Inward processing

What it means

Inward processing is a customs procedure for companies that import raw materials or components from outside the EU, process them and re-export the product. While processing takes place, neither customs duty nor import VAT is paid on the imported goods, because in the end they do not stay on the EU market.

Processing covers manufacturing, assembly, repair and adaptation of goods. The procedure is discharged by exporting the product, placing it under another customs procedure, or releasing it for free circulation, in which case the duty on the original import becomes payable.

The procedure requires a customs authorisation specifying the goods, the processing operations, the rate of yield, meaning how much product one unit of input produces, and the deadline for discharge. Goods are placed under it with a customs declaration, and any potential customs debt is covered by a guarantee.

How it works in practice

For manufacturers exporting a large share of their output outside the EU it is a significant cash saving: they need not pay duty and VAT up front and wait for a deduction or refund. For inputs carrying high duty or anti-dumping duty, the procedure decides whether the order is profitable at all.

In the books and stock records, imported goods must be tracked separately, so that it can be shown at any time how much input arrived, how much was used and how much product left. For such clients we therefore set up stock records by batch and linked to the customs documents.

Customs formalities are usually handled by a customs representative, but the data for the bill of discharge comes from the company’s own records. Holders of AEO status get simpler conditions for the authorisation and guarantees.

What to watch out for

If the procedure is not discharged on time, or the records do not match the customs documents, a customs debt arises for the full duty and VAT on any goods that cannot be accounted for, often with interest. At an audit it does not help that the product actually left if the company cannot prove it.

The procedure does not pay for companies that sell most of their output within the EU, because the duty is paid in the end anyway and the administration is not recovered. Before applying for the authorisation we therefore run a simple calculation of how much duty and cash it would save compared with the cost of record-keeping and a representative.