Inverted tariff – What it is, and how should it be used?

With increased conversation in the global trade community regarding questions about inverted tariff and its benefits in a US Foreign Trade Zone, we wanted to shed some light on exactly what inverted tariff is, and how it can be beneficially used. Below are some frequently asked questions and answers to help guide you through understanding and using inverted tariff:

Q: What is inverted tariff?

A: Inverted tariff benefit exists when the duty rate for the overall finished good is lower than the duty rate of the component parts. Therefore, by manufacturing finished goods within an FTZ, US importers can take advantage of the inverted tariff duty rate, all while keeping manufacturing operations within the US.

Q: How does inverted tariff work?

A: An importer with manufacturing authority within an FTZ is allowed to admit their components into the zone duty free, manufacture the finished good, and pay CBP duties on the foreign content in the finished good at the lower duty rate of the finished goods at the time of entry. The importer avoids paying the higher duty rate on the component parts and defers the lower duty payment on the value of the foreign content until the time of consumption in the commerce of the US.

Q: What is an example of inverted tariff?

A: One company manufactures small engines that are used in tractors for agricultural use. These engines are duty free items per their HTS number of the US tariff schedule. However, the imported components used to make the engine have high duty rates in the iron and steel chapter, ranging from 2% to 12.5% on certain types of screws. To lower their costs, the company admits the high duty rate components that are used in the engines into a US FTZ deferring duty payment, manufactures the complete engine within the FTZ warehouse, and enters the engine with all components duty free into consumption (via a CBP Form 7501-06) which is now ready to be shipped to the end-customer in the US.

Q: What industries benefit (the most) from inverted tariff?

A: Inverted tariff is seen predominantly in the manufacturing industry, benefiting automotive, petroleum, pharmaceutical, aerospace, electronics, textile companies and many more.

Q: How can inverted tariffs work with kitted materials (e.g. maintenance supply materials – always different)?

A: The pick list/BOM for the individual kit would list each component with its classification. The finished kit would need to be classified, and then the classification of the individual parts versus the kit would determine the inverted tariff. The Inventory Control and Recordkeeping System (ICRS) must recognize a packing/picking list which contains each item in the kit for reporting purposes.

Is your company reaping the benefits of inverted tariff? If not, you may want to take a deeper look at your manufacturing components and their duty rates in comparison to the duty rates of the finished goods.

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