With the development of international trade, countries have introduced various customs practices to increase exports and improve the competitiveness of their industries. One of these practices, the Inward Processing Regime (IPR), is an important foreign trade policy that allows imported inputs to be brought into the country exempt from customs duties or with customs duties suspended, provided that they will be used in the production of goods intended for export. Today, this system is implemented by many developed and developing countries and helps exporting companies become more competitive in international markets by reducing their costs.
The origins of the Inward Processing Regime date back to the customs duty drawback system implemented in Europe during the 18th and 19th centuries. In particular, the United Kingdom (England), one of the pioneers of the Industrial Revolution, introduced practices that refunded customs duties paid on imported raw materials when those materials were processed and subsequently re-exported. Through this system, the costs of exporting businesses were reduced and the country’s foreign trade volume increased.
These practices, which produced successful results in the United Kingdom, were gradually adopted in France, Germany, Belgium, the Netherlands, and other European countries. As a result, customs regimes supporting export-oriented production became widespread throughout Europe.
The Inward Processing Regime in its modern sense emerged during the period of the European Economic Community (EEC), with the establishment of common customs policies. Through the Inward Processing Relief (IPR) system developed in the 1960s and 1970s, common rules were established under which customs duties were not collected or were suspended when raw materials imported into member countries were processed and subsequently re-exported. This practice was later incorporated into the European Union Customs Code and continues to be implemented today under the name “Inward Processing.”
For Türkiye, the most important turning point was the entry into force of the Customs Union with the European Union on January 1, 1996, established by Association Council Decision No. 1/95, which was signed on March 6, 1995. Within the scope of the Customs Union, Türkiye largely aligned its customs legislation with that of the European Union, and the Inward Processing Regime became one of the important elements of this process. Türkiye also moved toward economic reforms promoting exports and began aligning its foreign trade legislation with international practices.
Customs Law No. 4458, which entered into force within this framework, established the legal basis of the Inward Processing Regime. The system was later reorganized through the Inward Processing Regime Decision No. 2005/8391 dated January 27, 2005, and its implementation principles were adapted to current requirements. As a result, exporting companies were granted the opportunity to import raw materials used in their production exempt from customs duties, VAT, and other financial obligations under certain conditions.
Today, Türkiye effectively benefits from the Inward Processing Regime in many sectors, including textiles, ready-to-wear clothing, automotive, machinery, household appliances, electronics, iron and steel, the defense industry, and chemicals. Through this system, production costs are reduced, export capacity is increased, and the competitiveness of Turkish industry in global markets is supported.
In conclusion, the Inward Processing Regime is not merely a customs practice; it is a strategic foreign trade policy that promotes exports, supports industrial production, and enables countries to gain a competitive advantage in international trade.
When its historical development is examined, it can be seen that its earliest examples were based on customs duty drawback systems in the United Kingdom, while its modern structure was developed by the European Economic Community. Türkiye also adapted this system to its own legislation as part of its integration process with the European Union and currently implements it successfully as one of the fundamental instruments of its export-oriented growth policies.
How and by Whom Can an Inward Processing Authorization Certificate (IPP) Be Obtained?
The Inward Processing Authorization Certificate (IPP) is an official document that allows companies engaged in export-oriented production to import raw materials, auxiliary materials, semi-finished goods, and packaging materials used in production exempt from customs duties and certain financial obligations. The certificate is issued by the Ministry of Trade and is granted to companies for a specified period and under certain conditions in return for an export commitment.
Under Customs Law No. 4458 and the provisions of the Inward Processing Regime, companies meeting the following conditions may obtain an Inward Processing Authorization Certificate:
- Natural or legal persons established within the Customs Territory of Türkiye, excluding free zones,
- Manufacturing or exporting companies that undertake to process and export the goods they will import,
- Businesses that perform the processing activity in their own facilities or have it performed by another company,
- Industrial enterprises that use imported inputs in the production of goods intended for export.
For the certificate to be issued, criteria such as whether the imported goods can be identified as having been used in the processed product, whether the production creates added value, and whether it contributes to exports are also taken into consideration.
Tax Advantages Provided Under the Inward Processing Authorization Certificate
The Inward Processing Authorization Certificate (IPP) provides significant financial advantages to businesses engaged in export-oriented production. For raw materials, semi-finished goods, auxiliary materials, and packaging materials imported under the certificate, customs duty, Value Added Tax (VAT), Special Consumption Tax (SCT), where the goods are subject to SCT, the Resource Utilization Support Fund (RUSF), and other charges having equivalent effect are not collected or are suspended against a guarantee under the conditions prescribed by the legislation. Exporting companies can therefore significantly reduce their production costs, use their working capital more efficiently, and gain a price-based competitive advantage in international markets.
However, to benefit from these advantages, the imported inputs must be used exclusively within the scope of the certificate, the committed exports must be completed within the validity period of the certificate, and all obligations under the Inward Processing Regime must be fulfilled in full. Otherwise, taxes that were not collected or were suspended are recovered from the company together with late-payment interest and the applicable penalties.
In this respect, the Inward Processing Regime constitutes a conditional tax advantage linked to an export commitment rather than a direct tax exemption.
How Is an Application for a IPP Certificate Submitted?
Applications for an Inward Processing Authorization Certificate are submitted electronically to the Ministry of Trade. The application process generally consists of the following stages:
- Company registration: The company’s tax registration, trade registry information, and business activity details must be up to date.
- Electronic application: The application is submitted through the Ministry of Trade’s electronic IPP system.
- Uploading documents and information: Information about the production process, imported inputs to be used, products to be exported, capacity details, and other requested documents is uploaded to the system.
- Ministry review: The application is evaluated for compliance with the relevant legislation.
- Issuance of the certificate: A fixed-term Inward Processing Authorization Certificate is issued to an eligible company.
- Import and export transactions: The company makes tax-exempt imports under the certificate and completes its committed exports within the validity period of the certificate.
- Discharge of the commitment: After the exports have been completed, the certificate discharge procedures are carried out and the regime is concluded.
Documents Required for the Application
Although the documents requested during the application may vary depending on the company’s field of activity, the following information and documents are generally required:
- Electronic application form,
- Tax identification number and trade registry information,
- Authorized signature circular,
- Capacity report, where required,
- Production formula or consumption table,
- Information regarding the products to be exported,
- List of the raw materials and auxiliary materials planned to be imported,
- Other information and documents considered necessary.
The documents required for the application are regulated in detail in the annexes to the Inward Processing Regime Communiqué No. 2006/12.
An application for an Inward Processing Authorization Certificate is submitted with an electronic signature to the General Directorate of Exports through the Ministry of Trade’s DYS system, the Inward Processing Regime Automation System.
An Inward Processing Authorization, which is issued instead of a certificate for simpler operations such as repair, assembly, and painting, is granted by the relevant Customs Directorates through the Single Window System.
Document tracking, company registration, and certificate issuance procedures are carried out through the General Secretariats of the Exporters’ Associations (IBGS) of which the company is a member.
Validity Period of the Certificate
Inward Processing Authorization Certificates are generally issued for a maximum period of 12 months. However, a longer period may be granted based on the duration of the project in cases involving shipbuilding, major industrial investments, or projects with long production periods. Where justified reasons exist, an additional period may also be granted under the conditions specified in the legislation.
What Are Equivalent Goods Under the Inward Processing Regime?
Equivalent goods refer to goods in free circulation that are classified under the same eight-digit or twelve-digit Customs Tariff Statistics Position (GTIP) as the goods planned to be imported under the Inward Processing Regime and that have the same commercial quality and technical characteristics. Through this practice, exporting companies can begin production using domestic or freely circulating equivalent inputs in their inventories without having to wait for the imported raw materials and can complete their exports within a shorter period.
The primary purpose of the equivalent goods practice is to prevent exporters from losing time in their production and delivery processes, ensure that orders are fulfilled on time, and increase their competitiveness in international markets. Accordingly, even when the input planned to be imported has not yet arrived in Türkiye, a processed product may be manufactured and exported using goods in free circulation that have the same characteristics. The goods imported later are then deemed to have replaced the equivalent goods used in production.
Certain basic conditions must be met for equivalent goods to be used. These are:
- The equivalent goods must be classified under the same GTIP as the goods to be imported,
- They must have the same commercial quality and technical characteristics,
- They must have the status of goods in free circulation,
- The use of equivalent goods must be authorized under the Inward Processing Authorization Certificate (IPP),
- The import and export transactions must be carried out in compliance with the provisions of the certificate,
- The use of equivalent goods must be traceable through production and accounting records.
For example, a textile company plans to export fabric manufactured using cotton yarn that it will import from China. However, it will take several weeks for the imported yarn to arrive in Türkiye. The company may begin production and complete its export using domestically produced cotton yarn in its inventory that has the same GTIP, quality, and technical characteristics as the yarn to be imported. When the yarn imported from China subsequently arrives, that import is deemed to have replaced the equivalent goods previously used. In this way, the export is completed without delay while the company also benefits from the advantages provided by the Inward Processing Regime.
The equivalent goods practice is widely used, particularly in the automotive, textile, ready-to-wear clothing, machinery, electronics, and chemical sectors. However, where the conditions prescribed by the legislation are not observed in the use of equivalent goods or it is determined that the goods do not have the same characteristics, the tax advantages provided under the Inward Processing Regime may be recovered and the relevant administrative penalties may be imposed.
The equivalent goods practice does not apply automatically to every type of goods. Restrictions or exceptions may apply to certain agricultural products, goods subject to trade policy measures, or products subject to special regulations. Therefore, Customs Law No. 4458, the Inward Processing Regime Decision, and the provisions of the relevant communiqués must be reviewed before the practice is used.
Extension of the Inward Processing Authorization Certificate Period
An Inward Processing Authorization Certificate (IPP) is issued for a specified period, and the certificate-holding company may request an extension when it is unable to fulfill its export commitment within the validity period of the certificate due to force majeure, unforeseen circumstances, or justified and documentable reasons. The extension granted by the Ministry will be equal to half of the initially granted period.
As stated in the Inward Processing Regime Communiqué No. 2006/12, an extension application may be made on two grounds: justified reasons and force majeure. The application must be submitted electronically to the Ministry of Trade before the validity period of the certificate expires, together with the reason for the request and supporting documents. The Ministry may grant an additional period under the conditions prescribed by the legislation after evaluating delays in the production process, supply chain problems, natural disasters, economic developments, delivery requests from the overseas buyer, or similar justified reasons.
However, an extension is not an automatically granted right, and each application is reviewed separately based on the specific circumstances of the case. It is highly important to apply before the certificate expires. Where an extension request is not submitted on time or is not approved, financial liabilities and penalties arising from the failure to fulfill the export commitment under the certificate may be imposed.
Obligations of Certificate Holders
Certificate-holding companies are required to:
- Use imported inputs exclusively within the scope of the certificate,
- Fulfill the export commitment within the validity period of the certificate,
- Maintain their records in compliance with the legislation,
- Submit the information and documents requested by the Ministry or customs authorities,
- Apply for the discharge of the commitment within the prescribed period.
Where the commitment is not fulfilled or the certificate is used for purposes other than its intended purpose, customs duties are collected together with interest and administrative penalties may be imposed under the relevant legislation.
What Is the Compensatory Tax (TEV)?
The Compensatory Tax (TEV) is a tax imposed when processed products manufactured using inputs originating in third countries under the Inward Processing Regime (IPR) are exported to certain countries under preferential trade arrangements. The purpose of the TEV is to prevent goods originating in third countries from benefiting from a preferential regime and being sent to other countries without customs duties being paid, within the framework of the Customs Union and Free Trade Agreements to which Türkiye is a party.
How Is the TEV Calculated?
The basic principle in calculating the Compensatory Tax is to calculate the customs duty applicable to the imported input originating in a third country.
The following elements are generally taken into consideration in the calculation:
- The CIF value of the imported goods (Cost of Goods + Insurance + Freight),
- The quantity of goods stated in the import declaration,
- The customs duty rate under the import regime applicable on the export date,
- The country of origin of the goods,
- The foreign exchange selling rate of the Central Bank of the Republic of Türkiye,
- The quantity of imported input used in the processed product.
Exports to Which Countries May Give Rise to the TEV?
As a general rule, the Compensatory Tax may arise when processed products manufactured using inputs originating in third countries and imported under a IPP are exported with a preferential document to the following countries:
- Member States of the European Union, for exports made with an A.TR Movement Certificate,
- Countries with which Türkiye has signed a Free Trade Agreement (FTA) containing a “prohibition of drawback or exemption from duties” provision, also known as a No Drawback provision,
- Countries participating in preferential trade under the Pan-Euro-Mediterranean Cumulation System (PEM), subject to the provisions of the relevant agreement.
On the other hand, the TEV may not arise where the goods satisfy the preferential rules of origin or an exemption applies under the relevant international agreements. In particular, for certain exports accompanied by a EUR.1 Movement Certificate, the Compensatory Tax is not required where the conditions specified in the legislation are met. Therefore, each transaction must be examined by considering the country of export, the movement or origin document used, and the origin status of the goods together.
Exports to Free Zones and Export Periods Under the Inward Processing Regime
As a principle, processed products committed for export under the Inward Processing Regime must be exported outside the Customs Territory of Türkiye. However, deliveries to free zones may also be considered exports provided that certain conditions are fulfilled. A delivery to a free zone alone, however, is not always sufficient for the discharge of the export commitment.
Under the Suspension System, processed products sent to a free zone within the validity period of the certificate must, within three months following the expiry of the certificate:
- Be proven to have been sold or exported from the free zone to another country,
- Or be proven to have been imported into the Customs Territory of Türkiye under another Inward Processing Authorization Certificate,
Where this is proven, the export commitment under the certificate is deemed to have been fulfilled and the certificate is discharged. Where the relevant transactions cannot be completed within this three-month period, the delivery to the free zone alone is not considered sufficient to fulfill the export commitment.
Therefore, under the Inward Processing Regime, deliveries to free zones are not directly treated as final exports. The goods must leave the free zone for a foreign destination, or the other procedures prescribed by the legislation must be completed within the specified period. This arrangement was introduced to ensure that free zones are used only as intermediate trade and logistics centers and that exports are genuinely directed abroad in accordance with the purpose of the regime.
Compensatory Tax (TEV) and Checks Performed After an Application for IPP Discharge
After the export commitment under an Inward Processing Authorization Certificate (IPP) has been completed, the certificate-holding company submits an application to the Ministry of Trade for the discharge of the certificate. However, submitting a discharge application does not mean that the certificate is automatically discharged. All import and export transactions carried out under the certificate are examined in detail by the Ministry for compliance with the legislation. Where the examination determines that a Compensatory Tax (TEV) liability has arisen, payment of the relevant tax or documentary proof of its payment may be requested before the certificate is discharged.
The following matters are primarily checked during the discharge process:
- Whether the import and export transactions were completed within the validity period of the certificate,
- Whether the export commitment was fulfilled in accordance with the conditions of the certificate,
- Whether the imported inputs were used within the scope of the certificate and in production,
- Whether the consumption rates, including wastage and yield, are consistent with the certificate and production records,
- Whether the import and export quantities remained within the limits of the certificate,
- Whether transactions involving the use of equivalent goods were carried out in compliance with the legislation,
- Whether deliveries to free zones resulted in the goods leaving for a foreign destination within the periods and under the conditions prescribed by the legislation,
- Whether a Compensatory Tax liability arose as a result of the issuance of A.TR, EUR.1, EUR-MED, or other preferential movement or origin documents,
- Whether exports were made under a preferential regime using inputs originating in third countries,
- Whether there are any deficiencies concerning customs duties, VAT, SCT, and other financial obligations that were not previously collected,
- Whether certificate revisions, period extensions, and other amendments were carried out in compliance with the legislation.
Where the examination determines that the Compensatory Tax has arisen, the tax must be paid to the relevant customs authority. After documentary proof of payment has been provided, the certificate discharge process is completed. Conversely, where the examination determines that no TEV liability exists, the certificate is discharged provided that the other conditions have also been fulfilled.
For this reason, during the IPP discharge process, companies should assess in advance the origin information of imported inputs, the movement or origin documents used, such as A.TR, EUR.1, and EUR-MED, the country of export, and any liabilities that may arise in relation to the TEV. Doing so will reduce the risk of taxes and penalties arising at a later stage.
The TEV liability arises at the time of export under preferential trade rules. During the discharge stage, the Ministry and the customs authority inspect whether this liability arose and whether it was fulfilled. Therefore, in practice, the TEV is often identified and requested during the certificate discharge review. Legally, however, the tax arises at the time of the relevant export transaction carried out under the preferential regime.
References
- Customs Law No. 4458, Official Gazette No. 23866 dated November 4, 1999.
- Inward Processing Regime Decision No. 2005/8391, Official Gazette No. 25709 dated January 27, 2005.
- Inward Processing Regime Communiqué No. 2006/12 (Export: 2006/12), Ministry of Trade.
- European Union, Union Customs Code (Regulation (EU) No 952/2013).
- European Commission, Inward Processing Guidance, Directorate-General for Taxation and Customs Union.
