Updated: 3 days ago
Import Duty plagued businesses sinking under red Brexit tape may eye on setting up shop in one of the new free ports in 2022. But hold on! Let's check out these benefits and challenges first.
Eight new English Freeports will be created and based in
East Midlands Airport,
Felixstowe & Harwich,
Liverpool City Region,
These Freeports are set to start operations in 2022 and cover sea, air and rail ports in England. Their creation is linked to high hopes: support jobs, trade and investment. Described as "humming hubs of high-quality manufacturing, titans of trans-shipment and warehouses for wealth-creating goods and services" by the UK government.
Freeports are special areas (‘special economic zones’ (SEZs)) within a country where business activity is subject to different rules from those in the rest of the country.
Some of the benefits in official papers relate to
reduced administrative burden,
relief from duties and import taxes, and,
ease tax and planning regulations.
Free of Duty
Typically, importers bringing goods into a Freeport do not have to pay duties until the goods leave the freeport and enter the domestic market. No duty at all is payable if goods come into the freeport and are then re-exported. So they come into the freeport and then leave again without entering the domestic market.
Cheaper if processed in a Freeport!?
If raw materials are brought into a Freeport from overseas and processed into a final product before entering the domestic market, then duties could be payable on the final good and not on the raw materials, usually making the final good cheaper.
There will be simplified declaration procedures for goods entering a Freeport to balance trader facilitation and ensuring the security of the border.
Businesses bringing non-controlled goods into the Freeport will need to make a customs declaration into their commercial records, while traders bringing in controlled goods, including those that are subject to excise duty will need to complete a simplified frontier declaration.
So, in summary, operating in a Free Zone can have the following benefits:
simplified customs procedures;
relief on customs duties relating to handling and processing of goods destined for re-export;
cash-flow benefits of not having to pay duty until the goods are released for free circulation in the domestic economy (or used or consumed within the free zone.
A business can import goods into a Freeport without paying tariffs, process them into a final good and then either pay a tariff on goods sold into the domestic market or export the final goods without paying UK tariffs.
The primary success story for Free Ports remains the UAE! The Jebel Ali Freeport in Dubai, one of the largest in the world, has had success as a hub through its highly liberal approach to taxation:
0% corporation tax
no income tax
no taxation at all.
Further, 100% foreign ownership is permitted along with no restrictions on repatriation of profits or controls on foreign currency exchange.
There are no import or export duties relating to the zone except for sales made into the UAE. It is also relatively easy to obtain work permits for foreign nationals, and there are guarantees of no corporate or even personal income taxes for between 15 and 50 years from set up.
One claim to fame for Freeports is that they are alleged of fostering money laundering and tax evasion, to the detriment of the national economy. As a report by the European Parliament suggests (see download below), in a way, goods in Freeport are technically "in transit" but there are never any time limits. Goods are not expected to "arrive" at a certain time in a certain place.
Unfair Value growth & Money laundering
This system may allow the stored goods to gain value, and it then allows for tax-free sales. Goods can enter a Freeport, stay there indefinitely and trade an unlimited number of times without ever having been taxed. Lack of scrutiny can facilitate trade-based money laundering, So there is a fear of relaxed oversight, lack of transparency,
trade data and systems integration.
Not less but more control?
On the other side of the spectrum, one could argue that goods are under
customs supervision and thus are often more controlled than elsewhere because
traceability is one of the logistical services offered. The UK government has indicated that Freeports will have robust security to tackle illicit activity and that HMRC and Border Force will continue to conduct compliance checks on goods within the Freeport.
We already have low to no duty
The trade deal with the EU and a low duty regime means that the economic benefit might not be as relevant in the UK as it would be in countries with higher duty or high taxes. Moreover, to suspend customs duty, often, suspensive regimes can be used (even though this may be complicated to set up). So while some businesses may benefit, it will not reduce or stop the border friction with the EU.
How will the EU react?
Do we care? Yes, I hope UK businesses do! The relationship with our closest neighbours matter. The European Parliament is sceptical about free ports for the reasons mentioned and the EU so far has been doing their utmost to ensure a level playing field. Will eight new Freeport at their front door cause more friction?
The case for or against Freeports has been made a while ago. The result was a foregone conclusion. Not out of necessity but political will, the UK embarks on more evidence of divergence from the EU, where free ports are reduced and limited to minimal, exceptional structures and seen as not compatible with international obligations, the same ones the UK is signed up to. While surely an exciting project and a boost for the selected ports, will we really see the hype of activity (and controversy?) that we see in Jebel in the UAE? More importantly, maybe, do we really want that in the UK?
The study from the European Parliament in 2018
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