Chapter 2 Literature Review
2.2 The Meaning and Concept of FTZ
2.2.3 The Comparison of FTZ among Different Countries
FTZs in different countries have different content and fulfill different functions. All FTZs aim to provide a liberal logistics center facilitating convenient trade of goods. The details of FTZ in different are shown as follows:
1. Hong Kong
Hong Kong follows the economic policy of free enterprises and free trade. There are no import tariffs and excise duties are levied only on four categories, including locally manufactured or imported tobacco, alcoholic liquors, methyl alcohol and hydrocarbon oils.
A tax is also payable on first registration of motor vehicles. The Customs and Excise Department is assigned the tasks of fighting smuggling, collection of government revenues on dutiable goods, the detection and deterrence of narcotics trafficking and abuses of controlled drugs, and the protection of intellectual property rights.
For health and safety reasons, five kinds of commodities are subjected to licensing control of the Director-General of Trade and Industry according to the ′Import and Export Ordinance′, the ′Reserved Commodities Ordinance′, the ′Ozone Layer Protection Ordinance′
and their subsidiary legislation. Import license is required for radioactive substances and irradiating apparatus. Import and export licenses are required for the following commodities: (a) Pharmaceutical products and medicines (b) Reserved commodities (c) Strategic commodities (d) Ozone depleting substances.
Except for the above regulations, Hong Kong has no trade barrier. Any company, regardless its ownership, can operate in Hong Kong freely. It is very easy to set up a new company in Hong Kong in six working days. Hong Kong has a simple tax system and the profit tax is one of the lowest in the world (Shen and Yeung, 2004).
2. Singapore
FTZs in Singapore were first established in 1969 to facilitate entrepot trade in dutiable goods. Firms in FTZ benefit from various advantages provided by the ‘Free Trade Zones Act’. Singapore has seven free trade zones (FTZ), six for seaborne cargo and one for air cargo, within which a wide range of facilities and services are provided for storage and
reexport of dutiable and controlled goods. Goods can be stored within the zones without any customs documentation until they are released in the market. They can also be processed and re-exported with minimum customs formalities. FTZs in Singapore are primarily for transshipment cargoes, and the key characteristic of Singapore is that the whole country is similar to FTZs. This means that in examining the concept of an FTZ with reference to Singapore, the whole country system needs to be considered (UN, 2005).
All dutiable goods imported into or manufactured in Singapore are subject to customs duty and/or goods and services tax (GST). The broad categories of dutiable goods for customs duty in Singapore are intoxicating liquors, tobacco products, motor vehicles and petroleum products. GST is a tax on domestic consumption within Singapore. It is paid at the rate of 5% whenever customers buy goods or services from GST-registered businesses within Singapore. The FTZs provide 72 hour free storage for import/export of conventional and containerized cargo and 14 day free storage for transshipment/re-export cargo. The rental cost of FTZ facilities within port area is relatively expensive due to scarce land. Most logistics companies have facilities in FTZs both inside and outside the port, but relatively small space in the FTZs inside the port for goods requiring quick action.
3. Japan
A total of 22 Foreign Access Zones (FAZs) scattered throughout Japan offer air and sea ports close to regional markets, which helps traders to reduce transportation time and costs within Japan. Each FAZ offers a comprehensive range of facilities to efficiently handle imports at all stages, from customs clearance to product sorting, processing and distribution. In addition, FAZ-resident companies realize additional benefits bu cooperating in joint importing, ordering and marketing. Each FAZ is equipped with special facilities for import-related activities, including exhibitions, fairs, conventions, commercial negotiations and seminars, all of which help to expand opportunities for business development. Import-related information and proxy services are also available.
In order to reduce the rate of joblessness and promote industry and trade, Okinawa in Japan planned Special Free Trade Zone. The applicable law is ‘Okinawa Promotional Special Measures Law’ in 1999. The designated area is approximately 122ha (Approx.
89.6ha available for business use not including roads and green space). In SFTZ, it
provides some incentives as follows:
¾ National Tax incentives:
9 For newly established business within the SFTZ with 20 or more full time employees, 35% of income earned will be exempt from corporate tax, corporate business tax and corporate residence tax for the first 10 years following establishment.
9 For businesses installing or expanding facilities worth more than 10 million yen within the SFTZ, 15% of machinery and equipment costs and 8% of building costs will be deducted from the corporate tax (max 20% of corporate tax, carryover for up to 4 years, with a ceiling of 2 billion yen in investment amount).
9 For businesses installing or expanding facilities worth more than 10 million yen within the SFTZ, 50% of machinery and equipment costs and 25% of building costs will be approved as special depreciation.
¾ Duty
9 When shipping products to the domestic market after processing or manufacturing using raw materials from overseas, businesses can choose whether the duty will be applied to the raw materials or the products, with some exceptions.
9 The approval fee for bonded storage facilities, bonded factories, bonded exhibition facilities and general bonded areas will be reduced by half.
¾ Local Tax
：
For business installing or expanding facilities worth more than 10 million yen within the SFTZ,…9 a portion of the business tax will be exempted for 5 years.
9 a portion of the real estate acquisition tax will be exempted (only the portion which is directly used for the business).
9 a portion of the fixed property tax will be exempted for 5 years (only the portion which is directly used for the business).
¾ Subsidy for employment of young Okinawa: a subsidy is granted to business operators who establish promises in Okinawa (limited to those established at a cost of 3 million yen or more) involving the long-term employment of three or more residents of Okinawa under the age of 35.
9 Amount of subsidy: 1/4 of the amount calculated using the method set by the
Minister of Health, Labor and Welfare (1/3 for small and medium enterprise owners).
9 Period of subsidy: One year (A subsidy for the second year may be granted if the employee retention rate is high).
9 Maximum amount: 1,200,000 per year per person.
¾ Subsidy for employment development: a subsidy is granted to business operators who establish promises in Employment Development and Promotion Regions (all areas of Okinawa Prefecture until March 31,2010) involving the employment of three or more residents of the region. The grant is made based on the number of workers and the cost of establishing the premises.
9 Amount of subsidy: Fixed amount (300,000 to 2.5 million yen) per year.
9 Period of subsidy: Three years (five years when specific requirements are met).
4. Korea
The government of Korea has also prepared a special tax incentive package for foreign-invested companies that locate in Fee Economic Zone (FEZs) to promote a key element of its plan to transform Korea into a Northeast Asia hub. Incheon International Airport (IIA) ranks third in air freight worldwide and tenth in passenger traffic in 2008 after just three and a half years of operation. The government continues working toi develop Busan New Port and Gwangyang Port into mega-ports as port of its Northeast Asian hub master plan. The surrounding areas will be developed into a logistics, assembly, trade and international business base. The three FTZs are being developed as Northeast Asian epicenters of business, logistical and high-tech services. Incheon FEZ, as air logistics business complex is built near IIA, including a 991,800 square meters customs free zone and a 495,900 square meters international business zone. By building new ports and logistical complexes in the surrounding areas, Busan and Jinhae FEZs are being developed to become Northeast Asian maritime logistics centers. An industrial complex for high-tech cutting-edge machinery, material and auto parts manufacturers are built in the vicinity of this FEZs to serve as a manufacturing center for southeast Korea complete with full R&D support services. The Gwangyang Bay FEZ is being developed into a maritime trans-shipment hub for cargo to China by building ports and logistics parks in the
surrounding area. The Yulchon Industrial Complex is being developed to include a petrochemical, auto parts manufacturing and steel mill industrial cluster. The government is striving to make FEZ business conditions more convenient for foreign investors and improve living conditions. In January 2004 the government announced a five-year plan to improve the management and living environment for foreign companies and workers. The government is in the process of completing 49 of the business-related tasks and 102 that involve living conditions. Mid- to long- corporate tax rates are being lowered to meet or beat those in competing countries. FEZ authorities are working to recruit world-renowned schools, hospitals and leisure facilities to provide non-Koreans residing there with high-quality services. FFEZ authorities are also engaged in inter-Korean economic cooperation and multinational negotiations that will create impetus for Northeast Asia to become a global economic hub.
Table 2-4 Incentives in Korea FEZs
Sectors Sector Benefits
Tax breaks ● Corporate tax exemptions for the first 3 years and a 50% reduction the following 2 years (for investments of more than US$50 million, a 100% exemption for the first 7 years and a 50% reduction the following 3 years)
● A flat 17% income tax for foreign CEOs and executives at foreign companies
● Capital goods import tariff exemption for 3 years
● Acquisition, registration, property, and aggregate land tax exemptions for the first 3 years and a 50% reduction for the following 2 years
Financial support ● Companies that locate in FEZs will either be exempt from or subject to reduced land fees.
● Financial assistance for the construction of such facilities as hospitals and schools to make life more convenient for foreigners.
Deregulation ● Minimal land-use regulations governing factory construction and enlargement (currently applicable to Seoul metropolitan area).
● Lift restrictions on entering businesses reserved for SMEs (small and medium enterprises).
● Direct foreign currency payments for ordinary transactions of less than US$10,000 allowed.
Employment and labor-management
● Unpaid weekly holidays allowed (currently paid)
● Exemption from obligatory employment of veterans, the disabled, the elderly
Educational improvements
● Schools can be established by foreign investors.
● Domestic residents can attend foreign schools.
Foreign hospitals and pharmacies
● Foreign-financed hospitals and pharmacies for foreigners allowed
Foreign broadcasting
● The ratio of cable network foreign broadcasting retransmission channels expanded from the current 10 to 20%
Administrative support
● English allowed for processing of public documents.
● Foreign Investment Ombudsman’s office will be established
Source: UN, 2005
5. China
Since 1980, China has established five special economic zones (SEZs) such as Shenzhen, Zhauhai and Shantou in Guangdong Province, Xiamen in Fujian Province and the entire province of Hainan. In 1984, China further opened 14 coastal cities to overseas investment: Dalian, Qinhuangdao, Tianjin, Yantai, Qingdao, Lianyungang, Nantong, Shanghai, Ningbo, Wenzhou, Fuzhou, Guangzhou, Zhanjiang and Beihai. In 1985, the state decided to expand the open coastal areas, extending the open economic zones of the Yangtze River Delta, Pearl River Delta, the Xiamen-Zhangzhou-Quanzhou Triangle, Fujian, Shandong Peninsula, Liaodong Peninsula, Hebei and Guangxi into an open coastal belt. In 1990, China decided to open the Pudong New Area in Shanghai and other cities along the Yangtze River Valley. In 1992, the State Council had opened 13 border cities, counties and towns, and opened all the capital cities of the inland provinces and autonomous regions.
In addition during the 1990s China also established 15 FTZs, 56 state-level economic and technological development zones, and 53 new and high-tech industrial development zones.
In these zones, they provide some incentives as follows:
¾ Tax incentives:
9 The prime income tax rate for foreign-invested enterprise (FIE) is 15% of profit.
9 The national government has standardized most preferential policies for FTZs, including a package of tax incentives.
9 For the first two years of operations, companies are exempt from enterprise income tax. During the next three years, companies are taxed at 50% of the normal FIE tax rate of 15%. After five years, in-zone enterprises pay the full FIE tax rate.
9 If more than 70% of the finished product is re-exported outside China territory, any
remaining product is taxed at a reduced rate based on the original imported components.
¾ Customs duty incentives:
9 There are duty exemptions on all construction or infrastructure imports necessary for production and on all equipment, parts, and components imported for self-use.
9 Imports entering the FTZ from outside China proper are exempt from customs duties and VAT (value-added tax); customs duties and VAT are assessed only after the finished products leave the FTZ for regions outside the bonded area.
9 All finished goods ‘imported’ from the FTZ into China proper will have customs duty and VAT assessed based on a ratio of locally sourced inputs to imported components.
¾ Local level incentives:
9 Each zone can, and often does, offer its own incentives on top of the central government ones.
9 Local authorities can establish land-use or utility incentives and may also decide to exempt in-zone enterprises from local income tax.
¾ No participation limit:
9 FTZs remain the only locations in which a foreign company may establish a wholly foreign-owned trading company; initially these wholly foreign-owned companies did not possess trading rights (the right to import and export). To sell products in mainland markets, these companies were required to engage agents with trading rights to handle customs procedures for transactions with the non-FTZ enterprise.
This changed in June 2003 when the State Council, the Ministry of Commerce and Customs, issued a notice allowing enterprises in Futian-Shatoujiao, Tianjin, Waigaoqiao, and Xiamen Xiangyu FTZs to register for the right to conduct domestic trade without using an intermediary with trading rights, and the notice leaves the drafting of detailed application rules to the zones.
¾ Bonded Commodities Exchange Market or exhibition centre:
9 FTZs offer a Bonded Commodities Exchange Market or exhibition centre through which in-zone enterprises sell their products to Chinese buyers and distributors for sale in mainland markets.
9 Exchange market administrators clear the goods through Customs and issue VAT invoices.
Like other special zones, FTZs in China provide other advantages in addition to the preferential policies:
¾ simplified and efficient administrative structure
¾ one-stop service for official procedure settlement
¾ top-flight infrastructures
¾ professional service system on a par with international standards
¾ catering actively to the individual and diversified demands of different investors
¾ tailor-made service and the readiness to help investors overcome difficulties
¾ strategic locations.
6. Philippine
The government promotes the establishment of world-class, environment-friendly economic zones all over the country to respond to demands for ready-to-occupy locations for foreign investments. At the helm of this strategy is the Philippine Economic Zone Authority (PEZA), a government corporation established through legislative enactment known as ′The Special Economic Zone Act of 1995′. FTZ in Philippine is an isolate policed area adjacent to a port entry (as a seaport) and /or airport where imported goods may be unloaded for immediate transshipment or stored, repacked, sorted, mixed, or otherwise manipulated without being subject to import duties. However, movement of these imported goods from the free-trade area to a non-free-trade area in the country shall be subject to import duties. But all FTZ belonged to ECOZONES. ECOZONES are selected areas with highly developed or which have potential be developed into agro-industrial, Industrial tourist/recreational, commercial, banking, investment and financial centers. An ECOZONES may contain any or all of the following: Industrial Estates (IEs), Export Processing Zones (EPZs), Free Trade Zones, and Tourist/Recreational Centers. The Incentives for Enterprises are as follows:
¾ Income Tax Holiday (ITH) or Exemption from Corporate Income Tax for five years, extendable to maximum of eight years;
¾ After the ITH period, a special 5% Tax on Gross Income, in lieu of all national and
local taxes;
¾ Exemption from duties and taxes on imported capital equipment, spare parts, supplies, raw materials;
¾ Also breeding stocks and/or genetic materials or the equivalent tax credit on these items, when sourced locally;
¾ Domestic sales allowance equivalent to 30% of total sales;
¾ Exemptions from export taxes , wharfage dutes, imports and fees;
¾ Permanent resident status for foreign investors and immediate family members;
¾ Employment of foreign nationals;
¾ Simplified import and export procedures;
¾ Other incentives under Executive Order 226 (Omnibus Investment Code of 1987), as may be determined by the PEZA Board.
7. Netherlands
There is no free trade zone or free port in Netherlands in the sense of territorial enclaves where commodities can be processed or reprocessed tax-free. However, There are a lot number of customs warehouses and free warehouses at designated places and international airports where goods in transit may be temporarily stored under Customs supervision. Goods may be repacked, sorted or relabeled. A customs warehouse means any place approved by and under the supervision of the Customs authorities where goods may be stored under the prescribed conditions. A customs warehouse may be either a public or a private warehouse. A public warehouse is a customs warehouse available for use by any person for the warehousing of goods, whereas a private warehouse is reserved by the warehouse keeper. Customs will accept applications for approval of different types of warehouses as follows:
¾ Type A: A public warehouse available to any person for the warehousing of goods under the responsibility of the warehouse keeper.
¾ Type B: A public warehouse that has one warehouse keeper who may in principle allow anyone to use the space. Type B warehouses are intended primarily for transit storage suppliers. The person whose name is on the declaration placing the goods in the warehouse is liable to Customs for them and must provide a guarantee for them.
Customs will supervise the entry, storage and removal of the goods in Type B warehouse by means of both storage documents that it retains and physical supervision.
Type B warehouses must be located near a Customs office.
¾ Type C: A private warehouse reserved for the warehousing of goods by the warehouse keeper. The warehouse keeper is synonymous with the depositor, although does not have to be the owner of the goods. Only the warehouse keeper is allowed to store goods and is liable to Customs for the goods in storage by way of a guarantee.
Customs supervises the goods mainly on the basis of records but also carries out physical controls. The types of goods and the level of detail in the records determine the frequency of these controls. The more specific the data, the less the need for physical controls. Because of the controls required, type C warehouses must generally be located near a Customs office.
¾ Type D: This warehouse is similar to a type ‘C’ warehouse, but the declarant has the option of having the goods assessed for duty either on the basis of their value on being placed in warehousing or at the time of release for free circulation. Type D warehouses, like type C, are private warehouses. They are intended solely for goods stored by the warehouse keeper and are mainly used for commercial storage or for building up stocks. The warehouse keeper is liable to Customs for the goods in
¾ Type D: This warehouse is similar to a type ‘C’ warehouse, but the declarant has the option of having the goods assessed for duty either on the basis of their value on being placed in warehousing or at the time of release for free circulation. Type D warehouses, like type C, are private warehouses. They are intended solely for goods stored by the warehouse keeper and are mainly used for commercial storage or for building up stocks. The warehouse keeper is liable to Customs for the goods in