Inward processing

Inward processing will enable to process non-Union goods duty-free. No commercial policy measures will be applied, except measures relating to import.
  • This processing can be applied, as a rule, to the goods for which the duty provided is greater than 0 per cent or if commercial policy measures are applied to the goods (for example, constraints in terms of quantity).
  • Inward processing shall not be applied, as a rule, for the purpose of suspending value added tax only, unless repair or destruction is in question. For the inward processing of goods duty-free, the KMD authorisation (an authorisation for payment of import VAT on the value added tax return)

Authorisation for inward processing and application

An authorisation from the customs authorities is needed for the use of inward processing. There are three different types of authorisations:

  • a single authorisation - an authorisation covering different Member States, if the successive processing operations are carried out in different Member States;
  • an ordinary authorisation - an authorisation valid in one Member State;
  • an authorisation granted on the basis of a customs declaration - an authorisation to be issued for individual (one-time) operations in the event of alteration, destruction, repair or handling (DA Annex 71-03).

A person from the Union can apply for the authorisation, who is a processor or organises processing and whose main accountancy is kept in Estonia.

The prerequisites for an application for an authorisation

  •  Import goods are identifiable in the finished products
  • The place of processing and the processing records, as well as the summary of the procedure enable for the customs authorities to exercise supervision
  • The economic conditions for issuing an authorisation are fulfilled

Obligations of the holder of an authorisation

  • The correct preparation of import documents and correct completion of the customs declaration;
  • The correct keeping of records on goods;
  • The correct termination of a customs procedure, including the lodging of the customs declaration for the application of the subsequent customs treatment manner;
  • Timely presentation of the bill of discharge;
  • Notification of the customs authorities in the event of changes in the relevant data;
  • Provision of a guarantee and monitoring its sufficiency.

If the holder of an authorisation fails to discharge the obligations and conditions related to the use of a procedure (for example, keeping records, presentation of the report timely), a customs debt shall be incurred (UCC 79).

For obtaining a single or an ordinary authorisation, an application shall be submitted electronically in the system CDS (See the instruction).

It takes up to 90 days for processing a single authorisation (IA 260), an ordinary authorisation takes up to 30 days (DA 171). The period for processing starts from the day on which all the necessary documents and information have been submitted to the customs authorities.

The period of validity of the authorisation shall not exceed five years, in the event of the goods referred to in Annex 71-02 (agricultural products and fish) the period shall not exceed three years (DA 173).

With the application for a single and an ordinary authorisation,

  • The additional documents mentioned in section 2 of the Regulation No. 56 of the Minister of Finance shall be submitted;
  • The authorisation to use a comprehensive guarantee shall be applied as well.
  • In order to describe the process concerning the goods, the relevant points of the self-assessment questionnaire shall be answered.

The authorisation shall be issued after the provision of the guarantee.

On the refusal of issuing the authorisation, the customs authorities shall make a justified written decision. A challenge against the decision to refuse to issue the authorisation can be filed by the applicant within 30 days.

An authorisation on the basis of a customs declaration. as a rule, can be applied for repair, destruction or simple forms of handling (the list of operations in DA Annex 71-03). For obtaining an authorisation, a relevant customs declaration shall be filed with the tax and customs administration at the location of the processing (profile I1). On the basis of a customs declaration, an authorisation cannot be applied for, if a simplified customs declaration (UCC 166) or any other customs simplification (UCC 189, 182) is used for lodging a customs declaration.

The customs authorities shall examine the application and take a decision on determining the guarantee at the latest within 30 days (DA 171 (1)). The acceptance of the customs declaration is considered as the issue of the authorisation. The goods shall not be released until the guarantee is provided. The holder of the authorisation shall be deemed to be the person who provides a guarantee at the request of the customs authorities (the person indicated in box 48 in the customs declaration). On the refusal of the issue of an authorisation, the customs authorities shall take a justified written decision and the applicant of the authorisation may file a challenge within 30 days.

1. The economic condition code

The economic condition code is used for the identification of the justification for inward processing. When applying for an authorisation, it is needed to indicate the economic condition code in accordance with the appendix of the Annex 12 to TDA. The economic condition code is also used in the event that the economic reason need not be proved by documents.

The economic justification need to be proved only, if the import duties are desired to be paid on processed products (UCC 85) and agricultural goods are in question (Annex 71-02 to DA), or the anti-dumping, countervailing or additional duties are applied to the goods (DA 166 (1) b)).

However, the economic justification need not to be proved also for the abovementioned goods, if the request relates to:

  • The processing of goods of a non-commercial nature (for personal use)
  • If the goods to be processed have been obtained through processing on the basis of a previous authorisation which was granted after the examination of the economic conditions
  • Destruction
  • The total value of the agricultural goods to be processed (Annex 71-02 to DA) does not exceed 150,000 euros in a calendar year .

The proofs of the economic justification (comparisons of the prices, price offers from Union and non-Union producers) shall be submitted together with the request. The proofs must show why the goods produced in the Union cannot be used for production. For each commodity code, the economic condition code for justification shall be indicated. The request is not treated without the necessary proofs and shall be returned to the applicant.

2. The period of processing

The period of processing starts with the declaration of the goods for the inward processing and ends with the application of the following customs procedure (for example, release for free circulation) or with a re-export. The goods declared for re-export have to be taken out of the customs territory of the Union within the time-limit for processing (UCC 215 (1)).

The necessary period for processing in months shall be indicated in the application for an authorisation. In general, the period for processing does not exceed one year.

If it becomes evident after the issue of an authorisation that a bigger period for the processing is needed than it had been originally applied for, a written request (digitally signed e-mail) for the extension of the processing period shall be made to the supervising customs office.

3. Processed products

Processed products mean goods which have undergone processing operations. All processed products shall be indicated in the application for an authorisation, both the main processed products and the secondary processed products (by-products) which are not considered as production losses (IA 1(7) and (9)).

4. Rate of yield

The rate of yield is the quantity of the compensatory product which is produced from the quantity of the goods placed under inward processing. It can also include the products used up in the processing operation which are not directly contained in the end products.

The estimated rate of yield or the method for its determination must be indicated in the application for the authorisation. If the application involves several processing operations, a separate rate of yield shall be provided for each operation, taking into account:

  • The quantity that went for the production of the processed product
  • The quantity of the by-product
  • The production losses - evaporation, desiccation, waste to be destroyed, etc.
  • The quantity of the goods necessary for the production but which are not contained in the compensatory product (for example, polishing paste)

If the end product is the same as the imported goods, for example, in the event of repair, the rate of yield is 1:1.

If upon processing different goods are used to produce one end product, then the rate of yield shows how many units of the imported goods shall be needed for making one unit of the end product (e.g. for making one blouse, it is necessary to have three metres of fabrics, five metres of thread and six buttons).

If upon processing one type of imported goods are used for different end products, the rate of yield shows the quantities of different end products per quantity of the imported goods (e.g. the 1000kg wood shall give 14 tables, 10 chairs and 50kg wooden waste (by-product)).

If the rate of yield is unknown at the moment of application or the rate of yield is different for each batch, then it shall be indicated in the application that for determining the rate of yield, the production report shall be used and the rate of yield shall be submitted together with the declaration ending the procedure. If the rate of yield changes or is incorrect, the supervising customs office shall be notified of this.

Procedure

By release of the goods for free circulation upon the inward processing, the holder of the authorisation or the person to whom the rights of the holder of the authorisation have been transferred (UCC Art 218, IA Art 266), shall lodge the customs declaration for import (4051) and submit all the documents needed for release of the goods for free circulation.

It will be indicated in the additional information box whether the amount of duty in the event of a customs debt is calculated according to the processed product (UCC Art 85) or the taxation elements of the import goods (UCC Art 86 (3). If not the goods subject to agricultural policy measures, anti-dumping measures, commercial policy measures or countervailing duty measures are in question, then the both manners of taxation may be indicated in the application.

According to the processed product or end product (UCC Article 85)

According to taxation elements of import goods 
(UCC Art 86 (3))

Duty is paid according to the processed product. Duty is paid according to the taxation element of non-Union import goods .

Value added tax is paid according to the processed product.

The calculation of value added tax is performed as follows: (the value of the processed product + the amount of the duty + the amount of the excise duty rate) × 0,2

Value added tax is paid according to the taxation element of non-Union import goods.

The calculation of value added tax is performed as follows: (the taxation element of the import goods + the amount of the duty + the amount of the excise duty rate) × 0,2
The excise duty rate is paid according to the processed product. The excise duty rate is paid according to the processed product.
The taxation elements of the processed goods are the commodity code, the customs value, the quantity and the origin. Although the taxation is performed according to the taxation elements of import goods, the end product is declared for release for free circulation. 

The excise duty rate (including the anti-dumping duties, etc.) is not subject to the taxation elements of the import goods, or the taxes shall be calculated at the moment of the release for free circulation according to the valid excise duty rate.

Upon the release of the goods, which remained unprocessed, for free circulation, the import duties (customs duty, value added tax, excise duty) are paid on a customary basis or according to the taxation elements of the goods to be declared for release for free circulation.

For application of the procedure, the customs declaration is submitted to the customs office initiating the procedure indicated in the authorisation (in the event of the authorisation granted on the basis of a customs declaration, to the customs office which processed the goods).

The reference to the additional documents is indicated on the customs declaration (box 44) and shall be submitted at the request by the customs authorities:

  • The document certifying the value of the goods (commercial invoice or proforma invoice);
  • The authorisation for inward processing (in the event of an ordinary or a single authorisation);
  • Accompanying document.

The customs authorities may demand submission of other relevant documents.

Upon lodging a declaration, additional documents, as a rule, shall not be submitted but they shall be kept available to the customs authorities and submit at the request of the customs authorities.

Discharge of a procedure

For the discharge of a procedure, the holder of the authorisation files a customs declaration to the supervising customs office for the following customs procedure or for the application of re-export.

  • In the event of re-export, the customs declaration EX or EU shall be lodged. Code of procedure 31 shall be indicated in box 37A ‘Required procedure’.
  • The goods declared for re-export may be transported to a customs office of exit (departure from the EU) under a transit procedure (after the acceptance of the re-export declaration the transit operation shall be applied) or under inward processing.
  • If the goods declared for re-export are brought to a customs office for exit (departure from the EU) without the transit procedure (under inward processing), the responsibility of the holder of the authorisation will end, if the goods are actually taken out of the Union customs territory.
  • If after the inward processing procedure, the proofs of preferential origin are certified on the goods to be re-exported (EUR 1, EUR 2, EUR-MED), the relevant import duties shall be paid on the non-Union goods contained in the processed product (UCC 78).
  • The import duties are paid by the re-export declaration (3151).
  • One of the following codes of the proofs of the preferential origin is indicated in box 44AA ‘Code of additional document’: N954, N864, U045 or U048. If the codes are not indicated, the taxes cannot be paid (however, the taxes can be entered, but the system does not save these). The declarant figures out the taxes and enters manually in box 47.
  • The calculation of taxes are given on a page of tax calculation (box 44AA, code 4004), which can be attached to the declaration or kept available to the customs authorities and shall be submitted at the request of the customs authorities.

Upon placing goods in a customs warehouse, ‘ST goods’ - code ‘10200’ or ‘10300’ is indicated in box 44 on the declaration for customs warehousing (if commercial policy measures apply to imported goods).

The transportation of the goods from the place of the inward processing to the customs warehouse can be performed:

  • Under a transit operation
  • Under the responsibility of the inward processor
  • Under the responsibility of the warehouse keeper

Upon the re-export from the customs warehouse, code 3151 for the customs procedure is indicated.

Upon release of the goods for free circulation from the customs warehouse, code 4051 for the customs procedure is indicated.

Upon placing goods into a free zone, the goods are transported into the free zone under a transit procedure or under the responsibility of the inward processor. The indication ‘ST goods’ shall be made on the declaration for transit or on the accompanying document. No customs declaration is lodged on placing goods into a free zone. The goods are entered in the stock records of the free zone with the indication ‘ST goods’. When the goods move under the responsibility of the inward processor, the entry number in the stock records of the free zone shall be indicated in the inward processing registration.

If the place of processing is located in a free zone, then after the processing when placing the goods under the treatment of the same free zone, the inward processing will be ended with the entry to be made into the stock records of the free zone.

Upon the re-export from the free zone, the re-export declaration shall be lodged and the code of the customs procedure shall be 3151. Upon the release of the goods for free circulation from the free zone, the code of the customs procedure shall be 4051.

Upon conveyance of the goods to another Member State, the goods are moving, as a general, under a transit procedure. The indication ‘ST goods’ shall be made on the transit declaration or on the accompanying document. If the goods are released for free circulation in another Member State, the document INF 1 (appendix 71 of Annex 13 to TDA) may be used for forwarding the information concerning the amount of the duty.

If the goods move to another Member State under the single authorisation, then the goods will move without customs formalities under the responsibility of the holder of the authorisation. The use of INF 1 is mandatory (DA 176 (1), TDA Art 23). The movement of goods shall be reflected in the registration of inward processing.

The holder of the authorisation or the person to whom the rights of the holder of the authorisation have been transferred, (UCC 218, IA 266) shall provide the im port declaration (4051) and all the documents needed for the release of the goods for free circulation.

Taxation

When the processed product is released for free circulation, the duty will be paid according to indication in the authorisation, whether according to the processed product (UCC 85) or the import goods (the goods to be brought in for inward processing) (UCC 86 (3)).

The value added tax and the excise duty is paid according to the taxation elements of the processed product. The taxation elements of the import goods are the commodity code, customs value, quantity and origin. The rate of duty (including anti-dumping duties, etc.) is not subject to the taxation elements of the import goods, or taxes at the moment of the release for free circulation are calculated according to the valid rate of duty.

Upon the release of the goods, which remained unprocessed, for free circulation, the import duties (customs duty, value added tax, excise duty) are paid on a customary basis or according to the taxation elements of the goods to be declared for release for free circulation.

If the taxes are paid according to the taxation elements of the import goods, the taxes will be entered in the customs declaration manually (box 47 G, I, J). The calculation of taxes are given on a page of tax calculation (box 44AA, code 4004), which shall be attached (uploaded) to the customs declaration.

Provision of the bill of discharge

The holder of the authorisation shall present the bill of discharge to the supervising customs office within 30 days after the expiry of the time-limit for discharge of the inward processing or at the time indicated in the authorisation (DA 175). The bill of discharge must contain the particulars provided for in Annex 71-06 to DA.

The bill of discharge is not presented in the event of the authorisation granted on the basis of the customs declaration, if one-time repairing is considered.

Destruction on inward processing

For destruction of the goods, the person performing or organising the destruction shall have to apply for an application for inward processing. The authorisation can be applied for a multiple or one-time procedure.

For one-time procedure, the authorisation can be applied together with the lodging of the customs declaration. In addition, a guarantee shall be provided. For discharge of the inward processing and release of a guarantee, a report on the destruction of the goods containing the information about the goods to be destroyed, the method of the destruction and about the waste and scrap.

Last updated: 17.11.2021

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