Free Trade Zones: What All You Need to Know?
What is a Free Trade Zone?
A free trade zone (FTZ)is a designated area that eliminates traditional trade barriers, such as tariffs, some kind of taxes and fees and minimizes bureaucratic regulations.
The goal of a free trade zone is to enhance global market presence of the Country or location by attracting new business and foreign investments.
Tax-free trade zones generate foreign exchange through exports, and create economic value added.
Free, foreign, and export processing zones all fall under the umbrella of being free trade zones. Because these terms are confusingly similar, they are often used interchangeably.
Objectives of FTZs Tax-free trade zones have four policy objectives:
to attract foreign direct investment to decrease unemployment to support economic reform strategies by developing and diversifying exports to test new approaches to foreign direct investment and to policies related to law, land, labor, and the pricing of goods.
Incentives Regulatory incentives In many zones, the authorities act as a one-stop shop, simplifying administrative procedures. A further regulatory incentive is an exemption from limits on foreign ownership. In many Gulf countries, such as Kuwait, Bahrain and the UAE, land ownership regulations are relaxed either through renewable long-term leases or outright waivers. Fiscal incentives Algeria, Egypt, Kuwait and the UAE offer complete exemption from private and corporate income taxes. Lebanon, Morocco and Yemen offer corporate tax holidays of variable duration. As for the private income taxes of foreign employees, Yemen offers full exemption, Jordan a 12-year holiday and Tunisia a flat income tax rate of 20%.
What are the Benefits to a Zone User?
Duty Exemption- No duties on or quota charges on re-exports. Duty Deferral- Customs duties and federal excise tax deferred on imports. Inverted Tariff- In situations where zone production results in a finished product that has a lower duty rate than the rates on foreign inputs (inverted tariff), the finished products may be entered at the duty rate that applies to its condition as it leaves the zone (requires prior authorization). Logistical Benefits- Companies using FTZ procedures may have access to streamlined customs procedures (e.g. weekly entry or direct delivery). Other Benefits- Foreign goods and domestic goods held for export are exempt from state/local inventory taxes. FTZ status may also make a site eligible for state/local benefits which are unrelated to the FTZ Act.
NAFTA
In 1994, the North American Free Trade Agreement (NAFTA) came into effect, creating one of the world’s largest free trade zones and laying the foundations for strong economic growth and rising prosperity for Canada, the United States, and Mexico.
Since then, NAFTA has demonstrated how free trade increases wealth and competitiveness, delivering real benefits to families, farmers, workers, manufacturers, and consumers.
Want to learn more about free trade zones, international organizations related to free trade zones, and general rules and types of free trade zones? ComplianceOnline webinars and seminars are a great training resource. Check out the following links: All You Need to Know About Free Trade Zones Understanding North American Free Trade Agreement (NAFTA) NAFTA Rules and Certificate of Origin (USA, Canada, and Mexico) Harmonized Tariff Schedule/Schedule B and NAFTA Rules of Origin an How to Improve Your International Trade Compliance Score