Escape the red tape tangle

Free trade zones are traditionally all about deferring the payment of taxes and duty, and gaining cash flow advantages. But today’s shippers are just as likely to set up operation in a freeport for speed and simplicity, to avoid bureaucracy, and to gain closer control over goods coming in and out.

“Cash flow is important but becoming less so as world tariffs and free trade areas expand. It isn’t so much about tax anymore; it is really about ease of transaction and movement of goods,” says Jim O’Gara, senior vice president at AECOM International Government Services, based in Washington, US.

“The main advantage comes in the strong business environment aimed at accommodating the rapid movement of goods and the application of value-added logistics services. Ease of set-up and operation of business, minimal red tape, strong and efficient dedicated regulatory authority, availability of excellent common services and infrastructure – these elements improve the business climate and reduce risk for businesses operating in the freeport.”

Modern freeports or free trade zones tend to be called special economic zones and they are popping up everywhere, says Mr O’Gara. Notable examples of new SEZs are Sohar and Salalah in Oman, and Yangshan Free Port in Shanghai.

He believes that where such zones used to be an ‘added extra’, they are rapidly becoming a feature ports simply can’t do without. “I believe all ports of the future will develop with these free zones.

“Freeports are evolving, because an increasing share of the value that is added is represented by logistics nowadays. Everything is rapid. Companies often don’t keep their own inventories any more – someone else manages their production, etc. So the ability to move things very quickly without a lot of transactions and tax issues is more and more important.”

The key issues for businesses setting up close to a port or airport are land, infrastructure and, in many cases, labour, says Mr O’Gara. In the Middle East Gulf, for example, practically all labour is imported, and the management of this can be very onerous – but within a freeport regime, securing labour permits could be a much smoother process.

“Free zones, SEZs and freeports usually have a strong regime where they deal directly with the investor on behalf of the ministry of labour or immigration department. Bureaucracy can be a huge cost in emerging markets and, of course, can be a platform for corruption. Elimination of bureaucracy and straight dealing pays dividends for freeports,” he says.

In the UK, some customers use the Port of Tilbury’s free zone to ensure they make the most of import quota allowances, says freeport manager Neil Davis. “The main facilities that are most important to the free zone users are the cash flow benefits and the ability for the sheet material customers to maximise the volume of cargo received under the annual coniferous plywood quota,” he says.

Tilbury saw a 39% increase in the number of Freeport entries processed between 2007 and 2009. According to Mr Davis, a broad selection of commodities are entered into the freeport by a range of customers, including paper products, sheet materials, timber and general cargo. However, the majority of entries relate to sheet materials for the main plywood receivers in the port, along with some entries for third-party paper product customers.

The port’s free zone approval is valid for five years and it has recently completed the re-approval process based on its current land area. The freeport designation covers the whole of the area of the port enclosed by the customs fence, 767 acres.

“The application for free zone approval is very thorough and requires a high standard of security and robust operational processes to be complied with at all times,” says Mr Davis. “The Port of Tilbury has a good relationship with the local UK Border Agency staff and has worked closely together with them to obtain re-approval for another five years.”

The UKBA has direct access to the port’s computer system, IPOS, and the port is subject to regular audits to ensure the conditions of the free zone approval are being met, he adds.

In Europe, a Free Zone – previously Freeport – is a designated area in which non-Community goods are treated as outside the customs territory of the EC for the purposes of import duties.

“This means that import duties, including agricultural charges, are not due provided the goods are not released for free circulation,” says Mr Davis. “Import VAT and Excise duty is also suspended until the goods are removed to the UK market or used or consumed within the Free Zone. However, there are no special reliefs in Free Zones from other taxes, or local authority rates.”

Changes introduced by Europe in 2001 provide for two distinct types of control in Free Zones: type I, where controls are principally based on the existence of a fence, wall or physical barrier, are adopted by most EU member states but not the UK, while type II zones, where controls are principally based on the requirements of the customs warehouse procedure, using mostly audit-based checks, are used in the UK. There are designated Free Zones in the UK at the ports of Tilbury, Liverpool, Medway/Sheerness and Southampton, and at Prestwick Airport. 

There are many advantages to Freeport users, Mr Davis says. Cargo can be left within the zone for an unlimited period of time, free from import duties, VAT and quota restrictions, offering significant cash flow benefits; goods can be handled or processed within the zone without incurring duties or levies; they can be landed and then re-exported without having to pay any VAT or duty; and cheaper insurance rates may be possible for cargo stored in a free zone, thanks to the additional security and controls.