Processing outside the customs territory (code 61): if raw material is processed abroad and brought back, what is formalised and how is it reflected in the accounts?
Fabric went abroad to have a pattern printed on it and came back as printed chintz. Which permit is needed, on which value are duty and VAT calculated, what happens if the product does not come back, and through which accounts does the fabric pass in the books: the example of a textile company.
"Chinoz Mato" LLC wants to turn the white calico it weaves itself into printed fabric for children's clothing. There is no pattern-printing equipment in Uzbekistan, while a print house in Turkey does the job for 0.80 dollars per metre. The fabric leaves across the border and comes back printed. The owner does not change, so this is neither a sale nor an ordinary import. In customs language this is processing outside the customs territory, code 61 in the declaration (Instruction on the procedure for filling in the cargo customs declaration, Annex 3).
What does this procedure give and what does it require?
Under Article 42 of the Customs Code, Uzbek goods are taken out for processing and the subsequent bringing back of the products of that processing. The outgoing goods enjoy conditional exemption from customs duties and taxes, and economic policy measures are not applied (except for the prohibitions and restrictions under Article 54).
By processing the Code (Article 43) means three kinds of operations:
| Type of operation | Example close to "Chinoz Mato" (hypothetical) |
|---|---|
| Processing or working the goods themselves (identification features are preserved) | Printing a pattern on calico |
| Making other goods from the goods taken out, including assembly, mounting or disassembly | Having ready-made shirts sewn from the fabric |
| Repair: restoration, modernisation, replacement of worn parts, elimination of defects | Having a weaving loom unit repaired |
Under part three of Article 43, the following are not processing operations: keeping the goods intact and preparing them for sale or transport; work involving animals (breeding, raising, cloning, fattening, catching, obtaining and collecting their produce); growing plants and harvesting; extracting minerals; copying and replicating information, audio and video recordings. That is why simply rewinding the fabric abroad does not fit this procedure.
The main condition: customs must be able to recognise the goods taken out in the product that comes back (Articles 44 and 46). The methods listed in Article 46: applying seals, stamps or marks; detailed description, photographing or other depiction; comparing a sample taken in advance with the processed product; using factory and serial numbers or other marking. In addition, other methods may be used in accordance with legislation, and at the request of the authorised person and with customs consent, identification may also be ensured by examining detailed information on the raw materials, materials and processing technology. "Chinoz Mato" keeps a sample of every roll: the printed fabric that comes back must have the same density and the same yarn composition.
How is the permit obtained and how long is it valid?
Placement under this procedure is possible only on the basis of a permit issued by the customs authority (Article 42, Article 132). To obtain it, Article 134 of the Code lists three documents:
- an application for the permit;
- a feasibility study (calculations) describing the processing technology, and the conclusions of an authorised body or organisation for setting the yield rate (not required if the operation is a repair);
- an extract copy of the contract on which the processing is based, or of the contract for taking the goods out for processing and bringing the product in.
No other documents may be required (part two of Article 134). Customs considers the application within no more than ten working days (Article 137). The permit is issued for two years; an application to extend it is filed no later than one month before the term expires (Article 47).
When the fabric leaves across the border, the declarant submits the CCD and accompanying documents (Article 45). If there are permits, customs checks them independently in its own information system.
On what are duty and VAT calculated when the printed fabric returns?
This is where the main benefit of the procedure lies. When the processed product is placed under the release for free circulation (import) procedure, customs duty and VAT are calculated not on the value of the whole fabric but on the value of the processing operations (Article 53). This value includes two things:
- the fee for processing the goods taken out;
- the cost of delivering the goods to the place of processing and bringing the product back to the customs border, if it is not included in the processing fee.
The rate applied is the rate for the processed product. Excise tax is different: it is calculated on the customs value and quantity of the product (part two of Article 53).
There is a separate rule for repair (Article 53):
| Repair situation | Exempt from |
|---|---|
| Free repair under a contract or warranty, or a manufacturing defect not taken into account at the original import | Customs duties and taxes |
| Paid repair | Customs duties and excise tax |
If waste left over from processing is brought in, it is exempt from duties and taxes (Article 51). An unprocessed remnant is cleared as goods being re-imported.
How is the procedure closed and what happens if the product does not come back?
The procedure is completed before the term set in Article 47 expires in one of three ways (Article 52): placing the processed product under the import procedure; placing the goods taken out or their remnant under the re-import procedure; placing them under the export procedure without actually presenting them to customs (except in cases of mandatory re-import).
If the printed fabric does not come back at all, duties and taxes are applied to the calico taken out as in export, and the rates are those on the day the goods were placed under procedure 61 (Article 52). The person applying the procedure must reconcile the data within thirty calendar days of the day the processing term expires.
The classifier of customs payments has two fee codes related to this procedure: 11 (clearance fee in the procedures of processing within and outside the customs territory and transit) and 42 (fee for issuing a processing permit) (Instruction, Annex 13). The amounts of the fees are not given in this article.
Which path does the fabric take in the books?
Even while abroad, the fabric remains the property of "Chinoz Mato". Under paragraph 97 of NAS No. 21, materials sent out for processing are recorded in account 1070, and the fee paid to the processor is recorded to the debit of the account that records the item obtained from processing.
The hypothetical figures of the example:
| Indicator | Calculation | Amount, soum |
|---|---|---|
| Cost of the calico | 8 000 m × 15 000 | 120 000 000 |
| Print house fee | 8 000 m × 0.80 = 6 400 dollars × 12 500 (hypothetical rate on the day the service was accepted) | 80 000 000 |
| Transport both ways (local carrier) | hypothetical | 9 000 000 |
| Cost of the printed fabric (without customs payments) | 120 000 000 + 80 000 000 + 9 000 000 | 209 000 000 |
| Transaction | Amount, soum | How it is reflected in the accounts |
|---|---|---|
| Calico sent for processing | 120 000 000 | Under paragraph 97 the fabric is recorded in 1070; the NAS No. 21 tables have no separate line for this transaction, so set the specific entry in the accounting policy |
| Printed fabric came back and was received (value of the calico) | 120 000 000 | The value in 1070 moves to the account recording the item obtained from processing; there is no separate line in the table, set it in the accounting policy |
| Print house fee added to the value of the printed fabric | 80 000 000 | Paragraph 97: costs paid to the processor are debited to the account recording the item obtained; paragraph 254: 6010 is credited with the value of the service accepted; set the specific pair of accounts in the accounting policy |
| Transport cost added to the value of the fabric | 9 000 000 | Paragraph 254; NAS No. 4, paragraphs 15 and 22; set the specific pair of accounts in the accounting policy |
| Print house paid from the foreign-currency account | at the rate on the payment date | Dt 6010 – Ct 5210 (NAS No. 21, paragraph 257, line 13: Ct 5110-5530) |
Customs duties and fees paid at import clearance are also added to the cost of the printed fabric (NAS No. 4, paragraph 15). If VAT is recoverable, it is not included in cost (paragraphs 15 and 23). Where each customs payment code is recorded is covered in detail in a separate article.
The dollar debt to the print house is a monetary item (NAS No. 22, paragraph 9). If payment slips into the next month, the debt is remeasured at the month-end rate (paragraph 8), and the difference becomes income or expense from financial activities (paragraph 11). This difference does not change the cost of the printed fabric.
Test yourself
5 questions on this topic: pick an option or reveal the answer.
VAT payer "Nurafshon metall" made products from a foreign customer's raw material placed under the processing within the customs territory procedure. The service fee excluding VAT is 45,000,000 soums. The products were not taken out: the customer placed them under the release for free circulation (import) procedure. How much VAT is charged on the service fee?
The Namangan Tekstil textile mill intends to export fabric, a product of Uzbekistan, for dyeing abroad, with the dyed fabric to be returned to the customs territory. The customs authority's permit has been obtained. Which regime code (per the classifier of regimes) is entered in the customs cargo declaration?
Under the processing in the customs territory regime, a knitwear company obtained 21 tonnes of knitted fabric from 25 tonnes of foreign yarn (hypothetical). By the definition in Article 11 of the Customs Code, what is the yield rate of the processed product?
Under the Customs Code, which of the following is NOT a processing operation within the customs territory?
Sirdaryo Agro LLC imported a combine harvester belonging to a foreign lessor under the temporary import customs regime. Before the period expires it wants to hand the combine over for use to the Baxmal Dala farm. When is this permitted under Article 67 of the Customs Code?
Answered: 0 / 50 of 5 correct
All tests →See also
- Import and export section
- Customs procedure
- Re-import
- Materials sent out for third-party processing
- 37 customs payment codes: which go into the cost of goods and which become an expense?
- How is the cost of imported goods built up: contract, freight, duty and exchange difference
- 1070 Materials sent out for third-party processing
Sources
- Customs Code of the Republic of Uzbekistan (approved by Law No. ZRU-400 of 20 January 2016), Articles 42, 43 and 44 · definition of the procedure; conditional exemption from customs duties and taxes; processing operations (direct processing, making other goods, repair) and operations not included in them; requirements and conditions
- Customs Code of the Republic of Uzbekistan (approved by Law No. ZRU-400 of 20 January 2016), Articles 45, 46 and 47 · CCD and accompanying documents; identification methods; the permit is issued for two years, an application for extension is filed no later than one month before the term expires
- Customs Code of the Republic of Uzbekistan (approved by Law No. ZRU-400 of 20 January 2016), Articles 51, 52 and 53 · remnants and waste; ways of completing the procedure; if the product is not returned, duties and taxes as in export; duty and VAT on processed products calculated on the value of the processing operations; exemption for warranty and paid repairs
- Customs Code of the Republic of Uzbekistan (approved by Law No. ZRU-400 of 20 January 2016), Articles 132, 134 and 137 · procedures requiring a permit; documents for the permit (application, feasibility study, extract from the contract); the application is considered within no more than ten working days
- Instruction on the procedure for filling in the cargo customs declaration, Annex 3 "Classifier of Customs Procedures" and Annex 13 "Classifier of Customs Payments" · code for processing outside the customs territory: 61; code 11: clearance fees in the "processing within the customs territory", "processing outside the customs territory" and "transit" procedures; code 42: fees for issuing a permit
- NAS No. 4 "Inventories" (approved by Order No. 24 of the Minister of Finance dated 28 May 2020, registered by the Ministry of Justice on 30 June 2020 under No. 3259), paragraphs 14, 15, 22 and 23 · composition of cost: customs duties and fees, non-recoverable taxes, transport and procurement costs; method of including transport costs directly in cost
- NAS No. 21 "Chart of Accounts for Accounting of Business Entities and Instructions for Its Application": paragraph 97, paragraph 254, paragraph 257 (line 13) · materials sent out for processing are in 1070; costs paid to the processor are debited to the account recording the items obtained from processing; 6010 is credited with the value of works and services accepted; payment Dt 6010 – Ct 5110-5530 (the only specific line in the table)
- NAS No. 22 "Accounting for Assets and Liabilities Denominated in Foreign Currency", paragraphs 7, 8, 9 and 11 · Central Bank rate on the transaction date; monthly remeasurement of monetary items; the exchange difference is income (expense) from financial activities
- Example, company name, amounts and exchange rate · compiled by the author, hypothetical