“Free-trade zone, also called foreign-trade zone, formerly free port, an area within which goods may be landed, handled, manufactured or reconfigured, and reexported without the intervention of the customs authorities. Only when the goods are moved to consumers within the country in which the zone is located do they become subject to the prevailing customs duties.” (Encyclopaedia Britannica)
We get a handful of enquiries every month about the use of free trade zones in Latin America, in particular in relation to Brazil and the Mercosur region. This is often prompted by regional sales managers or company commercial directors trying to find a way around Brazil’s (in)famous high import duties. So, without entering into very complex tax and legal territories that we leave to our specialist associates, let’s answer your FAQs on free trade zones in Latin America as simply as possible…
What’s a free trade zone?
The Encyclopaedia Britannica’s definition above is spot on. Your goods arrive at a free trade zone and can stay there, without paying import duties, until they leave the area and enter a country (which can be the same country the FTZ is based at, or, more commonly, another country).
In that area, they can be “handled, manufactured or reconfigured”, so you can make changes to them.
In the case of a service FTZ, it’s more complicated, but basically the staff working in a FTZ export services. For example, a call-centre for a regional travel agency or for an insurance company located at a FTZ in Colombia can answer calls from customers all over Latin America. A tax consultancy at a FTZ in Uruguay can advise clients in Argentina and the same applies to software/video games, legal services, back-office support and a whole host of services.
So can I avoid paying duties, especially very high duties like Brazil’s, by using a free trade zone?
No, sorry. You will have to pay import duties when the goods leave the FTZ, in Brazil or wherever.
So why should I bother with a free trade zone then?
In terms of goods, there are many reasons. To name just four:
- Your stock is readily available regionally. For example, if you use a FTZ in Uruguay and you have distributors/offices/agents across Paraguay, South of Brazil, Argentina, then your goods can reach your customers in just a few days, not weeks (or months!) as it’s the case if you ship from China/Europe/etc. This can mean everything to a distributor and to your end clients. It can be your tool to differentiate yourself from competitors and it can be the reason why your products can command a premium price.
- You don’t pay taxes until the goods leave the FTZ, which can really ease your cashflow.
- Your potential clients or distributors from the whole region can visit and see your products before they buy without having to visit you in China/Europe or wherever you manufacture.
- If you are manufacturing within the FTZ, savings can be considerable as tax incentives are very beneficial and also laws regarding employing foreign workers, for example.
Are free trade zones just for goods? How about services?
Free trade zones are famous for the movement of goods but they are equally, if not more, appealing when it comes to services.
So where are these free trade zones in Latin America?
It might help searching for FTZ in the way we called them in Latin America: “zonas francas” (same in Spanish and Portuguese). Some of the ones I recommend looking at are Zonamerica in Uruguay, Iquique in Chile, Colon in Panama and Manaus in Brazil. But it all depends on what you are looking for. There’s a good map from the Americas FTZ Association here.
How do I know which FTZ is better for me?
As I said before, it all depends on what you are looking for, for example:
- Which country/countries are you targeting? If you target Argentina, for example, it’s more logical to think of a FTZ in Uruguay than in Panama. The reserve applies to tackle the Caribbean.
- What do you want to do in that FTZ? Are you just holding stock for your regional distributors or do you want to make some changes to your products such as labelling? Or do you need to manufacture your whole product? Or do you need to set up a regional call-centre or back-office support?
- How much can you afford to pay? FTZs vary considerably in terms of prices.
- What kind of service do you expect? From pretty basic warehouses to state-of-the-art facilities with temperature control and strict security, there’s a FTZ for every need.
- How long do you need to engage with a FTZ for? You might only want to use it to test the markets, or to penetrate them, or while you build manufacturing facilities locally. Will a contract tie you for too long?
Always check the track record of the FTZ in question, and always, always check how solid the FTZ legislation is in the country. If there’s a change of government, could that country get rid of FTZs altogether?
How much do FTZs cost?
There is usually a charge for being part of the FTZ and if you use a logistics company, say, for warehousing or moving goods, they will charge you separately for those services. In the case of services, they will charge you per month. Please note that in some service FTZs you don’t actually need to have a physical office within the zone, you can operate remotely but will still have to pay a fee as a FTZ user.
You need to get some prices, based in your usage, and then work out if it’s worth it for you or not. Usually we find that products that are low-margin, low-rotation and high-bulk benefit less from FTZs than smaller products with higher margins and quicker turnarounds, but that needs to be judged on a case-by-case basis. The benefits are usually greater for commodity-type products and FMCGs than for specialist, bespoke products.
Anything else about free trade zones?
Well, as you can imagine, there’s a lot to learn about free trade zones but also about free ports and airports, and about special economic areas where governments grant tax benefits not dissimilar to the ones FTZs benefit from. Please do not hesitate to contact us for further advice.
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