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FTZs & Drawback March 2016
Matthew
Anderson Michael
Leightman
Petroleum FTZs – Recent Trends
• Reduction in foreign dutiable crudes into the U.S.,
due to:
– Trade preference programs (sometimes – consider
example of NAFTA and Canadian heavy crude)
– U.S. energy revolution
• Continuing demand for FTZ status jet fuel
• New Drawback opportunities
2 2
FTZs and the Energy Industry
• Oil Refineries / Petrochemical Facilities
– 24 of the top 25 FTZ production operations (by value)
are oil refining or petrochemical subzones
– 77 individual production approvals (facility-specific)
• Oil Drilling Equipment
– Offshore drilling platforms, riser systems, shipbuilding
– Oil drilling and other oilfield equipment
– Flexible piping and tubing / undersea umbilicals
• Barite Grinding and Milling
– 11 subzone sites approved
Foreign-Status Products
Received in US FTZs ($ million)
Source: Annual Report of the Foreign-Trade Zones Board – 2014 (published August 2015)
Industry $ million Share
Oil/Petroleum 128,228 74.7%
Vehicle Parts 12,359 7.2%
Machinery/Equipment 6,416 3.7%
Consumer Electronics 6,040 3.5%
Pharmaceuticals 5,637 3.3%
Petrochemicals 5,448 3.2%
Other Electronics 1,615 0.9%
Chemicals 1,304 0.8%
Other 4,552 2.7%
Recap of FTZ Benefits for
Refiners
• Weekly Entry
– Merchandise Processing Fee (MPF)
• 0.3464% of value, capped at $485 per entry
• May consolidate all shipments out of a FTZ on one weekly entry and
pay one MPF (maximum annual payment of $25,220)
• Quarterly payment of Harbor Maintenance Fee (HMF)
• Increased supply chain speed through Direct Delivery
• Increased inventory visibility and control
• Increased security of merchandise
• Production Equipment
• Synergy with drawback
– Increased optimization strategies under new law
Accounting Methodology
• Producibility – Only applies to petroleum refining in a zone or subzone
• Sets upper limit on quantity of various categories of product that can be attributed to one of several types of feedstock
• Derived from Treasury Decision 66-16
– Definition - Method of attributing products to
feedstocks for petroleum manufacturing in accordance
with TD 66-16
– Attribution - Method whereby all final products
removed from the zone are related back to feedstocks
admitted into the refinery in the current or prior
manufacturing period
• FTZ Regulations have a provision to allow the importer to
elect to pay the duty rate of the raw material rather than
finished goods that will enter US commerce
– Privilege Foreign (PF) Status – Goods subject to the raw material
(receipt) duty rate
– Non-privilege Foreign (NPF) Status – Goods subject to the finished
product (shipment) duty rate
• Election of status must be taken at time of admission
into FTZ
• NPF status can later be changed to PF status if goods have
not been manipulated
Zone Status
Drawback
• 1313 (j) – Direct ID & Unused
• 1313(a) and (b) - Manufacturing
• 1313(p) – Petroleum and their derivatives
• PL 114-125 – Drawback Simplification provisions
8
Drawback
• 1313(j)(2)
9
Drawback
• 1313(b)
10
Drawback
• 19 CFR 24.24 – HMT
• 26 USC § 4611
11
Similarities between FTZs & Drawback
FTZ Drawback
Duty abatement, deferral or elimination program
Duty refund program
Special accounting rules for certain products (ex: attribution)
Different rules for different products (ex: “P” Products)
Highly technical, increased compliance burden, separate audit risk.
Highly technical, increased compliance burden, separate audit risk.
12 12
Differences between FTZs & Drawback
FTZ Drawback
Limited to a specific geographic location(i.e. each refinery)
All import and export activity under IOR or w/suppliers and customers
Weekly Accounting and maintaining balanced inventories (NPF/PF/Dom)
Periodic claims as transactional data becomes available
Duty decisions are prospective (ex: determine duty treatment @ time of admission)
Duty decision has been made, claim is based on historic, completed activity
May mitigate or defer duties and may provide deferral savings on taxes
Mitigates duties and certain taxes and fees
13 13
Visual Illustration of Duty Benefits
Imported
Crude Oil
FTZ Domestic Sales-
Duty Deferral
Re-Export Sales
Duty Elimination via
FTZ OR Duty
Drawback
Domestic Sales
Inverted Tariff
Duty Elimination
Imported
Crude Oil
FTZ Savings Optimization
►FTZ savings
►Determined optimal FTZ savings assuming that at
least enough imported crude would be admitted in
NPF status for use in inverted tariff
► Duty free products
► Reduced-duty products – May also be eligible for duty
drawback
► Neutral-duty products – May also be eligible for duty
drawback
►Remaining imported crude would be admitted as PF
status for MPF savings then utilized in duty drawback
FTZ and Drawback
• FTZ and Duty Drawback program work in
coordination with one another
• Duties can be saved via FTZ and/or Drawback
• NEW - Taxes and fees on manufacturing claims.
16
Example
17
FTZ NPF
PF
Dom
10.5 c/bbl
5.25 c/bbl
0
Gasoline
Jet
Diesel
No. 6 Oil
Duty Free Products 0
5.25. c/bbl
10.5 c/bbl
52.5 c/bbl
52.5 c/bbl
Example
18
FTZ NPF
PF
Dom
10.5 c/bbl
5.25 c/bbl
0
Gasoline
Jet – In bond
Diesel
No. 6 Oil
Duty Free Products 0
5.25. c/bbl
10.5 c/bbl
52.5 c/bbl
52.5 c/bbl
Example
19
FTZ NPF
PF
Dom
10.5 c/bbl
5.25 c/bbl
0
Gasoline
Jet – In bond
Diesel
No. 6 Oil
Duty Free Products 0
5.25. c/bbl
10.5 c/bbl
52.5 c/bbl
52.5 c/bbl
Quarterly
HMT
Quarterly Oil
Spill
Point of
Taxation
Example
20
FTZ NPF
PF
Dom
10.5 c/bbl
5.25 c/bbl
0
Gasoline
Jet – In bond
Diesel
No. 6 Oil
Duty Free Products 0
5.25. c/bbl
10.5 c/bbl
52.5 c/bbl
52.5 c/bbl
Quarterly
HMT
Quarterly Oil
Spill
Point of
Taxation
Manufacturing Drawback
Claim
- Manufacturing Abstract
Example
21
FTZ NPF
PF
Dom
10.5 c/bbl
5.25 c/bbl
0
Gasoline
Jet – In bond
Diesel
No. 6 Oil
Duty Free Products 0
5.25. c/bbl
10.5 c/bbl
52.5 c/bbl
52.5 c/bbl
Quarterly
HMT
Quarterly Oil
Spill
Point of
Taxation
Manufacturing Drawback
Claim
- Manufacturing Abstract
J2 Claim
- Diesel
- No. 6
Impact on FTZ Operations
• Keep NPF / PF strategy to increase duty
drawback eligible exports:
– reduction of in-bond (as applicable)
– direct exports from the FTZ
• Quarterly HMT CBP Form 349 & supporting
schedules.
• Oil Spill filings – now need tax worksheets for
admissions
22
Drawback
• Expanded import pools to claim against:
– 10.5 c/bbl crude
– 5.25 c/bbl crude
– Duty free crude
• Export Values for ad valorem fee drawback
calculation
23