Many multinational chemical companies are taking a strategic approach to trade and customs issues to decrease their overhead, improve their supply chains; increase cash flow and better position themselves for today’s uncertain economy and changing regulatory environment.
The following is a snapshot of important trade and customs considerations, opportunities and challenges for chemical companies.
Free Trade Zones
Multinational chemical companies can often gain significant advantages using Free Trade Zones (FTZs)1. These zones are designated areas that provide multinational companies conducting import operations with savings opportunities for customs tariffs and flexibility in terms of inventory management and regulatory requirements. Many FTZs offer ready access to port facilities, warehousing and other infrastructure. In the US, chemical companies that operate in FTZs may realize the following customs savings opportunities:
- Inverted Tariff Savings: Refers to an imported FTZ duty savings benefit for chemical manufacturers which potentially exists when certain finished chemical and petrochemical products are made at a US facility from foreign-sourced technical ingredients and raw material inputs that are dutiable upon importation.
- Duty Elimination on Exports, Scrap or Zone-to-Zone Transfers: In the example above, the FTZ chemical company might decide to ship a foreign-sourced input, intermediate product or a finished product that has a duty rate associated with it to another FTZ or for export. In that case, there is a full exemption from customs duties payable by the company.
- Duty Deferment: FTZs can help chemical manufacturers and distributors improve their cash flow posture. Foreign-sourced inputs may stay in FTZ inventory indefinitely without the payment of customs duties and fees until the input, intermediate or finished chemical is shipped from the FTZ into customs territory.
- Reduction in Customs Administrative Fees: FTZs offer the possibility of substantial savings in administrative costs, especially in terms of merchandise processing fees payable to customs and customs broker charges.
In 2012, the US Foreign-Trade Zones Board issued new regulations that have helped improve the FTZ program’s flexibility, ease-of-use and transparency2.
Customs and Tax Coordination on Related Party Pricing
Companies that coordinate between their tax and customs compliance teams can develop a strategic transfer pricing policy designed to satisfy international guidelines, specific country customs regulations and business objectives.
In 2012, CBP finalized a long-awaited revision to its policy on transfer price adjustments3. The agency stated that, under certain circumstances, transfer price adjustments are compatible with the customs “transaction value” method, and the agency modified its policy to allow duty refunds for downward transfer price adjustments provided a number of conditions are met4:
Free Trade Agreements
Preferential or Free Trade Agreements (FTA) create free trade areas that lower or eliminate tariffs and quotas on most goods and services traded among the participating countries. More than 100 regional and bilateral FTAs exist today.
For global chemical companies, sourcing from countries with FTAs can result in potentially significant reductions in duties. Companies that further qualify their manufactured products under FTAs and can provide customers with the necessary certificates of origin can also recognize the competitive advantage these agreements bring to export sales.
Export compliance, emerging markets, and mergers and acquisitions
Many growth strategies developed by chemical companies include targeting sales to emerging markets and supporting growth through mergers and acquisitions (M&A). Both strategies are laden with export control implications that need to be carefully considered.
The recently enacted Iran Threat Reduction and Syrian Human Rights Act of 20125 imposes sanctions liability on a US company for any act by its foreign subsidiaries. The US parent companies must now disclose these activities, so they are working hard to identify those that are relevant under law.
Entering emerging markets creates the necessity to stay abreast of foreign relations and other local trade-related movements. For example, many exporters have experienced the tightened import controls in Argentina. These controls can delay or even prevent imports. In response, chemical companies have been exploring alternative shipment routes or ways to hold products in bond.
Today’s chemical companies can improve their competitive position by understanding both risks and opportunities related to global trade and customs. The first step may be to assess current conditions and expected developments in your existing and target markets with regard to import and export activity. You also need to determine that savings opportunities are addressed and compliance elements are integrated into the company’s broader business and risk strategy.
Companies that successfully address these issues and include trade and customs elements in their business and risk strategies will be better positioned this year and in the future.
1Free Trade Zones are known as Foreign Trade Zones in the United States.
2Fact Sheet: New Foreign-Trade Zones Regulations, US Department of Commerce, accessed at http://trade.gov/press/press-releases/2012/fact-sheet-new-foreign-trade-zones-regulations-021712.asp
3CBP Will Open the Door to Retroactive Transfer Pricing Adjustments and Potential Customs Duties Refunds, but Five Factors Hold the Key, KPMG, June 11, 2012
4Customs Bulletin and Decisions, Vol. 46, No. 23, page 14, dated May 30, 2012. See also page 11 where CBP states that the list of factors is conjunctive, meaning all five factors must be satisfied.
5http://www.treasury.gov/resource-center/sanctions/Documents/hr_1905_pl_112_158.pdf (PDF 235 KB)