Foreign Trade Zones (FTZs) are set up to encourage and facilitate international trade. Usually, set up near seaports or airports these FTZs are designated areas within the geographic boundary of the country they are located in but are considered to be outside the Customs territory of that country. By using a FTZ you may defer duty and excise taxes until the merchandize is shipped out of the zone and into the market. This allows companies to keep their inventory costs down. The merchandize may be inspected, repaired, or destroyed prior to payment of the Customs duties and excise taxes. No duties or taxes are owed when the merchandize is detroyed or re-exported from the FTZ.
Goods may be assembled or manipulated in the FTZ which will allow the importer to adjust the tariff classification to a different classification on the final product which carries a lower duty rate. Zone procedures allow companies to choose between the tariff classifications applicable to the components and the tariff classification applicable to the finished product. This procedure results in the what is known as the “inverted tariff”. The description of “inverted tariff” is when imported parts are dutiable at higher rates than the finished product which they are incorporated.
Many importers use FTZs for receiving and storage of goods to be distributed in smaller lots to multiple customers.