How to Potentially save on YOUR MERCHANDISE PROCESSING FEE:
If your company has not already done so, we recommend you take a hard look at the amount you are paying annually for your Merchandise Processing Fee (MPF).
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FTZ background:
U.S. Customs charges the MPF for each import entry into the United States. The MPF is calculated as .3464% of the value of the commercial invoice for each entry, with a maximum dollar amount per entry of $497.99. An entry is defined as an inbound shipment into the United States.
In any FTZ, the MPF is NOT calculated on the inbound side; it is instead calculated “WEEKLY” for each outbound shipping week, consolidating ALL OUTBOUND ORDERS from the FTZ into ONE ENTRY – at a maximum fee of $497.99 for the week. More specifically, if an importer ships outbound every week for all 52 weeks of the year, the maximum MPF to be charged is $497.99 x 52 weeks = $25,895.48 in MPF for the year. If you subtract this $25,895.48 from your current annual MPF spend, then the difference is your annual MPF savings. These savings begin immediately upon using the FTZ.
EXAMPLE OF A SHIPPER NOT USING FTZ:
You import 1,000 containers per week via 75 entries: MPF = 75 entries x $497.99 per entry = $37,349.25. If this is the weekly entry amount, then $37,349.25 x 52 weeks = $1,942,161 in MPF annually.
EXAMPLE OF A SAME SHIPPER USING FTZ:
You import these same 1,000 containers per week – but now pay only the $497.99 MPF per outbound shipping week and consolidate all outbound shipments (no maximum) into one entry. The max MPF is $497.99 x 52 weeks = $25,895.48 annual cost. Your new annual MPF spend has been reduced from $1.942 million to just under $26,000 a year, an annual savings of more than $1.9 million.
FOREIGN TRADE ZONE BENEFITS
Cash Flow Savings/FTZ Borrowings Reduction Savings (Duty Deferral)
Imported parts and finished products are stored before being utilized and/or distributed to their ultimate destination in the U.S. or overseas. While the inventory generally moves very quickly, the average value of on-hand inventory subject to U.S. Customs duties is significant. The postponement of Customs duty payments on the imported merchandise will result in cash flow savings to the Company. In the past, companies used to take this amount and multiply it by a borrowing rate factor. We have labeled this savings category “FTZ Interest Savings.” As the economy has contracted, many companies now count the cash outlay as a savings figure. We have labeled this optional savings category as “FTZ Borrowing Reduction Savings.” The average on-hand
inventory value of $25,000,000 has a value for Customs duty of $1,500,000 ($25,000,000 x 6% Customs duty rate). This is the “FTZ Borrowing Reduction Savings.” A conservative approach is to multiply $1,500,000 by a suggested interest rate (5%) which equals $75,000. This is the “FTZ Interest Savings.” Either of these methods may be utilized to calculate the Company savings on cash flow. We have broken out the savings with both methods. This will provide two total financial savings totals at the end of the worksheet. These totals are identical except that one includes the “FTZ Borrowing Reduction Savings” calculation and the other includes the “FTZ Interest Savings” calculation for the cash flow category.
Inverted Duty Savings
Imported parts may be subject to duty rates that are higher than the finished product. Generally, manufacturing is determined when the Harmonized Tariff Schedule of the United States (HTSUS) classification number on the imported parts/material changes to a different number during manufacturing or processing. The average Customs duty rate of 6% would normally apply to the imported parts/materials without a zone. The materials are admitted to the zone and manufactured/kitted into a finished product with a 0% Customs duty rate. Utilization of foreign-trade zone procedures will allow the Company to choose the Customs duty rate of the finished product (0% versus 6%) rather than the Customs duty rate that normally applies to imported parts/materials. This places the U.S. production facility in the same financial position with regard to U.S. Customs duties as foreign production facilities. This may be the most important area for financial savings. The imported parts/material value ($100,000,000) would normally have a 6% Customs duty rate or a Customs duty value of $6,000,000. However, by choosing the Customs duty rate that applies to the finished product (0%), the duty value will decrease to $0.
Weekly Entry / Merchandise Processing Fee / Customs Broker Entry Fee
Under zone procedures, individual or daily Customs entries are replaced by one Customs entry per week. This option is referred to as Weekly Entry. The reduction in paperwork, Customs Merchandise Processing Fee, and brokerage expense can be significant. A sample Customs broker fee is $125 per entry. The Merchandise Processing Fee is .3464% to a maximum of $485 per entry. If the Company averages twenty (20) entries per week, this equals 1040 entries on an annual basis. This can be reduced to one entry per week or 52 entries on an annual basis. Without a zone, a company would pay $504,400 in Merchandise Processing Fees. Weekly entry reduces this number to $25,220, resulting in an annual savings of $479,180. Without a zone, the company would also pay a Customs broker fee of $125 per entry, resulting in an annual payment of $130,000. With a zone, this can be reduced to one payment per week and reduce the annual payment to only $6,500, resulting in an additional financial savings of $123,500. Shipments to NAFTA countries (Canada and Mexico) require additional entries. The number of entries can be reduced to two (2) entries a week under weekly entry. There is the normal once a week (06) entry and in this case there will be an additional (08) entry for NAFTA due to the exports to Mexico for a total of only two (2) entries per week.
Exports
A company can generate significant financial savings by avoiding Customs duty payments, merchandise processing fees, and the significant expense and complexity of duty drawback on all exported products. The Customs duty drawback program recovers duties paid on imported parts that are subsequently re-exported. However, full financial recovery is never achieved for a variety of reasons. The U.S. Customs duty drawback procedures are complex, expensive, and not time sensitive. Seeking drawback on exports to NAFTA countries is even more complex. Further, if your
organization has parts/material in the future that are subject to antidumping or countervailing duties, the zone is another opportunity for financial savings. Currently, it is not possible to seek drawback on these special duties. Zone procedures provide savings by never paying the special antidumping or countervailing Customs duties. Initially, if 20% of the finished product that will be manufactured in the proposed zone is exported, a significant savings is achieved. This represents a value of $20,000,000 ($100,000,000 annual import value x 20% exported). Under the example provided in the worksheet, the Customs duties that will be avoided through use of the zone is $0
($20,000,000 x 0%). However, if the Customs duty rate of the finished product is 2% with the same imported parts/materials, the financial savings would total $400,000 ($20,000,000 x 2% Customs duty rate). This amount of duty would have to be paid in an identical transaction without a zone. Exports of manufactured product to a NAFTA country should be considered separately, as special rules apply. This is an area for additional discussion.
U.S. Quotas
Most merchandise may be held in the FTZ, even if it is subject to absolute quota restrictions. When the quota opens, the merchandise may be immediately shipped into the U.S. Customs territory. Items can be stored indefinitely in a FTZ unlike a bonded warehouse.
Security
The FTZ is subject to Customs supervision and security procedures, saving you, the FTZ users, expenses for security and insurance.
Harbor Maintenance Fee
Fees are paid quarterly on merchandise admitted in the FTZ, not on U.S. Customs entry.
Inventory Control
FTZ operations require careful accounting on receipt, processing and shipment of merchandise. Firms find that the increased accountability cuts down on problems with inaccurate receiving and shipping as well as waste and scrap.
Inventory Taxes
By federal statute, tangible personal property imported from outside the U.S., and tangible personal property produced in the U.S. held in a zone for export are not subject to state and local ad valorem taxes. Most state and county tax authorities exempt all merchandise in the FTZ from inventory tax.
Indefinite Storage
Allows for any size or quantity of merchandise to be placed in a foreign trade zone and stored for an indefinite period of time.
PRODUCTION MACHINERY
Machinery for use in a zone may be assembled and installed before duties are owed on either the parts or finished product rate.
INTERNATIONAL RETURNS
A number of firms that export have a percentage of the exports returned to the United States. U.S. Customs duties are owed each time merchandise of foreign origin that has not been registered with U.S. Customs is returned. American Goods Returned merchandise can be verified. By being returned and admitted to an FTZ, no U.S. Customs duties are paid upon return.