The Inward Processing Reconciliation That Did Not Add Up
A textile manufacturer in Country T imports 12,000 kg of cotton yarn under inward processing (IP) to produce 60,000 T-shirts for export to Country U. The authorisation allows a yield of 5 T-shirts per kg and a waste rate of 4%. During production, 500 kg of yarn is damaged and sold on the domestic market as waste; 1,200 finished T-shirts are rejected by the buyer and sold domestically; and 300 kg of yarn remains in stock at the end of the 12-month period. The company also transferred 2,000 T-shirts to a related company in Country T under a temporary admission procedure for a trade show, then sold them after the show. The customs authority asks for a reconciliation. The company argues that the exported T-shirts should be duty-free and that the domestic sales are negligible.
1. Reconcile the inward processing authorisation. Which quantities are dutiable and on what basis?
Read the worked answer
The authorised input is 12,000 kg, with a yield of 5 shirts per kg, or 60,000 shirts, and an authorised waste rate of 4%, or 480 kg. The 500 kg damaged is 20 kg above the authorised waste. The 1,200 rejected shirts sold domestically represent 240 kg of yarn equivalent (1,200 divided by 5). The 2,000 shirts transferred to temporary admission and then sold represent 400 kg of yarn equivalent. Those quantities were not exported under the IP procedure and must be regularised. The 300 kg remaining is still in stock; if it is re-exported or entered for home use within the time limit, no duty arises yet, but it cannot simply be ignored. The dutiable quantity is therefore 240 kg plus 400 kg plus the 20 kg excess waste, or 660 kg, unless national rules also charge duty on the 480 kg of normal waste. Many IP regimes exempt normal waste that is destroyed under customs control or re-exported, but charge duty on waste sold domestically. The rate is the rate applicable to the imported yarn, or to the compensating products if the authorisation uses that method. The company's 'negligible' argument has no legal basis; the procedure requires full discharge.
2. The 2,000 shirts were transferred to temporary admission for a trade show and sold after the show. How should this be handled?
Read the worked answer
Temporary admission permits import for a specific use with total or partial relief from duty; it does not permit sale while the procedure is still running. Transferring the shirts from IP to temporary admission did not discharge the IP procedure, because the goods were not exported. When the shirts were sold after the show, the temporary admission procedure was misused. The company should have re-exported the shirts or lodged a declaration for home use before the sale, paying duty on the shirts or on the equivalent yarn, depending on the procedure. The sale triggers duty from the date the goods were placed under temporary admission, plus interest, and may attract penalties for improper use of the procedure. For the IP reconciliation, the 2,000 shirts count as 400 kg of yarn that was not exported. The company should correct the temporary admission record, pay the duty and interest, and document the trade-show use separately from the domestic sale.
3. What should the company do to correct the records and avoid revocation of the IP authorisation?
Read the worked answer
The company should perform a full reconciliation from imported yarn to finished shirts, waste and stock, and disclose the discrepancies to customs before the audit becomes an assessment. It should apply to amend the authorisation if the yield or waste rate was unrealistic, pay duty and interest on the domestically disposed quantities, and destroy or re-export any waste under customs supervision where the regime allows. The 300 kg remaining must be re-exported, transferred to another approved procedure or entered for home use before the deadline. The company should also implement a yield and waste monitoring system, train production and customs staff, and keep records for the full retention period. A voluntary correction and a credible corrective action plan reduce the risk of revocation. Revocation is more likely where there is repeated misuse, concealment or failure to cooperate; prompt disclosure and payment are mitigating factors.