Customs Warehousing and Free Trade Zones – Case Study

When it comes to assessing the lowest costs, a product must be selected in order to obtain more concrete figures. A good case study to analyze costs associated in assembling and distribution of products would be automobiles. In this case study, three different scenarios will be taken into account. The first scenario will consider a finished product moving into a customs warehouse for either export into the U.S. or distribution into Spain. The second scenario would be importing an intermediate product such as steel into a free trade zone that will be used for assembling a car. The third scenario will focus on a hypothetical situation where every part of the production of a car occurs within Spain.

Case Study 1: Finished Product (Export/Import into a Customs Warehouse)

Consider having the car assembled and produced outside of Spain. Initially, this product avoids Spanish regulations and taxes. Once the product is exported to its destination, then the duties and taxes will be subject to the discretion of the final country of destination. Take a Spanish company that wants to access the European or American market with its line of cars, this company will want to store supplies until the market deems it necessary for use. Once an opportunity presents itself, the company will begin distribution of supplies depending on where it is necessary.

To export a finished car to the U.S. the company must pay a 10% VAT tax and a 2.5% tariff. The trader will also incur a merchandise processing fee of anywhere between a minimum of $27.23 to a maximum of $528.33 per entry in a customs warehouse at a rate of 0.3464% of value of a product. Finally, another cost incurred would be the harbor maintenance fee at a rate of 0.125% of the product value. For imports into Spain, the tax process is much simpler – with only two major components to worry about, a 21% VAT tax and a 10% tariff. To put this in numbers, €1,000,000/$1,000,000 worth of cars will be used as an example. The breakdown for numbers is listed below.

This goes hand in hand with the amount of storage costs that a company incurs a day. This process takes place preceding exporting from Spain or following arrival to the customs warehouse. To maintain cars within a customs warehouse, the average cost of storage is approximately €0.15 in Madrid and €0.2267 in Barcelona.

Case Study 2: Intermediate Product – Steel (Export/Import into a Free Trade Zone)

In this case, a company is to import an intermediate product that will ultimately be used in the assembly of the product. This may be a favorable option for companies that wish to take advantage of a free trade zone’s flexibility towards processing. A free trade zone would allow for transformative processing that a customs warehouse would not.

Taking a core component in the production of a car, steel, a rough estimate can be obtained over how much cost a company may incur. For steel being imported into Spain, from the U.S., the product will be subject to no taxes until a final product is manufactured. Once a car is assembled, the product is then subject to an additional 21% VAT tax rate and a 25% tariff. For steel exported into the U.S., the product will be subject to a similar merchandise processing and harbor maintenance fee mentioned in case 1. After a car is produced, the product is then subject to an additional 10% VAT tax. This process would be repeated for all the other differing products needed in a car. This car would then be subject to a storage fee preceding exports to another country or arrival to Spain prior to distribution. To maintain the cars inside a free trade zone, a company must pay anywhere in between €0.01054 – €0.0924 per cubic meter per day. In order to compare between the intermediate and final product, a €1,000,000/$1,000,000 worth of steel will be analyzed with destination or origin to the United States. Once again, the numbers are listed below.

Case Study 3: Production in Spain

For this case, the entire process of putting together a car is done inside Spanish/EU customs zone. Ignoring labor costs and fixed costs, we can determine the effect of VAT taxes on intermediate processes of the car. For this process, a manufacturer must acquire raw materials and pay a 21% VAT tax on the amount purchased. This cost is then pushed down onto the next manufacturer as a new sale price is set. VAT, at this point, is taxed on the gross margin at each point of the manufacturing, adding to the total VAT tax. Finally, this total VAT is then pushed onto the consumer, who ultimately pays for it once a final price is set. Once again, the additional VAT is added due to the gross margin proposed by the retailer.

For a complicated process of putting together a car, it may prove to be too expensive to go about this route. There are too many intermediate points of value added and compound with each middleman. It is always much better to pay VAT once, rather than several times. While the cost of VAT is ultimately recuperated at the sale of the product, it may prove to dig into a company’s cash flow when moving large quantities of products.

Conclusion

Overall, there are three different approaches a company can take to go about processing and creating a car. Based on the options presented, the first two options seem to be the most cost-effective option. However, this is dependent on the product being produced. For a company looking to cut costs while also continue processing, a free trade zone proves to be the most cost effective. A company focused on storage and logistics, then a customs warehouse is more effective.