Customs Warehousing and Free Trade Zones

Taxes and Cost

In the current free market, there are some options an exporter may take to ensure they produce their products efficiently and cost-effectively. For a company considering moving their products abroad, there are some main concerns that a company must consider moving into an international market. The most important factor to a company’s profit in this case would be import taxes, value added taxes, and commercial policy measures. This is where both customs warehouses and free trade zones play an important part in trade. Both customs warehousing and free trade zones provide an opportunity for exporters to defer these taxes and provide special treatment for goods and storage.

In fact, by deferring value added tax until the point of exportation, businesses have reported up to 25% to 30% overall savings. This is due to the high levels of VAT taxes the Spanish government imposes on imports. With the VAT tax rate being at approximately 21% for most goods, the overall total customs estimate totals between 20%-30%. The total customs estimate is just the combination of costs due to duty, VAT tax, and customs fees. In the United States, this burden is less with total customs rate imposed is approximately 10-20%. These are savings that can be allocated into other areas of logistics for the distribution of cargo.

Overview of Differences

While both storage options offer a good tax incentive, there are other variables that make either one of these options more fitting for the right company. For exports in the United States, there is a time limit of five years set for goods to be held in bonded warehouses, whereas they can be held indefinitely in a free-trade zone. However, for this time limit is not present in the European Union. This opportunity allows for companies to delay introduction of a product to market until there is greater demand. Listed below are some important distinctions between the two:

  • Domestic Reach – Custom warehouses allow for quick domestic response to domestic demand.
  • Restricted Goods – Restricted goods are only limited to customs warehouses.
  • Processing – Only processing that does not fundamentally change the product is accepted in customs warehouses. Manufacturing can take place in free zones.
  • Allowable Exports – Custom warehouses are exclusive to only foreign exports while free trade zones are open to both foreign and domestic goods.
  • Duty Payment – Payment of duty is made once the goods leave the customs warehouse or exits non-custom territory. However, movement can be made between free zones.
  • Control of Goods – Local customs officials are in control and supervision of stored goods in customs warehouses and their movement. In contrast, free trade zone officials have full control of the stored product.
    • However, customs warehouses carry the added benefit of offering logistical services for transport, packaging, waste management, etc.
  • Ease of Withdrawal and Removal – Withdrawal from a customs warehouse is done with permission from Customs and must be withdrawn in its entirety. A “as-needed” withdrawal requires special permission. Goods in free trade zones can be withdrawn more freely.

Here is a table summing up the differences between the two options:

Conclusion

Overall, the choice behind what kind of storage option is right for your company is based on what the end goal and necessity is. A customs warehouse is geared more towards a company that has more manufacturing capabilities. A free trade zone is more geared towards international trade. As it stands, it may seem to the average consumer that the more cost-effective and freeing choice is a free zone. However, a company must acknowledge the savings on taxes and its comparative savings on logistics. If the goal is to focus on a more domestic market with an international product, a place where supply needs to be satiated at a moment’s notice, then a customs warehouse would likely be a better option. This allows for less customs red tape and for a more dynamic procedure. For a more international focused trade, free trade zones may prove to be more cost effective. Ultimately, the goal is to reduce the amount of cost a company incurs and maximizing logistical output.