What do importers need to know about inward processing relief

Understanding the various tax and customs regimes around the world is vital for all importers, especially if they wish to avail themselves of the many incentives and other measures put in place by governments to encourage trade and support local industries.

One special customs regime that may be of particular interest to manufacturers and other organizations that aim to add value to imports is inward processing relief. Understanding how this works, when it applies and how businesses can take advantage is critical in ensuring firms can keep their costs to a minimum while remaining in full compliance with import and export rules.

How does inward processing relief work?

Inward processing is a special customs procedure that allows companies to seek relief from a range of duties for any goods that are brought into a territory, processed and then re-exported. Processing can cover a wide range of activities, from repackaging or sorting goods to highly complicated manufacturing. 

Several jurisdictions around the world offer some kind of inward processing regime, with efforts to boost domestic manufacturing a major goal of such relief. The EU's Inward Processing is perhaps one of the most relevant to many businesses, but the UK also runs an Inward Processing Relief policy and the US offers similar relief for some imports as part of its drawback and duty deferral schemes.

In the EU, inward processing rules mean that goods are not subject to the following measures provided they are re-exported:

  • Import duty
  • Other taxes related to their import, such as VAT and/or excises
  • Commercial policy measures

If the finished products are released to free circulation in the market where they were processed, duty and VAT must be paid on either the originally imported raw material or on the processed products. 

What must firms do to benefit from inward processing relief?

In order to take advantage of inward processing relief, businesses must gain authorization from the relevant customs authority. As part of this, companies will be given a specified period in which they must complete their processing and either re-export finished goods or release them into the territory. These applications can usually be submitted electronically.

While retroactive authorization is possible, it is rare, so authorization must usually be granted before goods enter the territory. As this process can take several months, good planning is a must. Businesses will also need to keep complete records of each stage of the process, including details of what items have been imported, what value-added activities have been carried out on them, and when re-exports take place. 

What are the requirements to gain inward processing authorization?

For inward processing within the EU's customs union, importers will have to demonstrate that they meet certain requirements in order to receive authorization. These are:

  • To show proof the business is established in the customs territory of the Union. While authorization can be granted to a person not established in the customs territory of the Union, this is only considered in exceptional circumstances.
  • To provide necessary assurance of the proper conduct of the operations
  • To provide a guarantee where a customs debt or other charges may be incurred.
  • To carry out processing operations on the goods or arrange for them to be carried out.

What are the benefits of using inward processing?

According to the EU, the advantages of inward processing include higher exports of manufactured goods, which benefits businesses and the wider economy. For example, one previous study noted that of the €160 billion worth of EU motor vehicles exported in 2011, 43 per cent were manufactured under the inward processing regime - in other words, they were assembled in the EU using components imported from outside the bloc.

The European Commission states that inward processing relief gives businesses the flexibility to process goods before they have determined whether final products are to be sold within the EU or moved on, allowing them to take decisions based on evolving logistical or commercial needs. It can also help navigate complex rules of origin requirements that would otherwise result in duties on certain parts of products.

Other benefits may include not needing to pay import duties on products that may be subject to wastage during manufacturing processes, though this will require careful recordkeeping to ensure firms remain compliant and can identify exactly what items may eventually be subject to import duties. 

As such, having effective import and export software solutions to make this easier, such as tools that can recalculate duties and help manage inventories for special customs regimes, are highly useful.

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