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Foreign Trade Zones, Bonded Warehouses and Free Trade Agreements: Lowering Your “Landed Costs”

FTZ The Port of Melbourne has announced major investments to expand terminal operations at Webb Dock East.
Foreign Trade Zones, Free Trade Agreements, Global Trade Daily, International Trade

Foreign Trade Zones, Bonded Warehouses and Free Trade Agreements: Lowering Your “Landed Costs”

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Foreign Trade Zones

FTZ’s have been an excellent source for lowering “landed costs” in face of increasing freight costs and long delays in the global supply chain, over the last two years due to the Pandemic and that impact which is now lasting well into 2022.

The primary reasons for considering FTZ’s in your global supply chain are:
– Ease of moving freight to and from the borders between trading           countries
– Reduction or elimination of duties, taxes and other import/export       costs
– Financial incentives on a local level
– Lowers the “landed costs” in your import/export business model
– Provides financial incentives that translates to lower operating             costs in your import and export transactions

There are other advantages that may be unique to geographic location and industry verticals.

The automotive industry which is dominated by foreign competition has been one of the major industry verticals to capitalize on FTZ’s here in the United States, as well as many countries abroad.

The basic FTZ model allows a company to manufacture or assemble finished products in a country abroad utilizing local labor for the specific purpose of reducing landed cost.

For example, a German car manufacturer sells a car in the U.S. for $50,000. Duties and taxes can add another $1500 to the landed cost.

Through the utilization of a FTZ strategically placed here in the United States. That German car manufacturer could import parts from Germany and utilize U.S labor to work in their U.S. factory.

Upon entry into the U.S. FTZ, duties and taxes on the parts are deferred. Upon assembly completion, the car leaves the FTZ for ultimate sale and that is when the deferred portion of the tax and duties are paid. If labor costs make up 50% of the $50,000 value, … only $25,000 is applicable to duty and tax.

This model (simplified by design for this article) reduces the “landed cost” by approximately $750.00 per vehicle. Compare this against 200,000 units and the savings could amount to over $150,000,000.00 annually.

There are numerous other benefits to FTZ’s that would need to be considered in any business model assessment.

In the above FTZ model, the utilization is assembly and manufacturing. More recent options allow high volume importers to have their goods pass through FTZ’s as they transit from the gateway through to their warehouses and distribution facilities.

This step allows a “weekly manifest clearance” which reduces entry fees and Merchandise Processing Fees (MPF) creating a significant financial savings impacting landed cost.

Consulting companies can help companies assess the benefits of an FTZ and weigh them against the costs and challenges to make it happen.

Bonded Warehouses

Another option, similar to but different from a FTZ is the “Bonded Warehouse”. Bonded warehouses are a supply chain option which allows importers and exporters to temporarily hold freight where the import is deferred along with duties, taxes and other import costs, until such time the goods enter the country or are exported from that country.

For example, let’s take a Cleveland based electronics distributor importing consumer music products from Asia, totaling over 200m annually with an average duty rate of 4.5 %. Approximately 20% of the products are then re-exported to Canada, the Caribbean and Latin America.

Under their current supply chain model, they utilize CBP’s drawback program to obtain up to 99% of the duties and taxes for those exports, totaling 1.8m annually. While drawback is a great program, it can be arduous and costly to manage and takes time to receive the refund of duties.

As an alternative, the distributor can apply to CBP to make their warehousing facility a bonded location. This will defer the duties and taxes to goods entering the warehouse to the point in time they are extracted from the facility.

Additionally, the 20% of the goods that are re-exported come in and leave the USA in bond and no duties or taxes are obligated to be paid providing significant savings in supply chain costs.

Bonded warehouses provide additional benefits, but the operations permitted in a bonded warehouse are limited so sorting, weighing and repacking. If the goods enter the warehouse as a widget, they must leave as a widget.

For Bonded versus FTZ … four steps must be completed to decide which may present the best option to the principal company.

These four steps allow a detailed assessment of the options, the benefits and challenges, a ROI, an operational overview … followed by implementation.

The process can take from 60-180 Days and will have costs involved in all the steps that are typically outweighed from the residual and ongoing financial benefits.

Free Trade Agreements (FTA’s)

FTA’s offer numerous advantages to both importers and exporters. Currently the U.S. participates in over thirteen agreements with numerous ones pending. The most well-known FTA is USMCA (Previously called NAFTA), which has consistently provided overwhelming ROI to Canada, Mexico and the United States.

When the three participating countries … USA, Canada and Mexico trade with one another there is a serious reduction of duties and taxes on qualified goods and merchandise.

The most advantageous benefit in the FTA’s is the free movement of goods between participating countries where duties and taxes are reduced or eliminated.

“Near Sourcing” is the recent phenomenon in global trade where trade is coming back to the USA or our USMCA partners. FTA’s provide a more level playing field, particularly against lower Asian based sourcing models.

Lower freight costs, reduced lead times and elimination of duties and taxes can very easily make manufacturing in Mexico or in a USA based FTZ … a much more competitive option, thereby leveraging critical logistics business model options.

Mexico enjoys a “Maquiladora Program” which greatly enhances USMCA benefits where manufacturing and assembly is done in Mexico for goods which will eventually be shipped to the USA.

Other countries such as but not limited to:

Australia                                                     Bahrain

Canada                                                        Chile
Colombia                                                   Costa Rica
Dominican  Republic                           El Salvador
Guatemala                                                Honduras
Israel                                                            Jordan
Korea                                                           Mexico
Morocco                                                    Nicaragua
Oman                                                          Panama
Peru                                                             Singapore

When searching out trading partners as sourcing or selling options … Free Trade Agreement Countries can provide competitive advantage to the buyers and sellers.

As political problems increase with China and disruptions in trade happen now with what we have with Russia … it makes the case for American Companies to buy and sell from trading partners where there are more favorable and sustainable working environments … and that can be leveraged to each party’s advantage.

FTZs
Archives, Foreign Trade Zones, Global Logistics, Global Trade Daily

Demystifying Foreign-Trade Zones: Tackling 3 Myths to Leverage FTZs in 2022

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Bigfoot, the Boogie Man, the Loch Ness Monster, and… Foreign-Trade Zones? Despite the overwhelming advantages offered by U.S. Foreign-Trade Zones (FTZs), there are still many misconceptions — and sometimes a little fear — surrounding the program. Much like Bigfoot, the reality of FTZs is far less scary.

To better understand FTZs, let’s get back to the basics. Foreign-trade zones, also referred to internationally as “free-trade zones” (and formerly named “free ports”), are areas where goods may be received, packaged, manipulated, manufactured, processed, and re-exported without the intervention of the customs authorities. These zones are designated sites authorized by the U.S. FTZ Board. A site that has been granted zone status must be approved for FTZ activation by the U.S. Customs and Border Protection (CBP) to receive FTZ benefits. While FTZs are considered to be outside CBP territory, foreign-trade zones still fall under the supervision of CBP.

These guidelines and procedures allow domestic activity involving foreign items to take place prior to formal customs entry. As a result, businesses — typically manufacturers and distributors — that leverage these zones drastically reduce or eliminate duty costs, encourage U.S. trade, and improve supply chain productivity.

FTZs have been in existence since 1934, and despite the fact that the program offers distribution and manufacturing companies tremendous reductions in duties, customs fees, and even logistics costs, FTZs still seem to be a misunderstood or even unrecognized trade program. How prevalent are FTZs in the U.S.? Who uses them? Are they still a viable solution?

According to the 2020 FTZ Report to the U.S. Congress, there were 195 active FTZs across all 50 states and Puerto Rico, and 3,400 companies taking part in the program. Last year also saw $625 billion in shipments made through FTZs, despite the challenges the global supply chain faced in 2020.

It’s understandable for CSCOs and business leaders to have concerns when introducing a new trade program. Some companies may be dragging their feet due to the current strain on the supply chain, and others may believe common FTZ misconceptions. However, companies that are taking advantage of FTZs are realizing impressive savings, and in many cases, obtaining relief from a number of supply chain issues. It’s time to debunk some common myths to demystify FTZs, explore the benefits of the program, and learn how to leverage FTZs in an increasingly competitive world. Let’s get started.

Myth #1: “My entire company and supply chain will be disrupted if I start using an FTZ.”

Over the past 20 years, the FTZ program has changed significantly. These changes make it far easier to establish and operate an FTZ.  In fact, if an FTZ is implemented by a knowledgeable advisor, there should be little change to a company’s daily processes and procedures, including logistics.

With the right FTZ inventory and record-keeping system in place, the only changes a company will notice will be placed on the designed FTZ administrator. Today’s FTZ solution providers establish and manage the entire FTZ program and its inventory. Therefore, there is also no longer a need to physically separate foreign and domestic inventory between FTZ and non-FTZ areas within the facility.

Essentially, your supply chain will look and operate the same tomorrow in a foreign-trade zone as it did yesterday, with two notable exceptions. Firstly, the FTZ program can speed up your supply chain so that you receive foreign shipments quicker; and secondly, after implementing an FTZ, you will have access to all the benefits — which brings us to myth #2.

Myth #2: “Zones only benefit companies that have long inventory turns, or re-export. Our company turns inventory quickly and has limited exports, so the FTZ program will not benefit us.”

It is well-known that FTZs defer duty payment on merchandise brought into a zone and that duties are paid only when the goods enter into U.S. commerce. This holds a lot of value and can lead to additional cash flow, but that isn’t the only benefit to using an FTZ. Other benefits include:

Relief from inverted tariffs: There are many cases where a component or raw material is subject to a higher duty rate than the finished product. An FTZ allows the manufacturer to pay duty at the manufactured item rate, rather than the higher component rate. This helps U.S.-based producers serve the domestic market on a level playing field versus importers of the same finished product.

Duty exemption from re-exports: This one is pretty simple and a huge advantage for FTZ users: there are no duties on or quota charges on re-exports. Therefore, if you were to export goods to another country, they would generally be exempt from duties. Generally, with an FTZ, the only time you have to pay is when the item enters U.S. markets.

Savings with weekly entries: Under standard importing procedures, companies have to pay a Merchandise Processing Fee (MPF) for every Customs entry. As of October 1st, 2021, the MPF is capped at a maximum of $538.40 per entry. Under Weekly Entry procedures, zone users can group all imports within a week into a single customs entry and pay a single MPF. This can yield substantial cost savings and reduce processing time and labor. For instance, a company that has 2,500 Customs entries a year would pay $1,346,000, assuming each entry hit the cap. If the company utilized Weekly Entries, 2,400 entries would be reduced to only 52. This offers savings of $1,318,003 just on MPFs.

No duty on waste, scrap, and yield loss: Without a zone, an importer pays the Customs duty owed as material is brought into the U.S. In a zone, no duty is paid on irrecoverable yield loss, or merchandise that is scrapped or destroyed. This can lead to tremendous benefits with even a low scrap rate. There are also advantages for recoverable scrap that can be sold or recycled, as the most common duty rate for scrap sold into the U.S is zero.

The ability to fix damaged or non-conforming items: Savings can be further increased because when an item that is considered “damaged” or “non-conforming” is tested and repaired, no duties are owed. Items can even be altered, repackaged, or relabeled to meet U.S. requirements with no extra cost.

State and local benefits: Foreign and domestic goods held for export are exempt from state and local inventory taxes. In addition, FTZ status may also make a site eligible for state and local benefits that are unrelated to the FTZ Act.

Free zone-to-zone movement: More savings are to be had when transferring goods from one FTZ to another. In this scenario, regardless of the number of shipments you make, you are not subject to duty on the goods. A beneficial use of this would be the duty-free transport of raw materials and components, eliminating any fees until the finished product is officially shipped into the U.S. market.

These benefits can add up to millions of dollars in cost savings and offer a strong competitive advantage for U.S. manufacturers and distributors. What’s keeping companies from taking advantage of these benefits? Here we find myth #3.

Myth #3: “The process is too overwhelming.”

The process to implement an FTZ can seem overwhelming, but with the right advisor and software, implementing a zone comes down to four easy steps:

Step 1: Get an in-depth analysis. Contact a trusted provider of FTZ solutions and schedule a call to discuss your goals and challenges; request a complementary evaluation and cost/benefit analysis with a service provider (like this one). This will ensure you understand the net savings the FTZ program can offer your company.

Step 2: Choose an FTZ solution provider. Your selected partner should assist your facility to receive FTZ designation. If you are a manufacturer or producer, your partner will assist in securing FTZ production authority. In addition, they will help activate your facility with CBP.

Step 3: Implement the software. Probably the most important step in maximizing net FTZ benefits, is choosing the right FTZ inventory control solution. A comprehensive software solution will ensure you compliantly maximize FTZ savings while minimizing administration costs.

Step 4: Reap the benefits. It’s that simple.

Why now?

The supply chain and e-commerce underwent rapid transformation in the past several years due to COVID-19, Brexit, newly imposed tariffs, and other challenges. As consumer behavior evolves, the global e-commerce market is expected to grow by $1 trillion by 2025, too. These trends are causing global manufacturers to rethink the “just in time” lean manufacturing strategy into a “just in case” model. FTZs are the perfect solution, allowing them to store more inventory in the zone without incurring inventory costs and duty over time.

Debunking common FTZ myths helps unmask the many benefits they bring for manufacturers and distributors. As e-commerce grows and the world regains control of the supply chain, now is the time to get ahead and take advantage of them.

Corey Rhodes is the President of QAD Precision

FCPA
Archives, Global Trade Daily, News

Hughes Hubbard Releases 2022 FCPA Alert

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Hughes Hubbard & Reed today released its 2022 FCPA Alert, a comprehensive review of the global cases, trends and enforcement actions that impacted anti-corruption law, multinational corporations and individuals to date this calendar year. For the 13th consecutive year, the highly respected and anticipated annual FCPA Alert highlights the most important trends and lessons for in-house counsel and compliance professionals.

The FCPA Alert’s contributors, led by Laura N. Perkins and Kevin T. Abikoff, co-chairs of Hughes Hubbard’s Anti-Corruption & Internal Investigations practice group, expect enforcement to surge – due in part to the Biden Administration’s recent memorandum on combatting corruption. Their analysis of recent enforcement actions suggests that going forward:

-The Department of Justice and Securities and Exchange Commission will be cooperating with an expansive number of domestic agencies and divisions to conduct complex bribery investigations, as well as a growing number of non-US enforcement agencies.

-Companies that have resolved FCPA matters through NPAs, DPAs or plea agreements should expect increased scrutiny and attention to compliance with ongoing obligations under such agreements.

-While commodities traders, in particular, can expect greater scrutiny, enforcement will continue in a diverse array of traditional and non-traditional industries and in high-risk jurisdictions, with special emphasis on the independence and authority of corporate compliance functions and complete and timely cooperation with enforcement agencies.

The 153-page Alert provides detailed descriptions of key matters from 2020 and 2021 that support these and other key takeaways.

“As enforcement leadership has evolved this year under a new administration in Washington, we’ve witnessed renewed vigor in the investigation and prosecution of bribery and corruption in the United States and abroad,” said Abikoff. “As the regulators continue to leverage greater resources and reach into new industries, it is vital that companies and compliance departments remain vigilant in enforcing their compliance programs.”

The Alert also contains a deep dive into anti-bribery enforcement and developments in France, Brazil, United Kingdom, China, Mexico, and by multilateral development banks. For the first time, the Alert includes a discussion of the rapidly developing intersection between transnational corruption issues and international arbitration. This discussion highlights examples of how tribunals and courts have treated corruption claims in arbitration in recent years and provides insight into key questions raised by bringing claims in arbitration proceedings, regarding the burden of proof, the identification and treatment of red flags, and the impact of government investigations.

“An effective compliance program is more than words on paper,” said Perkins, a former supervisor in the DOJ’s FCPA Unit. “Prosecutors will pursue companies that have established but ineffective programs in place. It’s critical that companies adequately staff and empower their compliance departments, conduct due diligence, address red flags and allegations, and follow-though on their obligations.  Every year, our analysis cites example after example of the downsides to a lack of vigilance. Especially given the expected surge in enforcement now is not the time to take your eye off the ball.”

The complete report is available for download here.

_______________________________________________________________________

About the Anti-Corruption & Investigations Practice Group

Hughes Hubbard’s Anti-Corruption & Internal Investigations Practice Group handles the full range of matters across the anti-corruption and compliance spectrum. It has conducted investigations in more than 90 countries involving the FCPA and other anti-corruption laws, resolved investigations and won landmark decisions for clients before U.S. and international authorities, and has served as compliance monitors approved by the Department of Justice, the Securities and Exchange Commission, the U.K. Serious Fraud Office, the Department of the Treasury’s Office of Foreign Assets Control and the United Nations.

Lawyers in the group include former senior government enforcement officials, corporate compliance counsel, foreign-trained attorneys and certified public accountants located in the United States and France. The group has many longstanding relationships with leading local firms in countries across the world with which it works closely on cross-border matters, including a strategic cooperation agreement with leading Brazilian anti-corruption firm Saud Advogados.

About Hughes Hubbard

Hughes Hubbard & Reed is a New York City-based international law firm that offers clients results-focused legal services and a collaborative approach across a broad range of practices. Hughes Hubbard was founded in 1888 by the renowned jurist and statesman Charles Evans Hughes. The firm is a leader in promoting diversity and is recognized for its pro bono achievements. For more information, visit hugheshubbard.com. 

FTZ
Archives, Foreign Trade Zones, Global Logistics, Global Trade Daily, Imports/Exports

QAD Precision Launches Complimentary Foreign-Trade Zone Cost/Benefit Analysis

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QAD Precision, an industry-leading provider of global trade and transportation execution solutions, today announced a complimentary Foreign-Trade Zone (FTZ) Cost/Benefit Analysis. This analysis calculates the cost savings manufacturers and distributors could realize by leveraging the Foreign-Trade Zones program. QAD Precision is a division of QAD Inc.

Under the US Foreign-Trade Zones program, goods imported into an FTZ are considered to be outside the US commerce and customs territory. As a result, no duties are paid on imports until such time as the goods enter US commerce. Should goods be exported from the FTZ, no import duties are paid. 

“Companies that establish and operate an FTZ must adhere to significant compliance requirements around inventory controls. With our free FTZ Cost/Benefit Analysis, organizations can discover the value FTZ can bring to their bottom line,” said Corey Rhodes, President of QAD Precision.

QAD Precision Foreign-Trade Zone was developed in collaboration with senior consultants and FTZ practitioners to create a user-friendly and configurable  FTZ Inventory Control and Recordkeeping System (ICRS). QAD Precision FTZ ensures compliance with FTZ regulations while lowering FTZ administration costs.

“Most companies considering an FTZ do so in order to defer import duties or eliminate the need for duty drawback. However, the Cost/Benefit Analysis will help uncover other opportunities for cost savings, such as relief from inverted tariffs and reduced Merchandise Processing fees and brokerage fees,” added Mr. Rhodes. “With QAD Precision FTZ, companies can slash import costs while accelerating supply chain velocity.”

To book a complimentary FTZ Cost/Benefit Analysis, please schedule a consultation online or contact an FTZ expert at +1 251-445-1363 or +1 251-445-1385.

________________________________________________________________________

About QAD Precision – Trusted Global Trade and Transportation Execution

QAD Precision, a division of QAD Inc., provides industry-leading global trade compliance, and multi carrier transportation execution solutions from a single, integrated platform. An ISO-certified company, QAD Precision assists companies to streamline their import, export and transportation operations, optimize deliveries, and increase logistics ROI. QAD Precision’s scalable and extensible solution easily integrates with existing ERP and WMS solutions. Industry leaders in every region of the world rely on QAD Precision’s global support centers to leverage thousands of carrier services and manage millions of global trade and shipping transactions every day. For more information about QAD Precision, visit www.qadprecision.com.

About QAD – Enabling the Adaptive Manufacturing Enterprise

QAD Inc. is a leading provider of next-generation manufacturing and supply chain solutions in the cloud. Global manufacturers face ever-increasing disruption caused by technology-driven innovation and changing consumer preferences. In order to survive and thrive, manufacturers must be able to innovate and change business models at unprecedented rates of speed. QAD calls these companies Adaptive Manufacturing Enterprises. QAD solutions help customers in the automotive, life sciences, consumer products, food and beverage, high tech and industrial manufacturing industries rapidly adapt to change and innovate for competitive advantage.

Founded in 1979 and headquartered in Santa Barbara, California, QAD has 30 offices globally. Over 2,000 manufacturing companies have deployed QAD solutions including enterprise resource planning (ERP), demand and supply chain planning (DSCP), global trade and transportation execution (GTTE) and quality management system (QMS) to become an Adaptive Manufacturing Enterprise. To learn more, visit www.qad.com or call +1 805-566-6100. Find us on Twitter, LinkedIn, Facebook, Instagram and Pinterest.

“QAD” is a registered trademark of QAD Inc. All other products or company names herein may be trademarks of their respective owners.

usmca
Archives, Banking on Global Trade, Foreign Trade Zones, International Trade

Optimism for Growth in 2021 is Uneven in the USMCA Region

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The past year and the ensuing Covid-19 recession has created a time of uncertainty and instability for economies throughout the world, and especially in the USMCA region, according to a recent Payment Practices Barometer survey from trade credit insurer Atradius.

The most telling data gathered in the region concerns business confidence, where survey results were drastically different in Mexico, Canada and the U.S. The majority of survey respondents in Mexico expect to see an improvement in business performance over the coming months, while in Canada, this picture is reversed with only a minority expressing optimism. The U.S. falls somewhere in the middle.

More than half of all sales transacted on credit

Of the total value of all B2B sales in the USMCA region, 53% were made using trade credit last year. This represents growth, as 44% of businesses told us that they increased the use of trade credit in the months following the pandemic.

Temporary fiscal packages in the U.S. and Canada have helped struggling businesses in the short term. As these are withdrawn in the coming months, we are likely to see a rise in insolvencies.

In this environment of heightened risk, it is important that businesses continually monitor the financial health of their customers and note any early warning signs of insolvency. Some of those signs may include slower payments or late payments. However, it should be taken into consideration that the pandemic has presented additional strain on the supply chain that is often out of any one company’s control, leading to slower payments.

Credit management costs rise sharply

Businesses throughout the USMCA region have reported a rise in the cost of managing their accounts receivable in the months following the Covid-19 outbreak. The sharpest rises were reported by businesses that managed credit and collections in-house.

In part, this rise can be attributed to an increase in the percentage of sales made on credit; simply a greater number of credit sales requires more resources to manage them. However, this may also be an indicator of a deteriorating risk environment, as the longer an invoice remains unpaid, the more resources it takes to collect on it.

For businesses that do not use trade credit insurance or an invoice collection service such as factoring, rising payment delays equate to rising costs. Businesses that do outsource credit management to such services enjoy the certainty that their invoice will be paid and that management costs will not escalate.

Businesses favor domestic markets for credit sales

The USMCA region saw many more domestic credit sales than foreign credit sales in the year following the outbreak of the pandemic, with a 60/40 split in favor of domestic customers. This could have been caused by the supply chain challenges that followed the Covid-19 pandemic, leading to concerns over offering credit to foreign customers.

Businesses outside of the USMCA region should approach trade in the region with optimism. While it is clear that the Covid-19 pandemic is not over, the region is rebounding as expected. If there’s one thing that businesses around the world have learned is that offering more flexibility within their supply chains can help tremendously in the face of unexpected events like the Suez Canal blockage, where its effects were compounded by the pandemic’s supply chain disruptions. Companies that diversify their customer base will be better prepared to capitalize on opportunities should their competitors face unexpected disruptions to their supply chain.

Uneven outlooks for growth

On average, most businesses across the region are positive in their outlook and expect to see improvement in the second half of 2021. Upon a closer examination, a country-by-country comparison reveals a vastly different picture. In Mexico, 81% of businesses surveyed anticipate growth, while 36% of businesses in Canada hold the same view. Businesses in the U.S. fall about halfway between these poles. However, it should be taken into consideration that each country in the USMCA all started from very different places before the pandemic, making their perceptions of recovery different.

Businesses in Mexico were experiencing a recession long before the COVID-19 pandemic and received limited financial support from their government over the past year and a half. In contrast, both the U.S. and Canada started from a stronger economic position going into the pandemic and have received substantial financial help from their governments to stay afloat.

Businesses in both Canada and the U.S. may be bracing themselves for the removal of government fiscal support as well, which will have a much greater impact on their business than those in Mexico who are used to the lack of government support and ready for a rebound.

Post-recession growth is predicted for all of the countries in the USMCA region. It will be interesting to see which businesses thrive and grow during this period and whether the optimism and pessimism expressed by the survey respondents comes to pass over the next year.

______________________________________________________________________

Aaron Rutstein is the Vice President – Regional Director, Risk Services – Americas at Atradius

customs value
Archives, Global Logistics, Global Trade Daily, Imports/Exports

Eliminating Non-Dutiable Charges from Customs Value

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Similar to how taxable income is a primary element to determining income tax, the customs value is used to calculate duty liability. To determine an accurate customs value, companies must factor in certain dutiable additions and non-dutiable deductions. In today’s high-tariff environment, maximizing every deduction is critical and many importers are leaving money on the table. 

For U.S. importers using transaction value, which is “the price actually paid or payable for the merchandise when sold for exportation to the United States,” the focus is often on validating that the enumerated additions to the price are properly declared to U.S. Customs & Border Protection (CPB). While this is a necessary step for maintaining compliance, trade teams should also consider whether they may appropriately deduct or exclude certain charges. 

Historically, these savings opportunities have not been fully explored because the resources required to sustain some of these programs exceeded the savings. However, with the Section 301 tariffs in place for China-origin products, many companies are paying significantly more in duties. Removing these non-dutiable costs can provide substantial savings–making it worth taking a second look at them for many importers.

Eight Overlooked Non-Dutiable Charges

For importers using transaction value, the following savings opportunities should be considered. While some of these programs provide ongoing savings and some are only used in specific circumstances, they all may play a role in reducing the tariff spend. 

1. Freight and Insurance

Foreign inland freight, international freight and insurance costs may be deducted from the transaction value if you meet certain requirements. More specifically, with accurate incoterms and supporting costs and documentation, this can provide long-term cost savings. Importantly, importers must verify that they are deducting the actual, not estimated costs, and that the supporting documentation is adequate. While the requirements around deducting these costs may be daunting, the advances in technology make freight deductions more approachable than ever.

Further, insurance costs may be deducted from the entered value when they are separately itemized and the actual costs (not estimated) are claimed. It is important to verify with sellers that they are providing actual costs because CBP will reject deductions based on estimates, even in cases where the importer paid more than it claimed on the entry.

2. Supply Chain (“Origin”) Costs 

International transportation costs typically include certain other fees, often referred to as “origin costs.” In many cases, CBP considers these origin costs to be “incident to the international shipment of merchandise” and, therefore, possibly excluded from the customs value. Examples of these charges include security charges, documentation fees, and logistics fees. 

On a per-shipment basis, these miscellaneous fees may appear insignificant. However, on an annual basis, they can result in a significant expense for the company by driving up duty payments. As a general rule, the importer must deduct the actual costs, validate that commercial documentation meets all requirements and understand where services are being provided. However, once these steps have been taken, it is likely that little additional work will be required to realize ongoing savings.

3. Warehousing Costs 

CBP has found that warehousing costs paid by the buyer to third parties are not included in the price actually paid or payable of the imported merchandise. However, CBP has distinguished this scenario from instances where the seller, or a party related to the seller, provided this same service and the warehousing costs are included in the price actually paid or payable. In that case, those payments were found to be dutiable and may not be deducted. 

For importers interested in using this opportunity, a careful review of payments and terms of sale should be conducted to validate that the transaction meets all of CBP’s criteria prior to taking this deduction.

4. Inspection or Testing Fees

Often before shipment, an importer will arrange for products to be inspected or tested to validate it satisfies a buyer’s quality standards. Under certain conditions, these fees may be excluded from the dutiable value in instances when they are made to third parties unrelated to the seller of the goods. 

It’s also important to understand that testing that is “essential to the production of that merchandise” is dutiable. In such cases, CBP would consider payments to unrelated third parties for these services as assists that are part of the transaction value. For importers who rely on the seller to perform inspection or testing services, an analysis should be conducted to assess the ROI for engaging a third party to perform these services.

5. Latent Defect Allowances

In certain circumstances, importers may be able to reduce dutiable value post-importation based on repair costs attributable to manufacturing or design defects. For importers with high-value products, such as those in the automotive industry, repair costs can be substantial and this allowance in value provides an opportunity to manage those costs by reclaiming duty. 

With proper planning, a program can be implemented to help ensure the importer does not overpay duty on goods that were defective at the time of import. While there are a number of requirements that must be satisfied to receive a duty refund, high-value importers should explore whether this may be an opportunity for them.

6. Instruments of International Traffic – Reclassification of Packaging

In certain cases, pallets, cartons, hangers and other packaging material may be considered instruments of international traffic (IIT), exempting them from duty. To qualify as an IIT, CBP has determined that the article must meet criteria, including that it is “substantial, suitable for and capable of repeated use, and used in significant numbers in international traffic.” Further, the article must be used in commercial shipping or transportation more than twice to qualify as an IIT. 

For importers whose supply chains include the reuse of certain containers or other materials used to transport international goods, it may be valuable to assess whether these goods qualify as IIT and are, therefore, duty-free. 

7. Post Importation Price Adjustments

When companies make post-importation price adjustments they may be entitled to a duty-refund on the amount adjusted. This typically occurs when downward transfer pricing (“TP”) adjustments are made between related parties, causing a reduction in the products’ customs value. 

For companies that routinely make retroactive transfer pricing adjustments, having in place the documentation to support a refund can have a powerful impact on duty spend.

8. Taxes and Other Fees

Companies may be entitled to deduct Value Added Tax (“VAT”) or Goods and Services Taxes (“GST”) from the declared value of the imports when these payments are refunded. Not only should importers maximize their refunds where possible, but in doing so they open another opportunity for savings. When VAT is remitted by the U.S. importer to the foreign seller, separately identified and refunded to the importer, then the refunded amount is not included in transaction value.

Importers should team with their tax departments and foreign suppliers to understand if VAT refunds are obtained and create documentation that reflects separate itemization of the refunded VAT.

The Big Picture

Potential cost savings through the reduction of non-dutiable charges from the dutiable cost basis of imported goods are often overlooked. However, in this high-tariff environment, these programs can help companies easily achieve cost savings. 

Additionally, with advancements in technology, managing these programs is more straightforward than it used to be. 

Of course, like with any duty-savings program, strong controls must be implemented to preserve compliance. However, as it is likely that steep tariffs will be in place for some time, companies should evaluate which of these programs can help reduce costs, potentially improve the return on investment and then develop an implementation roadmap.

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Andrew Siciliano is a Partner and U.S. Trade & Customs Leader at KPMG LLP. and Elizabeth Shingler is a manager at KPMG’s Trade & Customs Practice.

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Archives, Commentary, Global Logistics, Global Trade Daily, International Trade

The Future of International Trade: Is Globalization Dead?

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In this exclusive Q&A, Global Trade Mag hears from Ted Murphy, partner with global law firm Sidley Austin, LLP, on how the international trade and globalization landscapes have changed and what companies can predict as we approach 2021. 

1. What are some of the most significant changes in the global trade landscape? 

The most significant change over the past few years has been the decline of globalization. Up until recently, much of the world was pursuing policies aimed at increasing globalization. This meant that year-after-year it was getting easier and cheaper to move goods, people and data across international borders. While globalization is not dead, the last few years has seen a rise of economic nationalism in places where it had not been prevalent previously — like the United States and the UK. Combined with the economic nationalism that has always been present in places like China, it means that globalization has been in retreat for the past several years. We see that trend continuing, at least for the short-to-medium term (i.e., walls are more likely to go up, then come down, in the short-to-medium term).

2. How can global trade players navigate the new landscape? 

The first thing global trade players need to do is recognize that the paradigm has shifted. Hoping that the past comes back is not productive. Instead, you need to embrace the flux and move forward. No one knows what the future will look like. That said, we know it won’t look like it did 4 years ago. As a result, global trade players need to embrace the uncertainty (it is a reality), throw out the old plans and create new ones – recognizing that they may need to be amended on the fly.

3. What role will technology play in international trade relationships?

This is one of the fundamental trade questions that will get answered over the next couple of years. Will we have one interconnected world, or separate spheres each with its own technology?

4. What are some tips for compliance efforts moving forward?

Trade facilitation/trade compliance will continue to have increasingly important roles within companies going forward. The last few years have shown that trade really matters to most companies and that those that ignore things like trade risk, responsible sourcing, technology transfers and other trade-related issues do so at their peril. For example, as companies realign their supply chains, it is important to understand the trade risk profile of the alternative source – e.g., is the new source country likely to find itself on the wrong end of a U.S. Section 301 investigation for currency undervaluation; is forced labor enforcement a risk; the trade sanction risks; etc. Just looking for the lowest cost supplier is not the answer.

5. How can trade players prepare now for the future? 

In the past, it was relatively smooth sailing from a trade perspective as globalization increased. Expect the future to be bumpier. I am not saying that is necessarily a bad thing – uncertainty often brings opportunity. In order to be best able to take advantage of that type of opportunity, one needs to be well-informed and a bit bold.

This article has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create, and the receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers. The content therein does not reflect the views of the firm.

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Ted Murphy is a partner with global law firm Sidley Austin, LLP where he counsels companies on international trade and customs law and serves on the firm’s COVID-19 Task Force. He advises clients on international trade, trade policy and customs compliance issues, including actions brought under Section 232 of the Trade Expansion Act of 1962 and Section 301 of the Trade Act of 1974, as well as the administration of international agreements. Mr. Murphy also represents clients before the U.S. Court of International Trade, the U.S. Court of Appeals for the Federal Circuit, U.S. Customs and Border Protection, the Office of the United States Trade Representative and the U.S. International Trade Commission. Prior to joining Sidley, he was appointed by the Secretary of Commerce and the United States Trade Representative to serve on the Industry Trade Advisory Committee on Customs Matters and Trade Facilitation (ITAC 14) for the 2010–2014 and 2014–2018 terms.

IMMEX
Archives, Global Trade Daily, Imports/Exports, International Trade

How Manufacturers Save Money Through Mexico’s IMMEX Program

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The IMMEX maquiladora program combined with the available VAT certification offers one of the top cost-savings benefits for companies that implement nearshore manufacturing in Mexico. It offers a 16 percent VAT tax exemption for all temporary imported materials, equipment, and tools. Manufacturers that have previously expanded operations internationally may compare this benefit to what’s normally referred to as a “free trade zone.” Although tax-wise the IMMEX program is similar, the extra advantage is that it’s not centric to any one geographical location.

When added to access to a competitive, cost-effective workforce, close proximity to the U.S., and favorable trade relations through the USMCA, an operational transition from China to Mexico is a viable option for a growing number of manufacturers. Numerous global brands across multiple sectors have already experienced success over the years through Mexico manufacturing, and the benefits continue to entice new companies to explore their options closer to home.

Working with Mexico Shelter Companies to Ensure VAT Tax Exemption

To receive tax benefits through the IMMEX maquiladora program, manufacturers can either apply and become IMMEX program approved and then get their VAT certification on their own or operate under a shelter umbrella that already has both permits in place.

The timeline of being accepted into the IMMEX maquiladora program often takes several months due to the complexity of what’s necessary to meet the criteria. Plus, if there are any discrepancies in the application and a company is denied, they must start the process again. This impacts Mexico manufacturing costs since companies can’t import any components, materials, or equipment without having their IMMEX program.

Once they have it or work with a shelter to use the shelter’s program, manufacturers are able to initiate their equipment and materials imports and start the setup process on their current Mexico facility. As you can imagine, not doing this right and as fast as possible will present delays on your project. Mexico shelter companies allow manufacturers to receive VAT tax benefits automatically when working under the shelter’s IMMEX licenses since a VAT certification is already in place.

This is in addition to other advantages, such as lower customs broker fees and the use of special compliance software that tracks the timeframe of all temporary imported materials that exempt VAT payment at customs. Companies that wish to apply for the program on their own must hire a U.S. and a Mexico customs broker, since these are the representatives that process and transmit to customs all the documentation required to move materials and finish goods
through the US / Mexico border. Also if you select this operating option, you must absorb all compliance software fees.

Additionally, once approved, a manufacturer can lose VAT certification at any time if criteria is not met at the time of renewal or during an inspection from the Ministry of the Economy. Manufacturers who partner with a shelter company often benefit from decades of expertise, experience minimizing red lights at customs, and a history of optimizing operations.

Explore Cost-Saving Solutions When Manufacturing in Mexico

The fiscal benefit of Mexico’s IMMEX maquiladora program is significant but comes with strict guidelines and great responsibility. Although starting from scratch is an option when nearshore manufacturing in Mexico, it increases costs and extends operational set up times that can lead to bigger challenges down the road.

In addition to working under a shelter’s IMMEX license, a shelter provider can create a customized cost analysis that explores additional ways to save money and get operations up and running efficiently and on schedule.

Overall, the IMMEX maquiladora program provides a good avenue for manufacturers looking to get operations up and running quickly and smoothly.

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Sergio Tagliapietra has spent his entire career pioneering administrative service solutions in Mexico. He works with government in all parts of Mexico and he is one of the country’s most respected business leaders in the field. He is president and founder of IVEMSA, a full shelter services provider and partner to manufacturing companies expanding to Mexico.

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Archives, Foreign Trade Zones, Global Logistics, Global Site Selection, Global Trade Daily, Site Selection, Trade Credit Insurance

Minimize Foreign Trade Risks with These 10 Tips

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Does your company follow a strategy to go global? International expansion brings endless opportunities. Statistics show that companies that export boost their productivity by 34% on average over the first year. They are also more likely to survive in the long term when compared to companies with a local focus. 

However, we must emphasize the fact that foreign trading comes with risks. Currency, credit, intellectual property, transport, logistics, ethics… you’ll be dealing with a lot throughout this journey. Being aware of these risks and taking steps to minimize them will ensure the success of your brand’s international trade management.

10 Tips on How to Minimize Foreign Trade Risks 

Make Sure Your Products Are Allowed for Distribution

This is the first thing you need to check: are you allowed to trade with your products in the respective country? For example, the EU has strict regulations that prevent many goods from China from being imported. Each country has its rules, which your business must respect. Otherwise, you would waste a lot of time and resources planning an impossible expansion project. 

You can get familiar with the rules by reading relevant laws and regulations or contacting the customs services.  

Focus on the Legal Aspects of Business Expansion

Each country has its own regulations regarding businesses from abroad. Legislators set the legal framework and conditions for FFcustomers, sales, and particularities regarding the industry. It’s important to be aware of all these details ahead of time. When designing your strategy and drafting the initial contracts, you should make sure you stay within the legal framework of the country where you expand the brand. In addition, you should be aware of potential legal disputes and their solutions. 

Most business owners hire lawyers in their respective countries. A lawyer from your own country can also make connections and give you the details you need.   

Get Shipping Insurance

Everything looks well on paper. You consider the costs of production, transport, marketing, sales, and everything else related to selling your goods abroad. But there’s a risk that business owners often forget: damage during shipping. Items may break or get lost during transport. Your shipment may become a subject of theft or even vandalism. Accidents and contamination happen during transport all the time. If you don’t get good insurance for your shipment, you risk losing a lot of money. 

Proper insurance is not cheap. You should talk to several agencies to get the best offer on international shipments. We recommend using the best finance apps to plan all costs, including insurance over a longer period of time. These apps will help you calculate a decent budget and determine a final price that won’t leave much space for losses. 

Consider All Currency-Related Things

When planning foreign trade financing, you’re guided by the official currency in your own country. You focus on evaluating the risks related to credit, but as most business owners, you might forget about one thing: currency conversions may initiate losses, too. 

The COVID-19 crisis hasn’t been kind in this aspect. In March 2020, emerging-market currencies faced losses of up to 30%. That’s something that nobody could have predicted. However, you can analyze the movement of relevant currencies and estimate potential losses. You might need to work with a financial expert to make these evaluations.  

Evaluate the Risk of Protectionism

Trade protectionism is a policy for protecting domestic industries from foreign invasion. If, for example, a particular country stimulates the domestic flour milling industry, it will impose import quotas, tariffs, and other handicaps on foreign traders. Governments do this because they don’t want foreign products to drop the market prices and get the domestic industries in trouble. 

If you plan for global exposure, you have to learn about these policies. You must take the additional expenses into consideration, so you’ll evaluate a realistic final price. Will it be acceptable for the living standard of the respective country?

Register the Corporate Names and Trademarks

When doing business abroad, you risk violating another brand’s intellectual property rights. You can avoid that by registering your brand’s names and trademarks. If that process goes undisturbed, you can feel free to offer the products on the respective market. 

Consider the Risk of a Changing Market Environment

No market situation is stable and rigid for all times. You will develop a general strategy, which will be based on solid international risk management. But no matter how well you predict potential risks and future circumstances, you cannot be 100% sure that you did it properly. 

In Deloitte’s Global Trade Management Survey, none of the Swiss chief financial officers who participated thought that the global trade environment would become less complex. Only 15% of them said they expected the conditions to remain the same. 

Your company must continuously review the strategy and make the needed adjustments as the market circumstances evolve.   

Evaluate Foreign Ethical Standard

When offering your products on a global market, you should think about the differing ethical standards that you’ll face. For example, Israel has a thriving vegan culture. It might not be a good idea to trade fur there before evaluating the risk of getting your brand dragged through discussions as an unethical one. 

Get well informed about the customs and social conditions in the country where you plan to expand. 

Invest Time and Resources on Collaboration

Business owners often neglect the need to get comprehensive advice through collaboration with foreign lawyers and governmental services. They want to save time and money, or they simply forget that getting insider information is crucial before international expansion. 

You need to talk to experts who will explain the laws and regulations. You might need finance experts from abroad as well. In addition, you have to collaborate with industry insiders who know the market and can help you build a solid network of connections.

Get Acquainted with Foreign Business Customs

You may be used to a direct, friendly approach with a bit of humor in the mix. But in a foreign country, such an approach may be considered unserious or even offensive. Intercultural differences are a major factor in foreign trading success. 

You have to get acquainted with business etiquette when entering a new market. You can find this information online, but it’s best to hire a business advisor from the country in question. You’ll get proper guidance from someone who knows the target region and the communication etiquette in the particular industry. 

The country’s culture, politics, and economy are also important. Learn as much as possible, so you can start and maintain a productive conversation with potential partners. 

Foreign Trade Is a Complex Endeavor

Yes, it will be a rewarding experience for you as a business owner. With the right approach, you’ll take your brand towards substantial growth. However, you have to conduct basic research regarding the risks you’ll face during the expansion. This is a process that requires thorough planning, so don’t rush through it.

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James Dorian is a technical copywriter. He is a tech geek who knows a lot about modern apps that will make your work more productive. James reads tons of online blogs on technology, business, and ways to become a real pro in our modern world of innovations.

conventional arms
Archives, Global Trade Daily, International Trade, News

U.S. Moves to Block Conventional Arms Sales to Iran

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President Trump issued an Executive Order on September 21, 2020, which is effective immediately, imposes secondary sanctions on the transfer and sale of certain conventional arms shipments and the supply of related services to Iran by non-U.S. persons. This Executive Order follows the current administration’s failed effort to reinstate sanctions and a conventional arms embargo by the U.N. Security Council. The Executive Order, titled “Blocking Property of Certain Persons with Respect to the Conventional Arms Activities of Iran”, attempts to enforce such sanctions unilaterally by authorizing the U.S. Secretary of State to impose blocking sanctions on any non-U.S. person who transfers conventional arms to Iran or otherwise performs activities to support such transfers.

If the U.S. Secretary of State, in consultation with the U.S. Secretary of the Treasury, determines that a non-U.S. person has engaged in any of the following activities, then all of that non-U.S. person’s U.S. property (including property in the U.S., which transits through the U.S. financial system or which is otherwise in the possession of a U.S. person) will become blocked. U.S. persons and the U.S. financial system will be prohibited from transacting with those:

-Engaging in any activity that materially contributes to the supply, sale, or transfer, directly or indirectly, to or from Iran, or for the use in or benefit of Iran, of arms or related materiel, including spare parts;

-Providing Iran any technical training, financial resources or services, advice, other services, or assistance related to the supply, sale, transfer, manufacture, maintenance, or use of arms and related materiel;

-Engaging, or attempting to engage, in any activity that materially contributes to, or poses a risk of materially contributing to, the proliferation of arms or related materiel or items intended for military end-uses or military end-users, including any efforts to manufacture, acquire, possess, develop, transport, transfer, or use such items, by the Government of Iran or paramilitary organizations supported by Iran;

-Materially assisting, sponsoring, or providing financial, material, or technological support for, or goods or services to or in support of, any person whose property and interests in property are blocked pursuant to the Executive Order;

-Being owned or controlled by, or to having acted or purported to act for or on behalf of, directly or indirectly, any person whose property and interests in property are blocked pursuant to this Executive Order.

The Executive Order clarifies that it does not apply to persons “facilitating a transaction for the provision (including any sale) of agricultural commodities, food, medicine, or medical devices to Iran.”

Following the issuance of the Executive Order, the U.S. Department of Treasury’s Office of Foreign Asset Controls (OFAC) added several individuals and two (2) entities to the Specially Designated Nationals (SDN) list, thereby subjecting the designated entities to the above-described blocking sanctions. The Iranian entities are Mammut Diesel and Mammut Industrial Group P.J.S. (aka Mammut Industrial Group, Mammut Tehran Industrial Group, or Mammut Industries).

The U.S. Department of Commerce’s Bureau of Industry and Security (BIS) added five (5) individuals to the Entity List who BIS says “played a critical role in Iran’s nuclear weapons development program and continue to work for the Iranian regime.” By adding these individuals to the Entity List, they are now prohibited from receiving any items or technology that are “subject to the EAR”, which will essentially prohibit any exports or re-exports of U.S. origin items or technology to these individuals.

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Cortney O’Toole Morgan is a Washington D.C.-based partner with the law firm Husch Blackwell LLP. She leads the firm’s International Trade & Supply Chain group.

Grant Leach is an Omaha-based partner with the law firm Husch Blackwell LLP focusing on international trade, export controls, trade sanctions and anti-corruption compliance.

Camron Greer is an Assistant Trade Analyst in Husch Blackwell LLP’s Washington D.C. office.