Businesses wishing to operate in a Free Trade Zone or Port need to be aware of paperwork and due diligence requirements to counter illicit trade
The UK government had announced the creation of eight new freeports across England. The UK chancellor also made some bold claims about the economic benefits of England’s new freeports. Rishi Sunak said the creation of eight free trade areas, at ports and airports across the country, will boost manufacturing, job opportunities and investment in deprived areas.
Easier Global Trade
Overall, the decision of the UK to create eight free trade zones or port has been welcomed by many businesses as a way to attract new business and foreign investment. This is because such free zone makes trading easier and spurs economic growth (we hope!) by eliminating tariffs, quotas and other taxes minimizing bureaucratic requirements including certain customs procedures and disclosure requirements.
A part of daily global trade
Free trade Zones (FTZ) exist around the globe. They have popped up around the word and every major country has then. They have come to play a central role in business for many countries and leading manufacturers
The scope and nature of FTZ vary across countries, depending on the regime and type of activities allowed to take place inside, and many countries gibe them different names, such as
1. Free Zones
2. Enterprise Zones
3. Export Processing Zones
4. Special Economic Zones
5. Foreign Trade Zones,
6. Free Ports etc.
Should I move to a free zone?
Those likely to benefit the most from free zone will be manufacturing businesses with ambitious plans to export their products abroad. That’s because you can import goods into the area duty free, make the finished product there and export your goods without incurring any tariffs.
Manufacturers in free zone also benefit from simplified customs procedures, so there would be minimum red tape and checks to slow things down.
Taxes would only be paid if your goods leave the Freeport and enter the domestic market of the country that you are in. This means there are attractive cash-flow benefits for businesses who can store their goods duty-free.
Tariff reduction opportunity in Free Zones
If the duty on your finished goods is lower than then the material you use, you could certainly benefit by importing raw materials duty free. This means you would only pay tax on the final products and not the component parts.
So even if you don’t export your goods, you would be able sell them at a more competitive price on the UK domestic market. But as well as the obvious tax benefits, you should also consider the time and money your business would save by cutting out onerous customs checks and paperwork.
Of course, you would need to have the necessary manufacturing facilities within the freezone to produce your goods. The good news is that there are temporary tax breaks available to encourage manufacturers to move to a freezone. Companies based there will benefit from reduced VAT and zero business rates for five years, and you won’t have to pay stamp duty either.
The downsides of free zones
Critics say the benefits of freeports - where a country’s normal tax and tariff rules don’t apply - are minimal and claim that organised criminals will be among the few to benefit.
The secrecy and relative anonymity surrounding these mini tax havens can create a host of unwanted problems, however, such as money laundering and tax evasion. And there’s no escaping the fact that import tariffs on goods will still need to be paid at some stage.
A place for criminal networks?
These developments, however, have outpaced the adoption of standards and regulations governing effective oversight of the activities in FTZ in some countries. According to the EU Council’s “Rationale for developing the draft Recommendation” [for free zones], as a result, “criminal networks have found ways to abuse the supervisory gaps in some FTZ to smuggle or divert illicit products to the domestic market, set up production facilities for counterfeit and contraband goods, transit illicit goods and facilitate the conduct of illicit services”.
Lax control and enforcement
The EU further laments that “In some countries FTZ are treated for all purposes as outside the nation’s customs territory with the result that goods enter or exit these areas with minimal customs controls. Although the conditions for establishment of FTZ are regulated, the extent of customs controls or interventions is often insufficient or absent. Even where legislation specifically provides jurisdiction for customs authorities to exercise controls in FTZ,
enforcement can be weak”.
Benefits exist, but so does illicit trade
Many FTZ produce economic benefits to their local economies, but there is strong evidence to show that illicit trade flows through them e.g., in counterfeits, wildlife, arms, etc. OECD analysis finds a positive correlation between the size of FTZ, in terms of employment and firms established therein, and the value of illicit trade in counterfeits. Some FTZ are found to be key trans-shipment points for illicit goods that have been repackaged or relabelled to conceal their point of origin and to penetrate the legitimate supply chain.
Code of Conduct for Clean Free Trade Zones
The international body OECD believes that a key instrument for those countries operating the FTZ is the “Code of Conduct for Clean Free Trade Zones”. When a country implements this, business wishing to operating in it need to pay careful attention of the need to let the authorities know about any commercial or service you’d like to carry out and provide them with unconditional access to your premises. You will also be required to provide necessary assurance of compliance with the applicable customs provisions from carrying out an activity in the FTZ.
Detailed digital records must be stored for up to five years
Anyone operating in an FTZ must also maintain detailed digital records of all shipments of goods entering and leaving the zone, as well as all goods and services produced within it, sufficient to know what is inside the zone at any given time. According to the Code, these digital records should:
Document sales and purchase operations of all goods and services entering and exiting the FTZ, and be provided to the competent authorities upon request.
Maintain a complete and accurate record in accordance with domestic law of all commercial transactions to enable full accountability of materials used in production and assembling processes that may be reconciled with the volume and value of their commercial transactions.
These records should be:
Maintained for a period of at least five years.
Made available in a timely manner to the competent authorities upon request.
Maintained in a format as required by the competent authorities, such that it can be used for risk profiling by the competent authority.
Finally, FTZ countries are asked to incentivise electronic payment for any commercial or financial transaction of the economic operators active in the FTZ occurring inside or originating from the FTZ, and ensure the traceability of cash transaction.
Businesses that operate in a FTZ should be mindful that there are guidelines from the OECD and other global institutions which exercise some influence on the government’s ability to implement these FTZs. The result is a need for processes and procedure to ensure all special regulations are complied with. These could be significant. But they are essential to make sure the system is sustainable and allows the country to reap all its benefits.
Download Free Trade Zone Document Recommendation
The EU has published, in 2021, a 2019 position on free trade zone and how to combat illicit trade within one. This is particularly relevant in the context of the UK wishing to establish various Free Trade Zones at ports in the UK.
About the author
Arne Mielken is a leading global trade professional in the UK and the EU, and founder of the customs and training consultancy Customs Manager Ltd. Arne is on a mission to empower businesses with expert import and export advice, training, and intelligence and help them grow by trading across borders efficiently and compliantly.
For more information visit https://www.customsmanager.org