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It has been nearly a century since the Foreign Trade Zone Act of 1934 was enacted, which established the first modern foreign trade zones (FTZ) in the United States. Born from the Great Depression these initial FTZs provided a duty exemption when foreign merchandise entered into them.
The concept of the foreign trade zone has evolved significantly since those initial days, and there are approximately 4,300 various types of zones worldwide today. In an era of international competition and globalization, countries around the world are eager to attract foreign direct investment and seize the potential of these foreign trade zones.
While there is no precise definition of what constitutes a foreign trade zone, the term generally refers to a specific location within a country that is officially designated for eligibility for tariff and tax exemption with respect to the purchase or importation of raw materials, components or finished goods.
The city of Montreal announced the creation of a new free trade zone (FTZ) in the city on July 22-the 13th such zone created by the Economic Development Agency of Canada.
The FTZ aims to enable manufacturers, processors, and producers to manufacture goods using imported inputs and only pay tax and excise duty on them if they enter the domestic market. Goods can be stored, processed, or assembled in the zones, and taxes and duties are avoided if the goods are exported, or must be paid if they enter the domestic market.
CIFFA held a Q&A with John Moccia, Director, Regulatory Affairs Canada, Livingston International, to shed light on the advantages of FTAs for the industry.
- Why are FTZs helpful to your company/freight forwarders?
A FTZ may be helpful to freight forwarders by providing them with options that they can offer their clients to take advantage of potential duty and tax deferral opportunities. One such FTZ program is the Customs Bonded Warehouse Program – which allows for the deferral of duties and taxes until the goods enter the Canadian market place or if the goods are exported. No duties/taxes would be payable.
- Which benefits are most attractive to freight forwarders?
In general, the FTZ programs in Canada serve to remove trade barriers where tariffs (duties/taxes) are either removed, deferred or reduced. There are five main programs that can be leveraged and depending on the specific program conditions, imported commodities may be stored, processed and used in the manufacture of other products without the payment of any duties, bonds and licensing fees provided they are exported. Likewise, under the Exporters of Processing Services Program, imported foreign-owned goods for processing, distribution or storage are relieved of the Goods and Services Tax (GST) when exported.
- How are they helpful to the Canadian economy?
Canada has taken a unique approach to FTZs. Across the country, there exist Foreign Trade Zone Points created through public and private partnerships which offer a single-window approach to businesses. This not only eliminates the need to have to connect to multiple Government agencies and people but they also offer mentoring and support from industry experts. In addition, these FTZ Points provide access to various incentive type programs such as tax credits, grants, training incentives and additional Provincial and Federal incentive programs.
Currently, there are three main FTZ-like programs in Canada; the Duty Deferral Program, the Export Distribution Program, and the Exporters of Processing Services Program. Each of these programs offers key advantages and benefits for businesses such as upfront relief of duties and taxes, refunds of duties for exported goods and deferment of duties and taxes.
In the United States, foreign trade zones are secure areas under supervision of U.S. Customs and Border Protection (CBP). Foreign and domestic merchandise may be moved into zones for operations, assembly, manufacturing, and processing. While in the FTZ, merchandise is not subject to duty or excise tax until the merchandise enters the United States territory for domestic consumption.
- What issues, if any, have you encountered with them?
Canada has implemented FTZ policies that are available nationally and while businesses may enjoy this benefit anywhere in Canada, this degree of flexibility becomes a double-edged sword since the lack of “designated” FTZs makes it more difficult to market and promote to businesses and prospective foreign investors who have traditionally viewed FTZ as a specific local area.