Inward processing procedure is designed to boost and facilitate the activity of Community exporting industries by allowing goods to be imported without paying any agricultural duty or levy, or to be subjected to any commercial policy measure for the goods destined to the processing procedure into the Community and then re-exported outside the EU as compensating products.

For imports of intermediate goods from outside the EU, it is necessary to pay import duties as well as excise duties, and then add VAT. These costs naturally add to the cost of the final product. In this way, goods produced within the Community will be at a disadvantage when competing with overseas markets. With inward processing, an attempt is made to prevent the Common Customs Tariff from creating difficulties for Community export industries which are obliged to source certain materials abroad after failing to do so within the Community.

It is necessary to avoid Community producers from being disadvantaged when using inward processing. This is the reason why the authorization for its use is subject to the occurrence of at least one of a series of economic conditions.

1.1. 1.1. Fundamental principles of the inward processing procedure

Inward processing procedure is designed so that goods can be imported duty-free and processed in the Community, provided that:

• Products (hereinafter referred to as compensating products) are exported for an authorised process in a third country;
• Import goods can be identified in compensating products;
• Legitimate interests of Community producers are not significantly affected;
• Operators concerned are established within the Community.

The above regime is applied using two different systems.

The first, the so-called suspension system, consists in the suspension of the collection of import duties and VAT, as well as of any excise duties, until the compensating products are exported and it applies to all types of goods.

The second, the so-called refund system, requires the payment of import duties, which are reimbursed once the final product is exported. Unlike the previous system, the latter is not applicable to goods subject to quantitative restrictions, tariff quotas, export refunds and agricultural levies.

The table below shows the main differences between the two systems.

Both systems allow the use of the compensating products obtained from equivalent goods method, which allows operators to substitute Community goods for imported goods, where they are equivalent.

Likewise, as far as duty suspension is concerned, operators may utilise prior export, which consists of exporting the compensating products obtained from equivalent goods before the related import goods are placed under inward processing. An alternative to prior export is triangular trade, where inward processing goods declaration takes place at a customs office other than the one through which the compensating products prior export took place, which could possibly be located in another Member State.

The Customs Code considers inward processing an economic customs procedure. This implies the need for an import authorization and a customs declaration for it. After the processing procedures, the compensating products must receive a new destination and exit the scope of the regime by submitting a bill of discharge (suspension system) or a refund application (refund system). These formalities are specific to all economic customs procedures.

If some of the terms used are too sectorial, you can look them up on an online customs acronym & glossary.

1.2. The importance of inward processing for Community trade

Inward processing is one of the main trade regimes in the Community. The following tables show the percentage of goods subject to it on total imports and exports from and to third countries.

Inward processing imported goods represent around 6% of all Community imports, while compensating products exported under the same regime represent around 13% of total exports. The tables also show the relative use of the suspension and refund systems. The suspension system, which applies to almost all products, is by far the most used system, while the refund system applies only to 1% of exports and imports. However, it is also important to remember that the above percentages refer to the total figure. Undeniably, for certain product groups, inward processing regime covers up to 30% of imports, and for certain specific products, even the majority of commercial transactions.

Inward processing is particularly important for the following product groups:

• cereals;
• products of the milling industry;
• animal and vegetable oils and fats (i.e. olive oil);
• tobacco;
• explosives;
• pelts;
• machinery;
• air and space vehicles;
• ships and boats;
• weapons and ammunition.

1.3 Community legislation on inward processing

Provisions concerning inward processing are available in the Community Customs Code (Reg. N. 2913/92/ EEC) Articles 114-129, which provide inward processing special regulations, as well as Articles 59-78 which provide general regulations for placing goods under the various customs regimes and Articles 89-90, containing common provisions for all customs procedures.

In the implementing provisions (Reg. No. 2454/93/EEC as amended by Reg. No. 993/01/EC), Articles 536 to 550, containing specific provisions, refer to the regime in question, as well as Articles 496 to 523, containing provisions common to all customs procedures, Articles 275 and 276 concerning simplified declaration procedures, and finally Articles 198 to 252, relating to the normal declaration procedure.
The annexes to the aforementioned implementing provisions include inward processing annex 67 (application and authorization form) and annexes 68 to 75.
Examples and clarifications on some aspects of inward processing can be found in the Guidelines relating to Title III "economic customs procedures" of EEC Reg. 2454/93 as amended by EC Reg. 993/01.