Processing within the customs territory (code 51): if a product is made from a foreign customer's raw material, what is formalised at customs and what is recorded in the books?

"Kumush Profil" LLC assembles window and door frames. A construction company from Kazakhstan came with an offer: "We will send the profile, you assemble the frames and send them back to us, and we pay only for the work." The director's first thought was customs: if duty and taxes had to be paid on 13 000 metres of foreign profile, the order would not be profitable. The Customs Code has a separate procedure for exactly this case: processing within the customs territory, with code 51 in the declaration (Instruction on the procedure for filling in the cargo customs declaration, Annex 3).

What is the essence of the procedure and which works count as processing?

Under Article 70, goods are brought into the customs territory for processing and subsequent exportation in the form of processed products with conditional exemption from customs duties and taxes. Economic policy measures are not applied (except the prohibitions and restrictions in Article 82). The word "conditional" matters: if the condition is not met, the payment comes back.

Goods are placed under the procedure on the basis of a processing permit issued by the customs authority (part four of Article 70). Article 71 lists which works are processing operations:

The Code also separately lists works that are not processing (Article 71, part two): ensuring the preservation of goods, preparing them for sale and transport; breeding, rearing, cloning, fattening and keeping animals, obtaining and collecting their produce; growing and harvesting plants; extracting minerals; copying and reproducing information, audio and video recordings; using foreign goods as auxiliary means in a technological process.

Any interested person of Uzbekistan may place goods under the procedure, including a person who does not own the goods or does not perform the operation itself (Article 72). The operation may also be performed by another company on the instructions of the permit holder, but this must be reflected in the permit, and responsibility to customs stays with the permit holder (Article 71).

What conditions and terms apply to obtaining a permit?

Article 72 sets five conditions:

1. Identification of the imported goods in the processed products.
2. Setting the yield rate of processed products.
3. The goods do not fall under prohibitions and restrictions relating to this procedure.
4. Securing payment of customs payments for the imported goods (except in cases provided for by law).
5. The operations comply with Article 71.

Identification (Article 74): applying seals, stamps or digital marking; a detailed description, photograph or other image; comparing samples taken in advance with the product; using existing marking in the form of factory and serial numbers. Other methods may also be used in accordance with the law, and at the request of the authorised person and with the consent of customs, identification may also be carried out by studying detailed information about the raw material and the production technology. The method is chosen by the authorised person. For "Kumush Profil" the most convenient is the manufacturer's marking on the profile: it is visible in the finished frame too.

Yield rate (Article 76): if there is no approved rate, the authorised person determines it on the basis of actual production conditions, and the customs authority sets it when issuing the permit, relying on the technological process documents. In the example: 6.5 metres of profile per frame.

Terms (Article 75):

Filing an application does not stop the term from running. If the extension is refused, the goods must be placed under another procedure in accordance with Article 80.

How does the procedure end and what happens to the leftover profile?

The requirement of Article 80: processed products, remnants of the imported goods and waste must be exported or placed under another customs procedure no later than the day the term under Article 75 expires. If the product leaves in several batches, its conformity with the quantity in the permit may be checked periodically, at least once every three months, and within thirty calendar days of the day the last batch crossed the border. A report is drawn up on the results of the check. If it is found that more product was exported than the quantity in the permit, customs decides on an additional payment and notifies the company in writing; if payment is made within ten working days of the day the notice is received, no late payment interest is charged. After the procedure ends, the company must reconcile the data on the application of the procedure within thirty calendar days.

Now the figures. "Kumush Profil" received 13 000 metres of profile. Under the rate, this should yield 13 000 ÷ 6.5 = 2 000 frames. In fact 1 940 frames were assembled and shipped to Kazakhstan:

There are two paths for the 390-metre remnant, and no third:

• If the remnant is sent back to the customer, it is exempt from customs duties and taxes: part one of Article 81 grants this exemption to exported products, remnants and waste. This is the cheapest path.
• If the remnant stays in Uzbekistan, it is placed under another customs procedure before the term expires, for example release for free circulation (import, code 40) (Articles 79 and 80). The exemption in part one then does not apply, because it covers only goods being exported.
• Leaving the remnant within the term neither exported nor placed under another procedure is not an option: Articles 79 and 80 require this directly.

Article 81 has two more rules for the product itself. If the processed product is placed under the import procedure, payments are calculated on the customs value of the imported goods and (or) the quantity used under the yield rate, at the rates in force on the day of import (part two). If less product is exported than the yield rate sets, payments are made on the difference in the same way (part three). That is why it matters to set the rate from the real process sheet.

The small offcuts left from cutting are waste. Under Article 79 they too must be disposed of by placing them under some procedure before the term expires. If imported, the payment is calculated as if the waste had been brought in in that state (part four of Article 81).

What is recorded in the books: does the profile go onto the workshop's balance sheet?

It does not. The profile is the customer's property, and the workshop does not pay for it. Paragraph 440 of NAS No. 21 provides off-balance sheet account 003 "Materials accepted for processing" for exactly this situation: the customer's raw material is kept there at the contract price, with analytical records by customers, types and grades of raw material and storage locations. Off-balance sheet accounts are kept in a simple system (paragraph 437), that is, without a corresponding account, only receipts and disposals.

Under the contract the profile costs 3.5 US dollars per metre, and the rate in the example is 1 dollar = 12 600 soum (hypothetical):

The workshop's own costs are collected as usual on account 2010 "Main production" (paragraph 440: processing costs are kept on cost accounts):

The workshop's income is not the profile but the processing fee: 25 dollars per frame, 1 940 × 25 = 48 500 dollars in total. It is recognised at the Central Bank rate on the date of the acceptance certificate (NAS No. 22, paragraph 7):

Result: revenue 611 100 000 soum, cost 340 000 000 soum, gross profit 271 100 000 soum, plus a 2 425 000 soum exchange difference in income from financial activities (NAS No. 22, paragraph 11). If payment slips into the next month, the foreign currency receivable is remeasured at the end of the month (paragraph 8). Taxes withheld from and charged on wages are not shown, to keep the example simple.

Practical tips

• Keep the profile in the warehouse separately from your own materials and label it separately. At a stocktake it is then easy to check against the 003 balance.
• Write the yield rate into the permit from the real process sheet. If the rate is too "neat", actual waste grows and a payment arises for the product that fell short of the rate.
• Link every disposal on 003 to a CCD for each shipment: these are exactly the figures customs will ask for at the three-monthly check.
• Decide where the remnant and waste will go one month before the term expires. The application for extension must also be filed by that date.