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Inward Processing Regime

Since Customs Union Agreement took place on January 1st, 1996 between Turkey and European Union via 1/95 Decree of Turkey-EC Association Council, Turkey has adopted various regulations in conformity with EC's regulations. One of the mentioned regulations is Turkey's export incentive system which was abolished and replaced by Inward Processing Regime (IPO) via Decree NO. 95/7615 put into force on January 1st, 1996. For today, implemented Inward Processing Regime (IPO) via Decree NO. 2005/8391 put into force on January 27, 2005.

IPO is a system allowing Turkish manufacturers/exporters to obtain raw materials, intermediate unfinished goods that are used in the production of the exported goods without paying customs duty and being subject to commercial policy measures. Having granting IPO authorization, the owner of the IPO authorization is obliged to import goods stated on authorization and export them after processing the imported goods. The basic endeavor of the IPO is to maintain materials at the world market prices and enhance the competitiveness of Turkish exporters.

Inward processing can be classified by two main types of systems.

1. The Suspension System

The suspension system provides tax exemptions to the Turkish manufacturer-exporters/exporters by permitting manufacturer-exporter/exporters to import raw materials intended for use in production process and export final goods without subject to import duties and VAT during importation. Under this system, beneficiary of IPO has to submit letter of guarantee or pledge money covering total amounts of all duties and VAT to the Custom authorities at the importation. Holder of the authorization can be subject to discounted rate of guarantee if the export performance of the holder meets the criteria getting a discounted guarantee.

At this point, one can ask that which criteria we look for.

If the manufacturer-exporter can export more than 1.000.000 or 500.000 Dollars within four years under IPO or special classified companies, they can put up 1%, 5% or 10 % of total amounts of all duties and VAT as a guarantee instead of all. This tax concession should be stated on the authorization certificate.

Equivalent goods: In the suspension system, manufacturer-exporters/exporters can use equivalent goods instead of the import goods stated on the authorization certificate. Equivalence is a procedure which allows the substitution of the goods in free circulation in place of the import goods stated on the authorization certificate. It should be emphasized that equivalence needs to be considered as in terms inputs (raw materials or unfinished intermediate goods) not in the compensating goods (final goods). The equivalent goods must be of the same quality and have the same features with the import goods.

2. The Drawback System

The import charges of the goods paid during importation can be subject to tax reimbursement after the export commitments are fulfilled. Under the drawback system import duty and VAT have to be paid when the goods enter the free circulation into Turkey. Reimbursement of VAT and import duty can be claimed when the compensating products are exported.

Application and Evaluation of Authorization Certificate

Authorization certificate can only be granted to the firms which can submit necessary documents to Undersecreteriat for Foreign Trade (UFT) via General Secretaries of Exporters Unions (GSEU). These documents are inward processing project form, table of raw materials, signature circular, petition, trade registration journal, capacity report and other technical documents in some special cases.

The firms have to put in a request for authorization certificate to UFT via GSEU with the necessary documents counted above.

Applications are evaluated on the basis of economic criteria stated in IPO.

What are the criteria?

Criteria to grant a certificate is first, the imported goods should have been clearly determined that are used in the production of main compensating goods without any doubt, secondly, benefiting of IPO does not cause a serious damage to the domestic producers, thirdly, production process under IPO should have to create an additional production capacity, value added and increase competitiveness. The decision on granting the authorization certificate is made by examining whether or not these economic criteria are fulfilled.

Usage of Authorization Certificate

The firms which have granted an authorization certificate should have to import and export goods without paying any kind of custom duties and fees within the period stated on the authorization certificate. These period of discharge cannot be longer than 12 months. However, for some special production facilities the time can be given up to 24 months. The period of discharge can be extended maximum half of the period stated on the authorization certificate due to the force major situations. The period of discharge starts with the date of first party entry but this period cannot be longer than three months. And also when one faces with economic crisis or natural disaster, like earthquakes happened in 1999, extra time can be given for discharge.

Discharge of Authorization Certificate

When the holder of the authorization certificate completes all the entry and discharge transactions within the period stated on the authorization certificate, the customs authorities give the letter of guarantee back to the holder or reimburse the money which was pledged as security for all kinds of duties and fees taken during import. For this return of letter of guarantee or reimbursement of security, all the customs declaration and authorization certificate has to be submitted to GSEU. GSEU compare the amount of goods imported on the customs declaration with the amounts stated on authorization certificate, check rate of yield and if the GSEU conclude that import goods used in the production of export goods without any violation of IPO, then they inform the custom authorities that all the provisions of IPO are fulfilled without any violation of IPO, letter of guarantee or money can be reimbursed. If GSEU detect any violations of IPO, they also inform the customs authorities that all duties and fees should have taken from the holder including with compensatory interest and fine. (Fine equals the two times of all duties and fees).

(Source: Undersecretariat of the Prime Ministry for Foreign Trade Web Site)

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