2. Presentation Agenda
Tariffs and why they are used
What is a Foreign-Trade Zone (FTZ)?
The Banner Pharmacaps FTZ Story
Questions
3. Tariffs and why they are used
What is a tariff?
• A tax that adds to the cost of imported goods
• A form of international trade policy
Why are tariffs used?
• To protect . . .
Domestic employment
Consumers
Infant industries
Certain industries of strategic importance
• To retaliate against an unfair trading partner
4. How do tariffs affect prices?
Domestic price is found at DP
World price is found at WP
At the lower WP price:
• Domestic consumers will
consume more (WQ)
• Domestic manufacturers
will produce less (DQ)
Imports make up difference
(WQ-DQ)
Price without the influence of a tariff
5. How do tariffs affect prices?
A tariff increases WP to DPT
Under the price increase:
• Domestic consumers will
consume less (WQ)
• Domestic manufacturers
will produce more (DQ)
Overall effect is:
• Reduction in imports
• Increased domestic
production
• Higher consumer prices
Price under the influence of a tariff
7. The following slides courtesy of . . .
Craig M. Pool
President
Foreign-Trade Zone
Corporation
8. What is a Foreign Trade Zone?
A specially designated area, in or adjacent to a U.S.
Port of Entry, which is considered to be outside the
Customs territory of the United States
Established by Congress under the Foreign-Trade
Zones Act of 1934
Purpose is to
Expedite and encourage foreign commerce
Create jobs and capital investment in the United States
9. What May Be Done in an FTZ?
Assembly Storage Manufacturing
Relabeling Mixing Repairing
Repackaging Cleaning Destroy
Processing Display Sampling
Testing Manipulation Salvaging
11. Financial Benefits
Relief from Inverted Tariffs
Duty Deferral
No Duty on Re-exports
Duty reduction or elimination on scrap
Duty elimination on waste and yield loss
Reduction in Customs Fees
Duty Reduction / Elimination
12. Calculating Inverted Tariff Relief
Motor admitted to zone
– HTSUS 8501.10
– Duty rate = 5.3%
Motor manufactured into vacuum cleaner
– Cleaner HTSUS 8479.89
– Duty rate = FREE
Duty rate applied to motor would be FREE
Duty reduction = 5.3%
13. Inverted Tariff Relief Benefit
MOTOR IMPORTED
FROM CHINA
DUTY RATE
5.3%
NEW AGE VACUUMS
SUBZONE FACILITY
5.3% REDUCTIONIN DUTY ON DOMESTICALLY SOLD PRODUCT
VACUUM SOLD
IN DOMESTIC
U.S. MARKET
DUTY PAID AT
FREE VACUUM RATE
14. Inverted Tariff Relief Benefit –
Vendor Managed Inventory
MOTOR IMPORTED
FROM CHINA
DUTY RATE
5.3%
NEW AGE VACUUMS
SUBZONE FACILITY
VACUUM SOLD
IN DOMESTIC
U.S. MARKET
DUTY PAID AT
FREE VACUUM RATE
G.P. ZONE
WAREHOUSE
5.3% REDUCTIONIN DUTY ON DOMESTICALLY SOLD PRODUCT
15. Financial Benefits
Relief from Inverted Tariffs
Duty Deferral
No Duty on Re-exports
Duty reduction or elimination on scrap
Duty elimination on waste and yield loss
Reduction in Customs Fees
No duty is paid until the merchandise enters
the commerce of the US
16. Duty Deferral Benefit
MOTOR IMPORTED
FROM CHINA IN
JANUARY, 2011
DUTY RATE
5.3%
NEW AGE VACUUMS
SUBZONE FACILITY
MOTOR SOLD AS SERVICE
PART IN DOMESTIC U.S.
MARKET ON AUGUST, 2011
DUTY PAID AT 5.3%,
BUT ONLY AFTER SOLD
THE DUTY ON THE MOTOR IS DEFERRED FOR 7 MONTHS
17. Financial Benefits
Relief from Inverted Tariffs
Duty Deferral
No Duty on Re-exports
Duty reduction or elimination on scrap
Duty elimination on waste and yield loss
Reduction in Customs Fees
U.S. Duty is not paid on merchandise
exported from the distribution zone
18. Re-export Benefit
MOTOR IMPORTED
FROM CHINA IN
DUTY RATE
5.3%
NEW AGE VACUUMS
SUBZONE FACILITY
MOTOR SOLD AS SERVICE
PART AND SHIPPED TO
EUROPE
NO DUTY IS EVER PAID
5.3% SAVINGS
THE DUTY IS NEVER PAID ON EXPORTED MERCHANDISE
19. Financial Benefits
Relief from Inverted Tariffs
Duty Deferral
No Duty on Re-exports
Duty reduction or elimination on scrap
Duty elimination on waste and yield loss
Reduction in Customs Fees
US Duty is not paid on merchandise
destroyed or lost in production in the zone
20. TANK OF CHROMOZINE
10% DUTY RATE
VALUE OF $300,000
$30,000 DUTY PAID
GREENCHEM INC.
BEFORE BECOMING SUBZONE
TANK OF TRIGOLFERINE
SOLD IN DOMESTIC U.S.
VALUE OF CHROMOZINE LEFT
AFTER PRODUCTION $210,000
30% OF CHROMOZINE
LOST DURING PRODUCTION
DUTY IS PAID AT THE TIME THE MATERIAL COMES INTO THE U.S.
Duty on Waste and Yield Loss (No FTZ)
21. Elimination of Duty on Waste and Yield Loss
TANK OF CHROMOZINE
10% DUTY RATE
VALUE OF $300,000
$30,000 DUTY NOT
PAID WHEN ADMITTED
TO THE ZONE
30% OF CHROMOZINE
LOST DURING PRODUCTION
GREENCHEM INC.
SUBZONE FACILITY
TANK OF TRIGOLFERINE
SOLD IN DOMESTIC U.S.
$ ONLY 21,000 DUTY PAID ON
REMAINING CHROMOZINE IN
FINISHED PRODUCT
NO DUTY PAID ON
PRODUCTION LOSS
FOREIGN-TRADE ZONE SAVINGS= $9,000
22. Financial Benefits
Relief from Inverted Tariffs
Duty Deferral
No Duty on Re-exports
Duty reduction or elimination on scrap
Duty elimination on waste and yield loss
Reduction in Customs Fees
A process called “weekly entry” can reduce
the merchandise processing fee
23. Reduction in Customs Fees
Customs entries made on per shipment basis
Every entry is charged a fee based on 0.21% times
the value of the merchandise
There is a cap on the fee of ($485) per entry
Zone admissions are not Customs entries, therefore
not subject to Customs fees
24. MPF with No Zone
OLD AGE VACUUMS
FACILITY
Mon
MPF=$485
Tue
MPF=$485
Wed
MPF=$485
Thu
MPF=$485
Fri
MPF=$485
TOTAL MPF WITH NO WEEKLY ENTRY = $2,425
25. MPF with FTZ (Weekly Entry)
NEW AGE VACUUMS
SUBZONE FACILITY
ONLY ONE ENTRY IS
MADE FOR ALL THE
WEEKS SHIPMENTS
TOTALMPF = $485
Mon
Tue
Wed
Thu
Fri
SHIPPED TO
DOMESTIC U.S.Mon
MPF=$0
Tue
MPF=$0
Wed
MPF=$0
Thu
MPF=$0
Fri
MPF=$0
27. Acme Corporation’s:
Net Savings at a Glance
YEAR 1 YEAR 2 YEAR 3
Total FTZ Savings $1,050,666 $1,050,666 $1,050,666
Total FTZ Costs $195,000 $100,000 $100,000
Net FTZ Savings $855,666 $950,666 $950,666
28. Customs Duty and Fee Savings
YEAR 1 YEAR 2 YEAR 3
Cash flow $62,619 $62,619 $62,619
International returns,
obsolescence, waste,
scrap
$109,584 $109,584 $109,584
Re-exports $226,766 $226,766 $226,766
Merchandise Processing
Fee savings
$389,596 $389,596 $389,596
Brokerage fee savings $262,100 $262,100 $262,100
Customs Duty & Fee
Savings
$1,050,666 $1,050,666 $1,050,666
29. FTZ Sample Implementation & Operation Costs
TYPICAL COSTS YEAR 1 YEAR 2 YEAR 3
Fees Charged by FTZ Board N/A N/A
Fees Charged by FTZ Grantee
Consulting Fees include:
• Obtain FTZ Authority
• Activate with CBP
• Training
N/A N/A
FTZ Administration Software
• Software Implementation N/A N/A
SaaS Annual Fee
In House FTZ Personnel
Estimated Total Cost $195,000 $100,000 $100,000
NET SAVINGS FROM FTZ
OPERATIONS
$855,666 $950,666 $950,666
31. 1. Obtain Foreign Trade Zone Status
For Distribution Firms
– You must be located in an existing FTZ or
– You must apply for Foreign-Trade Zone status by
• Expanding or Modifying a General Purpose Zone
• Apply for Subzone Status
For Manufacturing Firms
– Even if you are located in an existing FTZ
• Apply for Foreign-Trade Zone Manufacturing Status
• Apply for Subzone Status
All applications and requests for FTZ status are
made to the Foreign-Trade Zones Board in
Washington, D.C.
32. 2. Activate Your Facility
Set up compliant procedures, and observe strict
audit trails required by U.S. CBP
Possibly the most important part of activation is
choosing an FTZ Inventory Control System
32
33. 3. Implementation of Software
Your company will need a robust Foreign-Trade
Zone inventory tracking and record keeping
system to manage the day-to-day FTZ operations
The system will need to:
– Meet U.S. Customs and Border Protection (CBP)
regulatory requirements
– Print CBP reports, forms, and entry documentation
– Perform many other tasks and processes unique to the
Foreign-Trade Zones program
35. Vision
Creating superior health care products to serve our global
community.
Mission
To become the world's most innovative and respected gelatin-
based drug delivery and specialty pharma company.
Who we are
Banner has done, and are currently doing, business with the
majority of the top 15 pharmaceutical companies in the world
36. Business & Manufacturing Locations
Around the Globe
Global Management
Center
Gelcaps de México
Banner Pharmacaps
(Canada) Ltd.
U.S. Corporate
Headquarters
Unites States
Manufacturing
Banner Pharmacaps
(Europe)
38. Banner’s Business Case for an FTZ
Identified imported raw materials with substantial
duties in late 1990’s
If raw materials were converted into “medicaments,”
would “substantially transform” the product to HTS
classification without duty
Task to implement appeared too difficult
Banner backed away
39. Banner’s Business Case for an FTZ
Large customer came to Banner in 2007
Wanted Banner to develop a softgel with their
imported active pharmaceutical ingredient (API)
Projected annual duty > $4 million USD
Award of business contingent on Banner
establishing an FTZ with permission
to manufacture
40. Banner’s Business Case for an FTZ
A substantial business opportunity
+ Banner’s own savings potential
= Banner pursuing a foreign-trade zone
41. Project Milestones
Summer 2007 – Decided to pursue FTZ
Fall 2007 – Evaluated of software and consulting service
providers
January 2008 – Engaged FTZ Corporation
February 2008 – FTZ Application out for public review
April 2008 – Project funding approved
– FTZ Consulting Services
– FTZ Compliance Software
September 2008 – Received approval
November 2009 – Activated
43. Internal Expenses Prior to Activation
Information Technology
– Interface file program development
– Dedicated server
– Communications equipment (CBP)
Project Team
– Labor
Signs
– All entry ways
– Property perimeter
44. Benefits Realized First Year
Improved cash flow
Obsolescence, waste, and scrap
Re-export of raw material
Merchandise processing fee savings
Brokerage fee savings
Return on Investment
Cash positive
45. What We Did Fairly Well
Identified that we needed professional help
Our due diligence was thorough
Chose single source for software and consulting
Our partner anticipated everything we would encounter
Example:
Significant time to test interface files
More surprises that we thought
46. What We Did Fairly Well
Developed thorough understanding of difference in
inventory systems
Built a relationship with the CBP Port Director and
Grantee
Remained completely transparent with Port Director
at all times
47. If We Were to Do it Over Again We Would Have . . .
Engaged consulting services before starting
Used an FTZ expert to develop our FTZ application
Included all of our products in initial application filing
Networked with other FTZ operators early on
(NAFTZ and local)
Not have underestimated ALL potential inventory
transactions
Dedicated full-time resources to project
48. If You Are Considering Implementing an FTZ . . .
Get professional help to get results sooner and do a
better job of implementing
Use a single solution provider for both the software
and consulting
Assign daily responsibility to a customs compliance
specialist
Build a relationship and trust with your CBP Port
Director along the way
Train and communicate effectively with your
– Leadership | Employees | Suppliers