Free-trade zones are areas with tax benefits established by countries to attract capital. Tax and tariff exemptions make these areas attractive for product imports/exports.
Some countries have parts of their territories under different tax regulations. These special areas are called free-trade zones (FTZ) and offer benefits for who operates there, like exemptions from paying import duties and certain taxes, for instance.
Many national governments establish FTZs in remote, extreme regions to attract capital, create jobs and foster economic development there,’ explains the World Free Zones Organization, adding that ‘These are areas where goods are not subject to traditional customs controls. Imports and exports are not taxed, except for rates that could be subject to it.’
Hong Kong, Singapore, Colón (Panama), Copenhagen, Stockholm, Gdańsk (Poland), Los Angeles, New York, London, and Amsterdam are among the cities with the world’s most active FTZs. ‘There are more than 5,400 FTZs in the world, more than 1,000 of which have been created in the past five years. Experts anticipate that over 500 new special economic areas will be established in the next few years,’ explain the authorities of INzone, an FTZ in Indianapolis.
The coronavirus pandemic has brought operational challenges for FTZs. ‘The past two years have been the most challenging years for the industry in recent history. Besides causing a health crisis, the pandemic also blocked trade and investment flows,’ highlights fDi Intelligence, an agency that spreads information on international trade.
In this sense, fDi explained that ‘Basically, the number of foreign direct investment (FDI) projects in 798 monitored areas went down to 309 in 2020 from 431 in 2019, reaching 171 between January and July 2021 – that means another 10% reduction in annual terms. However, in terms of capital investments, after a steep drop in 2020, $29.3 billion were invested between January and July 2021 in these FTZs, matching the figures for the entire year of 2019,’ the company added.
Benefits of FTZs for companies
Each FTZ has unique traits. Some of them only allow imports, while others include exports as well. There are FTZs who only offer warehousing, which can be permanent, special permanent or transitory, according to the merchandise’s storage time. Finally, these areas may be private, public, or public-private entities.
In Aerodoc, we conduct periodical checks on FTZ operations to ensure easier and more profitable export/import operations for our customers. Our service begins when packages are dispatched and ends upon delivery, covering import operations but also shipping and even warehousing if needed.
The biggest beneficiaries of FTZs are people or companies who bring an object into an FTZ’s country. Aerodoc’s international trade experts point out that operating in FTZs can bring time and money savings. Most FTZ users are individuals or legal entities, both national and foreign, who acquire the right to conduct activities there for a fee.
“The Free Trade Zone regime also serves to reduce the time to market, favoring the company’s cash flow”, says Estefania Sisatzky, Sr VP of OPS & Customer Experience at Aerodoc. And she explains: “Our customers import the stock in the free trade zones. Once the sale is completed, only then, they make a partial release only of products already sold. In this way they pay duties & taxes only for what has to be released. The financial benefits are very relevant, avoiding the nationalization of the total stock and the cost that this implies“.
FTZ users can also be classified as direct or indirect. The former hire FTZ franchisees directly and oversee a lot or a shop located in the zone. They are also accountable to Customs for declaring everything that comes in or out of that location, both for own and third-party goods.
Indirect users hire direct users and do not need to comply with those requirements. An example of this would be companies who storage merchandise temporarily in third-party warehouses without acting as direct operators.
The financial benefits from operating in FTZs depend on several factors and the zone where the operations are conducted. Although there are not always cost savings, companies operating in these areas claim that they allow them to better manage their cash flow. In addition, they generate benefits by having better timing of payments and and agility in goods movements. You can consult professional advisers who work exclusively on this field – working with them is recommended to learn about the costs and benefits and inform your decision-making.
Which industries are the heaviest users of FTZs?
Although there is not a single specific industry that uses FTZs more than others, tech resellers have recently emerged as key players in this space. Other big FTZs users include gadget or device marketers, which typically leverage their financial advantages, especially when their buyers are located overseas.
When a company or an individual purchases a tech product, a series of procedures must be cleared, including the payment of tariffs and taxes. Resellers help reduce costs, but they must have a clear picture of FTZs and their operational regulations.
FTZs are busy spaces with lots of daily operations. A typical customer could be an integration company that installs tech gadgets bought in the USA. To take advantage of tax benefits, that company can send its purchases to an FTZ in a convenient location and then to its destination, which could be a country in another continent.
Aerodoc has over 25 years of experience in logistics and added-value services for merchandise shipping, with expertise in IT, telecoms, broadcasting, and satellite communications. With operations in more than 160 countries, the company stands out thanks to its expertise in global storage and transportation.
