An increase in the use of Free Trade Zones around the world is playing a role in the rise of countries using Foreign-Trade Zones (FTZs). The continued growth of the global economy is also responsible for expanding FTZ use.

In 2017, the greatest challenges to FTZs will be compliance related, exacerbated by the expected increase of activity within these zones. Within the past three years, a record-high $99.2 billion in merchandise was exported from U.S. FTZs, according to data from the Foreign-Trade Zones Board.

During a recent webcast hosted by Integration Point, Michael D’Aoust, president and CEO of PointTrade Services, Inc. (www.pointtradeservices.com) identified specific risks areas and included improving compliance within a supply chain.

Now, he answers your most pressing questions from the webcast:

 

Q: We have heard that the FTZ Board is now doing audits of spot checks. What are they looking for in such a visit?

In one of the first spot checks conducted by the FTZ Board, auditors primarily focused on understanding the types of products the zone operator/user was importing and admitting into the zone a well as the various finished good products produced. Checks also focused on reviewing the traceability reports that link the admissions to the removals, and discussing with the zone operator the specific controls in place to monitor and comply with the approved production scope. 

The challenge is that most systems are capable of monitoring the inputs and outputs at the six-digit HTS level but that monitoring is usually reactive, meaning the transaction already took place. Additionally, because the product description is the primary determinant for scope approvals with the HTS supplementing the description, monitoring at the HTS level is somewhat limited in terms of its comprehensiveness but is generally a good place to start. 

We are seeing more and more companies getting procurement/sourcing groups responsible for ensuring imported products are within the approved scope and working with trade compliance to ensure that happens.

Q: ­Per a call with my U.S. Customs Border and Protection (CBP) contact today: CBP may be discontinuing direct delivery authority. Have anyone heard this from their CBP contacts? ­

Customs considering the option of discontinuing to grant direct delivery authorization is not something we have heard being discussed in trade. We have seen CBP around the country take a more deliberate review of the setup and operations of the zone before granting direct delivery privileges. For example, as more 3PL warehouse providers are operating FTZs, they may not qualify as the owner of purchaser of the goods. It is in these cases that CBP seems to be denying such requests. If the company squarely meets the requirements (listed below), direct delivery is usually granted. 

Another important point on direct delivery is the routine and repetitive nature of the goods.  We have seen in certain ports where Customs has attempted to apply a more strict interpretation of this by requiring a list of the HTS codes associated with the articles that will be moved under direct delivery.  If the importer or zone operator begins to admit to the zone any new articles classified under an HTS code not included on the list, CBP may require the company to first submit an updated direct delivery schedule.  This is not occurring at many ports around the country, but in some. 

146.39   

(c) Criteria. The port director shall approve the application if the following criteria are met:

(1) The merchandise is not restricted or of a type which requires Customs examination or documentation review before or upon its arrival at the zone;

(2) The merchandise to be admitted to the zone, and the operations to be conducted therein, are known well in advance, are predictable and stable over the long term, and are relatively fixed in variety by the nature of the business conducted at the site; and

(3) The operator is the owner or purchaser of the goods.

Q: ­Can merchandise for a Weekly Entry be removed from the zone prior to filing the Weekly Entry? ­

No. Foreign status merchandise may only be removed from the activated area of the zone following the release of the 3461 weekly estimate (see below). Once the 3461 weekly estimate is released (along with any relevant PGAs that have an interest in the goods), only then can the foreign status merchandise be transferred from the zone. At the end of the seven-day zone week period, the 7501 entry summary (Type 06) should be filed.

146.63   

(c) Estimated production—(1) Weekly entry. When merchandise is manufactured or otherwise changed in a zone (exclusive of packing) to its physical condition as entered within 24 hours before physical transfer from the zone for consumption, the port director may allow the person making entry to file an entry on Customs Form 3461, or its electronic equivalent, for the estimated removals of merchandise during the calendar week. The Customs Form 3461, or its electronic equivalent, must be accompanied by a pro forma invoice or schedule showing the number of units of each type of merchandise to be removed during the week and their zone and dutiable values. Merchandise covered by an entry made under the provisions of this section will be considered to be entered and may be removed only when the port director has accepted the entry on Customs Form 3461, or its electronic equivalent. If the actual removals will exceed the estimate for the week, the person making entry shall file an additional Customs Form 3461, or its electronic equivalent, to cover the additional units before their removal from the zone. Notwithstanding that a weekly entry may be allowed, all merchandise will be dutiable as provided in §146.65. When estimated removals exceed actual removals, that excess merchandise will not be considered to have been entered or constructively transferred to the Customs territory.

(2) Individual transfers. After acceptance of the weekly entry, individual transfers of merchandise covered by the entry may be made from the zone.

Q: Are there any red flags for a Regulatory Audit or it is random? ­

Customs may not specifically state the reasons for selecting a company to conduct a regulatory audit.  However, certain factors may prompt an audit including the size and volume of the imports; complexity of the import transactions and valuation; transfer pricing and first sale, FTAs; PGAs; safety considerations; counterfeit goods; and numerous prior disclosures.

Q: ­You mentioned foreign vs. domestic sourced material. Are FTZs being used to bring in material from domestic suppliers that are not imported? What are the advantages?

First In First Out (FIFO) as approved in C.S.D. 81-62 applies to fungible merchandise, i.e. merchandise which for commercial purposes is identical and interchangeable in all situations (19 CFR 146.1(b)(12)). In order to maintain FIFO integrity, if the same SKU is sourced from both a foreign and domestic supplier, both the foreign and domestic items must be tracked. This is because FIFO is based on the premise that all goods are fungible and, therefore, the company must record all transactions related to that SKU. 

Q: ­Would packaging be allowed under a distribution center FTZ if the essential character does not change or there is not substantial transformation?­

Yes. Packaging and repacking is allowed in a warehouse/distribution environment as long as the packaging/ repacking activities do not meet the definition of processes (production). The most prominent issue we see in the packaging/repacking process is that in certain situations, the combining of certain items can result in a kitting operation with one item taking on the essential character, which causes the classification of the related components to shift upon entry. That scenario requires production authority from the Board so it is important to keep a pulse on warehouse activity from a sales and marketing perspective.    

Q: ­How can you get a list of sample questions that will be asked to other departments?

https://www.cbp.gov/trade/programs-administration/audits/focused-assessment

Q: ­What is VMI?­

Vendor Managed Inventory (VMI) programs are becoming more common in FTZs and essentially involves the zone operator/user handling foreign vendor-owned inventory in the activated area of the zone prior to accepting title of ownership. Essentially, this delay of title transfer allows zone operators to admit the goods into the zone on the supplier’s behalf where the goods are stored until the zone operator/user need the goods for manufacturing or shipment to a customer. This delay in ownership (title transfer) allows the company to avoid recognizing the inventory on their books until it is needed. There are many nuances to managing VMI that include but are not limited to maintaining an audit trail of title transfers; developing processes to control inventory discrepancies and adjustments of VMI inventory; returns or rejected inventory; valuation; and right-to-make entry considerations. 

This strategy should be carefully documented, but can be a significant benefit to reduce inventory-carrying costs and assist with a just-in-time inventory strategy.

Q: ­Please explain ADD a little further.­

Items subject to Anti-Dumping or Countervailing Duty (AD/CVD) orders, or items which would be otherwise subject to suspension of liquidation under AD/CVD procedures if they entered U.S. customs territory, shall be placed in Privileged Foreign Status (PFS) (19 CFR 146.41) upon admission to a zone or subzone. Upon entry for consumption, such items shall be subject to duties under AD/CVD orders or to suspension of liquidation, as appropriate, under 19 CFR part 351.

Items subject to an active dumping order must be admitted into the zone in PFS, locking in the duty rate at time of admission. No inverted tariff benefit may be taken for items subject to dumping. When the goods are removed from the zone, the importer will be responsible for paying the normal duty rate as well as the ADD rate. Note that the entry requirements demand that the ADD case number be included on the Weekly Entry filing. 

Alternatively, items admitted into the zone in PFS that are subject to dumping may be re-exported from the FTZ.  Since the goods do not enter U.S. commerce, the dumping duties can be avoided. 

Q: ­How often would a company expect a CBP audit?­

There is no way to predict the frequency or timing in which Customs may initiate an audit. Customs usually conducts compliance reviews on the zone at least once annually (or more if warranted). If Customs finds repetitive mistakes, violations or other errors, it is possible your company will begin rising in priority level for an audit.

 

 

Integration Point delivers a comprehensive suite of global trade management products encompassing all industries, geographies, and trade programs, enabling companies to achieve global compliance while maximizing supply chain savings. www.IntegrationPoint.com