One of the main announcements in last month’s Spring Budget was the location of eight new freeports in England. According to Chancellor Rishi Sunak, freeports aim to “to reinforce [the UK’s] position of trading nation turned outward, open to the world“.
The government has three ambitions for the new free ports: to act as national hubs for global trade and investment across the UK; promote regeneration and job creation as part of the government’s commitment to “level up”; and provide hotbeds of innovation.
What are freeports?
Freeports are areas physically within the geographic borders of a country but outside the customs borders of that country. Freeports and Freelones are used globally, with approximately 3,500 freeports employing approximately 66 million people worldwide. Some of the more notable freeport sites are the United Arab Emirates, Singapore, the United States, China, and Hong Kong.
Free ports can offer a range of customs-related flexibilities, including exemption from import duties and taxes and reduced customs formalities. Along with these benefits, many free ports also offer broader tax incentives to facilitate investment opportunities in the geographic area surrounding the free port and more favorable regulatory regimes for foreign direct investment.
How will the policy work?
Following a competitive process organized last year, the locations selected for new freeports are East Midlands Airport, Felixstowe & Harwich, Humber, Liverpool City area, Plymouth and South Devon, Solent, Teesside and Thames. Freeports are expected to be operational from the end of 2021. Discussions are also underway between the UK government and decentralized administrations to establish further freeports in Wales, Scotland and Northern Ireland.
Each free port will have a designated main customs site in or near a seaport, airport or rail port in which tariff and customs benefits will apply. Freeport subzones can also be established to allow multiple sites to benefit from the relevant benefits. In addition, each free port will include an area in which the relevant tax breaks will apply.
What are the potential benefits?
Critics of the free port policy suggest that their economic effect is likely to be limited. While believed to create new jobs and facilitate broader economic benefits, studies suggest that overall, they are likely to move businesses from other parts of the country to the free port area without increasing the overall size of the business. ‘economy.
However, while the extent to which free ports increase economic activity and create jobs is open to debate, there are clearly benefits to companies establishing operations in one of the new free ports. These include:
- Tariff advantages: The established free ports will allow the rights to be reversed; When the duties on a finished product are lower than those on imported raw materials, a company could benefit by importing raw materials duty-free, processing the final product in the free port area, and then paying the duties at the rate of the finished product when it enters the UK domestic market. In addition, when the goods are transferred to a designated manufacturing area within or near the free port, they can then be re-exported to the rest of the world without ever having to pay the corresponding tariff.
- Simplified customs procedures: Companies operating in free ports will be allowed to use simplified import procedures and carry out fewer customs checks when goods are not transferred from the free port to the UK domestic market.
- Tax breaks: Businesses operating in open ports will benefit from a range of significant tax breaks designed to encourage capital investment and innovation. These include land tax relief from stamp duty, improved 100% capital deduction for investments in facilities and machinery to be used in the free port, improved structures and construction allowance, relief of the enterprise rate and a reduction in the employer’s contributions to national insurance.
What are the potential risks?
Even though there are recognized advantages of free ports for participating companies, these advantages could also be responsible for the introduction of additional risk factors which companies handling these free ports, and any financial institution that finances such activity, must be aware of:
- Counterfeit trade: A 2018 study by the Organization for Economic Co-operation and Development found that the creation of an additional free port was associated with an average 5.9% increase in the value of counterfeit exports in a local economy. This is facilitated by inadequate supervision and record keeping at free ports.
- Money laundering: Trade-based money laundering can occur when criminals use international trade as a matrix through which to transfer criminal funds. For example, by distorting the price of goods or by importing / exporting goods which can then be sold, criminals can transfer value across borders “through the back door”. This is particularly prevalent in free ports that process cash transactions and where companies do not have proper procedures to combat money laundering or the financing of terrorism.
- Tax evasion: Where there are few regulations controlling the length of time goods can be stored in the free port, there is a risk of tax evasion. Freeports have the potential to be used as a secure, tax-free, long-term storage facility for works of art, they can then be bought or sold without paying indirect or capital gains tax. Many free ports have been criticized for not needing sufficient information on beneficial owners.
- Customs duty evasion: Where physical security is insufficient, the World Customs Organization has reported that imported goods are “frequently” missing and are suspected to be moved out of the free port for sale.
Given these concerns, companies planning to operate in, through and with the UK’s new free ports – and the financial institutions that fund such activities – should ensure they have adequate systems and controls in place. In particular:
- Programs against money laundering (AML) and the financing of terrorism (CTF);
- Appropriate due diligence of the counterparty; and
- Transactional monitoring.
Each of the eight successful open ports will now need to prepare business cases and implementation plans. This process should take about six months. As part of this process, the governing bodies of free ports will work with the government, border forces, HMRC and the National Crime Control Agency to develop governance procedures that protect against the risk of free ports being used to host money laundering, smuggling or other illegal activities.
This period offers interested companies the opportunity to examine the potential benefits of the eight free ports for their operations.