes referred to as intangible benefits, have begun to play a greater role in a company s evaluation of the FTZ program. Many companies in FTZs find that their inventory control systems run more efficiently, increasing their competitiveness. FTZ users also find that in meeting their FTZ reporting responsibilities to the U.S. government, they are eligible to take advantage of special Customs procedures such as direct delivery and weekly entry. These procedures expedite the movement of cargo, thereby supporting just-in-time inventory methodologies. For the Economy In an expanding global economy, there is increased competition among nations for jobs, industry and capital. The FTZ program was designed to promote American competitiveness by encouraging companies to maintain and expand their operations in the United States. The FTZ program encourages U.S.-based operations by removing certain disincentives associated with manufacturing in the United States. The duty on a product manufactured abroad and imported into the U.S. is paid at the rate of the finished product rather than that of the individual parts, materials or components of the product. A U.S.-based company finds itself at a disadvantage vis-à-vis its foreign competitor when it must pay the higher rate on parts, materials or components imported for use in the manufacturing process. The FTZ program corrects this imbalance by treating a product made in a U.S. foreign-trade zone, for purposes of tariff assessment, as if it were produced abroad.

28 International Trade Foreign-Trade Zones Program The Foreign-Trade Zones (FTZs) Program was authorized by Congress in 1934 (FTZ Act - 19 USC 81a-81u) and is used to help encourage value-added activity at U.S. facilities in competition with foreign alternatives by allowing delayed or reduced duty payments on foreign merchandise, as well as other savings. Foreign-Trade Zone No.153, established in San Diego, California on October 19, 1988 (pursuant to the Foreign-Trade Zones Board Order #394 and published in 53 Federal Register 41616), is administered by the City of San Diego as the Zone Grantee for the San Diego FTZ program. Foreign-Trade Zones Program Fact Sheet (PDF) Benefits of the Foreign-Trade Zones Program In the global marketplace, many companies consider moving to foreign facilities to reduce costs. The benefits of the Foreign-Trade Zones Program may be the competitive advantage that companies need to keep their manufacturing or distribution operations in the United States. These include: Duty Deferral - Delayed payment of duties on goods that enter the U.S. market Duty Exemption - No duties on imported goods that are later re-exported Inverted Tariff - Manufacturing-specific benefits - can include reduction of duties if a lower tariff rate applies to the finished product leaving the zone than the tariff rates that would have applied on the foreign components. Logistical Benefits - Reductions in merchandise processing fees due to a single customs "entry" (pay one fee) per week rather than making multiple entries during the course of a week Other Benefits - Elimination of duties on waste, scrap and rejected or defective parts Other Advantages Enhancing Competitiveness - By reducing costs, FTZs level the playing field and improve U.S. competitiveness. FTZs can help businesses reduce production, transaction, and logisticsrelated costs by lowering effective duty rates, allowing special entry procedures, and encouraging production closer to market. Reducing costs through FTZ use can lead to more competitive U.S. operations, thereby helping to maintain U.S. activity and jobs. Creating/Retaining Jobs and Encouraging Investment - By helping local employers remain competitive, zones can contribute to maintaining or boosting employment opportunities. Also, lower FTZ-based production costs encourage increased investment in U.S. facilities. About the Foreign-Trade Zones Program Retail sales are prohibited within a zone site The FTZ Act prohibits residence within a zone site

29 With the exception of formal customs entry procedures, all other local, state and federal laws and regulations apply (including labor and immigration laws) FTZs remain under the direct supervision of U.S. Customs and Border Protection FTZs are within the territory of the U.S. and merchandise stored in a FTZ is considered imported into the U.S. but exempt from U.S. Customs' tariffs. How to participate in the Foreign-Trade Zones Program A company begins the application process by contacting the Grantee (City of San Diego). After site approval by the FTZ Board and completion of the U.S. Customs and Border Protection application process which includes background investigations, the company can start FTZ operations upon activation by U.S. Customs. Types of Companies Using the Foreign-Trade Zones Program Large and small companies alike use the Foreign-Trade Zones Program: 70 percent of users are small businesses. These companies defer, reduce or eliminate U.S. Customs duties and fees. Such companies include importers, manufacturers, distributors, assemblers of products, and exporters of imported merchandise and/or products containing imported merchandise. Small companies without warehouse facilities can contract with an approved Foreign Trade Zone No. 153 third party logistics company. A company that does not import foreign products will not benefit from participating in the Foreign-Trade Zones Program. Where are FTZ companies located? A company can apply for their facility to receive FTZ zone site designation at any location within the FTZ No. 153 Service Area. The Service Area includes all 18 cities within San Diego County and the south west corner of Riverside County. Map of FTZ No. 153 Service Area (PDF) Grantee Contact Adrienne Turner, Foreign-Trade Zones Program Administrator, City of San Diego, Economic Development Department,1200 Third Ave., Suite 1400, San Diego, CA (619) or aturner@sandiego.gov More Information Other sources of information for the Foreign-Trade Zones Program include: U.S. Department of Commerce, Foreign-Trade Zones Board National Association of Foreign-Trade Zones

30 Summary: A Foreign-Trade Zone (FTZ) is a secure, access-restricted, Customs & Border Protection privileged area in or near a U.S. port of entry where merchandise both foreign and domestic may be admitted, stored, exhibited, manipulated, temporarily removed, manufactured, or destroyed duty-free! Duties, certain user fees and taxes are only assessed on products that are transferred out of the FTZ and entered into the United States for consumption. Products that are transferred out of the FTZ and exported abroad are exempt from any duty, user fees or taxes. Benefits: 1. Duty Deferral Duties are only paid when imported merchandise is entered into the U.S. Customs territory. 2. Duty Elimination There are no duties paid on merchandise that is exported from a FTZ, transferred to another zone or destroyed. This eliminates the need to manage costly and time-consuming Duty Drawback programs. 3. Weekly Entry Customs allow for a weekly entry processing, which benefits importers because the Merchandise Processing Fees are capped at $485 on a weekly basis, versus per shipment basis. 4. HMF Deferral Harbor Maintenance Fee is paid quarterly and in a single payment. 5. Enhanced Security By using a FTZ, the internal controls requirements of section 404 of the Sarbanes-Oxley Act are met. Participants in the Customs Trade Partnership Against Terrorism (C-TPAT) program are eligible for additional benefits provided by Customs. 6. Expedited Logistics relocating CHB services to your facility and expedite the delivery to your facility without customs clearance. Potential savings is up to two days. 7. Ease of Paperwork through automation of the FTZ, the paperwork submitted for receiving and the weekly entry program is greatly diminished with all parties and the processes for approval are expedited dramatically. 8. Manipulation all manipulations are authorized and completed without physical Customs supervision. Goods are allowed to enter an FTZ and have the following manipulations: clean, repair, fix, improve in value, amend, exhibit, pick & pack, and many other functions.

31 FTZ VS. Bonded Warehouse Comparison Formal Customs Entry Customs Bond Payment of Duty State & Local Inventory Tax Permitted Activity Bonded Warehouse A bonded warehouse is within U.S. Customs territory. Thus, Customs entry must be filed before goods enter a warehouse. Required for all warehouse entries. Merchandise is dutiable at the rate in effect at time of withdrawal. Tax is levied on January 1st of each year on all merchandise. Merchandise may only be cleaned, repackaged & sorted under Customs supervision. Foreign-Trade Zone [FTZ] A Foreign Trade Zone is not considered within U.S. Customs territory. Thus, customs entry is filed just prior to removal of goods from the Zone and only for amount of goods to be removed. No bond required! All admissions to a Zone are covered under FTZ operators Customs Bond. No additional bond is required. Duties are due only upon entry for U.S. consumption. The rate can be that which is in effect at time of admission or withdrawal. Foreign merchandise is not taxed. Domestic merchandise to be exported is not taxed. Merchandise may be stored, inspected, repackaged, repaired, tested, cleaned, sampled, displayed, manipulated, mixed, processed, assembled, salvaged, destroyed, or reexported.

32 Bonded Warehouse vs FTZ Waste & Damaged Goods Goods with Documentation Labeling Defects Domestic Merchandise Drawback of Customs Duties or Federal Excise Tax Duty owed on entire shipment entering a bonded warehouse. May not be admitted. May not be admitted. Does not apply. No duty paid on waste, damaged or otherwise non-usable merchandise that is destroyed in the Zone. May be admitted and problems corrected. May be admitted without Customs Permit and comingled with foreign merchandise. May apply to goods admitted to the Zone if approved by Customs. Storage Period Not to exceed five years. Unlimited

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