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