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ABC’s of an FTZ

Trey Boring Liz Connell Jodi Earle IMS

Worldwide, Inc. Integration Point Crosman Corporation

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Agenda

• What is an FTZ? • Zone Benefits • Cost Benefit Analysis • Operations • What

WHAT IS AN FTZ?

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History of the FTZ

• Created as part of the New Deal – Roosevelt – To relieve U.S. Companies of punitive tariffs – Create a level playing field for U.S.

Operations • Expanded to include Manufacturing

– Petroleum • The FTZ Board

– Department of Commerce – Department of Treasury

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History of the FTZ

• FTZ Board Staff – Part of the Department of Commerce – Executive Secretary and Staff

• Trade Enforcement

• Changes to the Program – ASF – New Regulations (2012)

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What Is an FTZ?

• An area inside the United States that is designated as being outside Customs Territory.

– Where items are brought into the Zone

duty free.

– Where Customs duty is determined when the merchandise leaves the Zone.

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What Can I Do in an FTZ?

• Distribute • Store • Test and Inspect • Repack • Assemble • Repair • Manufacture

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How Do Companies Make Money in an FTZ?

• Duty Deferral

• Duty Elimination

• Duty Reduction

• Inventory Tax Savings

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What is a Zone site?

• Magnet Site – Industrial Park – Airport Industrial Development – Port Industrial Development – Rail Yard Industrial Development

• Subzone/Usage Driven Site – Company’s Facility/Facilities

ZONE BENEFITS

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Duty Deferral

• Duty is not paid when an item enters the Zone. – An item enters the Zone in January.

• Duty is paid when the item leaves the

Zone. – The item leaves the Zone in April.

• Four months of duty deferral.

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Duty Elimination

• Testing and inspection is conducted in the Zone duty free. – All rejected and destroyed items are duty

free.

• Exports are duty free. – All items exported from the Zone are duty

free.

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Duty Reduction

• For manufacturing Zones. – The Zone allows a company to choose the

lowest duty rate associated with its components and finished product(s).

• A company imports 3 components. – A has a duty rate of 10%. – B has a duty rate of 9%. – C has a duty rate of 8%.

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Duty Reduction

• The company’s finished product has a 5% duty rate.

• The company will pay for the value of the components at the finished product rate. – A from 10% to 5%. – B from 9% to 5%. – C from 8% to 5%.

• This reduction means a savings of 5% to 3%.

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Merchandise Processing Fee Savings

• Each entry into the United States is assessed a Merchandise Processing Fee (MPF).

• Manufacturing Foreign-Trade Zones are allowed one entry per week.

• The MPF is collected on that one entry.

COST BENEFIT ANALYSIS

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Cost Benefit Analysis

• Total Import Value • HTSUS of Items

– Duty Rate • Percent of items exported • Inventory Turn ratio

– How long does your inventory sit? • Company’s Oportunity Cost of Capital

– Rate

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Cost Benefit Analysis

• How many entries do you file per year? • What is your average MPF per entry? • How fast are you growing? • What trade agreements do you use?

– NAFTA – CAFTA – Etc..

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Assumptions Used in FTZ Cost-Benefits Analysis

Sample Manufacturing Case Annual cost, dutiable imports $120,000,000 Weighted average duty rate 1.00% Percent reject or scrap imported merchandise 0.67% Percent of imported merchandise re-exported 4.00% Percent of imported merchandise sold to the military 0.00% Annual cost, imports subject to duty inversion $40,000,000 Inverted tariff (finished product duty rate) 0.00% Affected raw material/component duty rate 4.90% Inventory turns per year 40 Opportunity cost of capital 5.0% Drawback system in place? Yes FTZ cost advantage (FTZ differential) over drawback 25.0% Average "Merchandise Processing Fee" per entry $139 Average number of entries per year 3000 Annual growth rate, FTZ operating expenses, etc. 3.0% Annual growth projections from current year

Year 2 5.0% Year 3 5.0% Year 4 5.0% Year 5 5.0%

Application and activation expense (estimated)* $125,000 Increased operating expenses (accounting/tracking/reporting/systems mod.) $150,000 Grantee fees (estimated) $9,000

* Application preparation, Customs activation and Operator training. Actual cost will depend on the sophistication of existing systems and other variables.

This is a preliminary analysis which is only as accurate as the assumptions used to generate the following results.

The analysis should not be relied upon until the assumptions, calculations, and results contained herein have been verified.

Prepared by IMS Worldwide, Inc., Houston, Texas

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FTZ Benefits & Expenses By Type Year 1 Year 2 Year 3 Year 4 Year 5 5-YEAR TOTAL FTZ Benefits

Re-Exports1 $12,000 $12,600 $13,230 $13,892 $14,586 $66,308 Reject, scrap, & military sales 8,040 8,442 8,864 9,307 9,773 44,426

One-time benefit2 --- Ongoing duty deferral 1,430 1,501 1,577 1,655 1,738 7,901 Inverted Tariffs 1,868,468 1,961,891 2,059,986 2,162,985 2,271,135 10,324,465 Merchandise Processing Fee savings 390,460 409,983 430,482 452,006 474,607 2,157,538 Total FTZ Benefits $2,280,398 $2,394,418 $2,514,139 $2,639,846 $2,771,838 $12,600,638 FTZ-RELATED EXPENSES Internal FTZ Operation Expenses $150,000 $154,500 $159,135 $163,909 $168,826 $796,370 Grantee fees 9,000 9,270 9,548 9,835 10,130 47,782 TOTAL FTZ-RELATED EXPENSES $159,000 $163,770 $168,683 $173,744 $178,956 $844,153 NET FOREIGN-TRADE ZONE BENEFITS $2,121,398 $2,230,648 $2,345,456 $2,466,102 $2,592,882 $11,756,486

1Export benefits to Canada and/or Mexico subject to applicable free trade agreements. Totals may vary, due to rounding.

Application and activation expense $125,000

2One-time benefit available after 1 weeks $28,599

This is a preliminary analysis which is only as accurate as the assumptions used to generate the following results. The analysis should not be relied upon until the assumptions, calculations, and results contained herein have been verified.

Foreign-Trade Zone Cost-Benefits Projections: Sample Manufacturing Case

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Annual cost, dutiable imports $125,000,000 Weighted average duty rate 22.50% Percent reject or scrap imported merchandise 0.25% Percent of imported merchandise re-exported 0.00% Percent of imported merchandise sold to the military 0.00% Inventory turns per year 3 Cost of domestic goods used in exports $0 Opportunity cost of capital 4.0% Drawback system in place? No FTZ cost advantage (FTZ differential) over drawback 100.0% Average "Merchandise Processing Fee" per entry $289 Average number of entries per year 1500 Annual growth rate, FTZ operating expenses, etc. 3.0% Annual growth projections from current year

Year 2 10.0% Year 3 10.0% Year 4 10.0% Year 5 10.0%

Application and activation expense (estimated)* $110,000

Increased operating expenses (accounting/tracking/reporting/systems mod) $185,000 Grantee fees (estimated) $25,000

* Application preparation, Customs activation and Operator training. Actual cost will depend on the sophistication of existing systems and other variables.

This is a preliminary analysis which is only as accurate as the assumptions used to generate the following results. The analysis should not be relied upon until the assumptions, calculations, and results contained herein have been verified.

Prepared by IMS Worldwide, Inc., Houston, Texas page1

Assumptions Used in FTZ Distribution-Only Cost-Benefits Analysis

Sample Apparel Distribution Case

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$175 Million in imports, no exports, no manufacturing

FTZ Benefits & Expenses By Type Year 1 Year 2 Year 3 Year 4 Year 5 5-YEAR TOTAL FTZ Benefits Re-Exports1 $0 $0 $0 $0 $0 $0 Reject, scrap, & military sales 70,313 77,344 85,078 93,586 102,945 429,265 One-time benefit2 --- Ongoing duty deferral 374,063 411,469 452,616 497,877 547,665 2,283,689 Merchandise Processing Fee savings 407,780 448,558 493,414 542,755 597,031 2,489,538 Total FTZ Benefits $852,155 $937,371 $1,031,108 $1,134,218 $1,247,640 $5,202,491 FTZ-RELATED EXPENSES Internal FTZ Operation Expenses $185,000 $190,550 $196,267 $202,154 $208,219 $982,190 Grantee fees 25,000 25,750 26,523 27,318 28,138 132,728 TOTAL FTZ-RELATED EXPENSES $210,000 $216,300 $222,789 $229,473 $236,357 $1,114,919 NET FOREIGN-TRADE ZONE BENEFITS $642,155 $721,071 $808,319 $904,746 $1,011,283 $4,087,573

Totals may vary, due to rounding. 1Export benefits to Canada and/or Mexico subject to applicable free trade agreements.

Application and activation expense $110,000

2One-time benefit available after 9 weeks $9,351,563

This is a preliminary analysis which is only as accurate as the assumptions used to generate the following results. The analysis should not be relied upon until the assumptions, calculations, and results contained herein have been verified.

Prepared by IMS Worldwide, Inc., Houston, Texas

Foreign-Trade Zone Cost-Benefits Projections: Sample Apparel Distribution Case

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Cost Benefit Analysis

• Cost/benefit studies are essential. – Accurate company-specific information is key to good

decision-making. – Be aware of limitations: special commodity issues – Specific FTZ Benefits to Evaluate

– MPF savings – Broker fee savings – Flexibility through direct delivery and weekly entry

processes.

OPERATIONS

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Activities Performed in an FTZ

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Inventory Control and Record Keeping System

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Movements in and out of an FTZ

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Operational Challenges

• Setting up your system • Converting inventory movements (ERP/WMS) into FTZ

transactions

• CBP • Meet early in process and get to know the officers in your

port

• Process for “out of process” • Brokers/Carriers • PGA’s - Partner Governmental Agencies • Internal changes and processes

WHAT YOU NEED TO KNOW

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What you need know....

• Ask questions • It is in the best interest of your company that you

completely understand the journey you are embarking on

• Network • Trade Conferences (like this one) • CBP • Utilize your brokers and carriers • Other FTZ’s in your area

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What you need know....

• It’s all about you • Choose Consultants/Service Providers that are

familiar with your situation: » Products, geographical location, other

governmental agencies you will interface with

» Transparency

• Ask for references AND speak to them » Develop specific questions regarding:

Project timing, budget, good/bad, expertise/knowledge, resource allocation, and support.

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What you need know....

• Corporate responsibility • It takes a village…. • Communication • Training, training, training

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Q&A

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Jodi Earle jearle@crosman.com

585-657-3082

Trey Boring Trey.Boring@imsw.com

281-554-9099

Liz Connell Liz.Connell@IntegrationPoint.com

704-576-3678 x1965

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