Free Zones: Requirements for effective operations
The UK has recently established new free ports. What are these free zones and how can businesses leverage all the opportunities?
Easier Global Trade
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
Different names
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?
Businesses who are flexible where (country / location) they manufacture goods and wish to export such goods may profit the most from the establishment of a free zone. This is due to the fact that you are able to import items into the free zone without having to pay any duties, you can create the completed product there, and you can export your goods without having to pay any taxes.
There would be a minimal amount of red tape and inspections to slow things down, which would favour manufacturers in free zones, who benefit from simpler customs processes.
Only in the event that your products leave the Freeport and enter the domestic market of a nation that you are currently located in would you be required to pay taxes on them. Because of this, companies who are able to hold their products duty-free will enjoy advantageous advantages to their company's cash flow.
Tariff reduction opportunity in Free Zones
If the duty on your completed items is lower than the duty on the material that you use, importing duty-free raw materials might most definitely be beneficial to your business. This implies that you would only have to pay tax on the finished items, and not on the individual components that went into making them.
Therefore, even if you choose not to export your products, you will still have the ability to sell them at prices that are more competitive on the local market in the UK. You should, however, take into consideration, in addition to the apparent tax advantages, the time and money savings that your company would experience as a result of the elimination of onerous customs procedures and paperwork.
It goes without saying that in order to manufacture your items inside the freezone, you will require access to the appropriate production facilities. The good news is that there are opportunities for temporary tax incentives that may be used to entice firms to shift their operations to a freezone. Companies who choose to set up shop there will enjoy lower VAT and nil business rates for a period of five years. In addition, you won't be required to pay any stamp duty.
The downsides of free zones
They suggest that organised criminals would be among the few people to gain from freeports, which are places where a country's standard norms regarding taxes and tariffs do not apply. Critics contend that the advantages of freeports are modest.
The relative anonymity and secrecy that surrounds these micro tax havens may, on the other hand, give rise to a range of unwelcome complications, such as the laundering of illicit funds and the dodging of taxes. And there is no way to get around the reality that at some point in the future, payments for import duties on products will be required to be made.
Smuggling?
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 the 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.
So what are the requirements for an effective operation of a FTZ?
REQUIREMENT 1: Code of Conduct for Free Trade Zones
The international organisation known as the OECD is of the opinion that the "Code of Conduct for Clean Free Trade Zones" should be considered a vital tool for those nations who are in charge of running FTZs. When this policy is put into effect in a nation, companies who want to do business there are going to have to pay close attention to the fact that they are going to be required to inform the government about any kind of business or service they plan to do and provide them unrestricted access to the locations where they do their work. When you carry out an activity inside the FTZ, you will also be expected to furnish the requisite assurance that you are complying with the customs regulations that are relevant.
Top Tip: Research further here https://www.oecd.org/gov/illicit-trade/transparency-on-free-trade-zones.htm
REQUIREMENT 2: Digital records
Any firm operating inside an FTZ is normally required by the FTZ operator to maintain detailed digital records of all product shipments entering and exiting the zone, as well as records of all commodities and services generated within the zone. These data should generally be detailed enough to indicate what is in the zone at any given time. Documentation of all sales and purchase transactions for all items and services entering and leaving the FTZ shall be preserved in digital records and made accessible to the competent authorities upon request. It is essential to keep a full and accurate record of all business transactions in compliance with your own country's legislation. This gives you complete control over the materials used in the production and assembly processes, which can subsequently be reconciled with the volume and value of your commercial transactions. According to national law, these documents must be retained for many years. When the right authorities request it, information is made easily available to them in a timely manner. They should also be kept in the format required by the relevant authorities, so that they may be utilised for risk profiling by the competent authorities.
REQUIREMENT 3: Trackable money
It has been requested of the nations that host FTZs that they encourage the use of electronic payment methods for any commercial or financial transaction carried out by economic operators engaged in the FTZ that takes place inside the FTZ or originates from the FTZ, as well as guarantee the trackability of cash transactions.
Conclusions
Companies who conduct their operations inside an FTZ need to be aware of the fact that the OECD and other global agencies have established certain standards that have some bearing on the government's capacity to put these FTZs into effect. As a direct consequence of this, the establishment of processes and procedures is required in order to guarantee that all specialised rules are adhered to. These could be noteworthy in some way. However, they are necessary to ensure that the system can be maintained throughout time and that the nation can get all of the advantages it offers.
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.
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