What is a Free Trade Zone?
According to Global Negotiator, a Free Trade Zone is a special commercial and industrial area in or near ports of entry where foreign and domestic merchandise may be brought in without being subject to payment of customs duties, quotas and tariffs. Free Trade Zone, popular known as FTZ is a designated area where tariffs are removed and the bureaucratic necessities are narrowed in order to attract new business and foreign investments. Free Trade Zone are also called foreign free zones, foreign trade zones, free ports or bonded warehouses. (1)
Free Trade zones are developed in places that are geographically advantageous for trade and located in developing countries, in places near to international airports and seaports.
The Free Trade Zone is a labor-intensive manufacturing hub, where merchandise (raw materials, components and finished goods) may be stored, sold, exhibited, repacked, assembled, sorted, graded, cleaned or manipulated prior to re-export or entry into the national customs authority. The produced goods are exported to different countries and the duties are imposed only when they pass from the zone into an area of the country subject to the customs.
These zones are mostly used by transnational corporations for establishing factories for the manufacturing of several goods. The goods depend on the availability of the raw material, skilled labor, and well-equipped technical staff. (2)
How a Free Trade Zone works?
As stated in Economywatch, one of the main purposes of the Free Trade Zones is to develop the economy of that specific area through more job opportunities, business options, manufacturing options, etc. However, sometimes Multinationals manufacturers set up factories in Free Trade Zones located in poor countries, so they can enjoy from the lost cost of labor in those areas. (3)
For a better understanding of how a Free Trade Zone operates we are going to adapt an example extracted by Encyclopedia.com.
An Italian high-luxury watch manufacturer is subject to tariffs in many countries, however, the assorted metals out of which the watches are built come from Africa and may not be taxed in their raw form. The Italian manufacturer could set a manufacturing facility in a Free Trade Zone in order to get access to African foreign metals instead of paying for high-priced metals originating in Italy and close to it (for example, The Canary Islands). The company could hire local employees to build the watches, and then when the watches are sent to a retail distributor in Italy, the watches would be treated as an import subject to tariffs. Paying these tariffs might be cheaper than using Italian materials and the local economy around the free trade zone benefits from the jobs provided by the Italian watch manufacturer.
Benefits of a Free Trade Zone
Many companies don´t know the benefits that can achieve through a Free Trade Zone
(4). For example:
Deferral, deduction or elimination of certain tariffs/duties. A Free Trade Zone facilitate cross-border trade by removing obstacles imposed by customs regulations. Free Trade Zone is beneficial for importers and exporters, the tariff of the manufactured good is zero, eliminating any costs associated with importing raw materials and goods. Also, these zones are designed to reduce labor cost and tax related expenditures. Free Trade Zones ensure faster turnaround of planes and ships by lowering custom related formalities. Instead of filing an entry every time a shipment enters the country, an importer operating in an Free Trade Zone only needs to file one Customs entry a week, reducing bureaucratic process and costs associated with entry filings. Free Trade Zones help the traders to utilize the available business opportunities in the best possible way. For example, a company can hold its goods indefinitely in an FTZ until a port opens up and it allows companies to more closely track their inventory by bringing goods into an FTZ warehouse that a company can control. Free Trade Zones promote export-oriented companies FTZs can be used to manage transshipping operations, saving money on manufacturing processing fees. Employment opportunities created by free trade zones help to reduce unemployment problem in the less developed economies.
Canary Islands Free Trade Zone
The Canary Island is a Spanish Special Tax Territory. In the 19th Century, the Spanish government made the Canary Islands a free trade zone to promote economic development. When Spain joined the EU in 1986, special fiscal measures were deemed incompatible with European legislation. For this reason, the Canary Islands’ Parliament decided to stay out of the European VAT area. (5)
The Canary Island has a maritime strategic location that connects Africa, Europe, and America, facilitating the import and the export around the world. It is also a Free Trade Zone, what it means is not subject to customs duty:
● No special taxes on goods introduced to the Free Trade Zone.
● No import duties while the goods are in the Free Trade Zone.
● No IGIC (Canary Islands’ VAT) on the goods within the Free Trade Zone and services provided for them.
● Community measures on trade policies such as contingents or restrictions of any kind will not be applied.
Though no VAT (IGIC) is levied, there is:
The AIEM (Arbitrio sobre las Importaciones y Entregas de Bienes or Tax on Imports and Deliveries of Goods in the Canary Islands) is levied on imports of certain types of goods that are produced in the islands. It aims to protect some local manufacturing sectors by charging some imports with rates of 0%, 5% or 15%. (5)
If you are company looking for the next goals and considerating a Free Trade Zone that connects Africa, America and Europe, we strongly recommend the Canary Islands. There are more fiscal benefits that a company can enjoy with a beautiful city and a high quality of life. If you require further information or if you want to know more don´t hesitate in contacting us.
Novara Capital Group is an international tax & capital investment consulting firm. We specialise in Corporate Structuring, European Union Tax Incentives, IP Positioning, and Transactions / M&A. We provide intelligent corporate structures, advice, and an integrated service which cross delivers in businesses. We advise companies globally to accelerate international growth, optimise net profits, and enhance equity value leveraging Intellectual Property and Licences. Our in-house experts specialise in International Tax Law, Company Law & Cross Border Jurisdiction, Investment & Asset Management, Mergers & Acquisitions, and Operational Management.
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