Inward Processing Relief (IPR) and Outward processing relief (OPR) are Customs procedures for goods that are entering the country for a process or are returning to the country after a process has been completed. A ‘process’ could be service such an inspection, repair or modification.
They are not a way of avoiding import duty and tax but is a procedure set up to ensure you only pay duty and tax on the applicable value of the process that has been carried out on the goods (if any). These procedures should not be entered into unless you fully understand them.
These systems would only apply for goods being imported into the EU or being exported outside of the EU where duty and taxes would be applied.
A typical Import example
Before I go into IPR and OPR – lets look at a how a simple international transaction where one company buys from another and arranges the shipping themselves.
As this is very simple example I will skim over the details such as Incoterms, shipping invoices and clearance procedures to try and keep this as clear as possible.
A company sells a machine to a customer in the USA for USD $10,000.
- The selling company becomes the exporter as they are selling goods to be shipped out of the UK.
- The customer becomes the importer as they are buying the machine and importing it into the USA.
- The seller would raise a commercial invoice of sale and the customer advised the order is ready for collection.
- The customer would collect the order and ship it to the USA using their nominated shipping agent. Total shipping cost $1000.
- Once the shipment has arrived in the USA it would be cleared through US customs and the customer would pay importDuty and Tax on the value of the goods plus the shipping cost (as it becomes part of the value of the goods)
So in this example the customer would pay:
- $10,000 to the company for the machine
- $1000 to the shipping agent for the shipping cost
- Duty and Tax to the US Customs on the total
This is a typical purchase import/export scenario and would be classed as a permanent export as the company has sold the goods and is not expecting them back.
For the customer it would be classed as (and cleared through customs as) a Home use shipment, as it is a straightforward purchase for use or resale within their own country. In this example it was an ex-works shipment as the importer arranged the shipping themselves.
So quite a simple procedure and the importer pays the duty and tax and everything is settled.
So how are IPR and OPR used for in this scenario?
Lets now expand on the example above – image something has gone wrong with the machine.
During the installation of the machine there was an accident and the machine got badly damaged. The customer now has a $10,000 machine that is badly damaged and they cannot fix it. They will need to send it back to be repaired. This is where IPR and OPR come into play.
Please note: If the steps are followed correctly it is a straightforward process. If you try and jump steps or do not provide all the information required this is where you can find yourself paying Duty and taxes on goods that you have previously already paid them on.
Using Inward Processing Relief (IPR)
- The customer of the (now damaged) machine sends it back to the UK using their nominated shipping agent.
- On the shipping invoice they cleared state “Goods being returned for repair”
- The declared value of the machine is the original value of $10,000
Upon arriving back in the UK the company would need to instruct their clearing agent that the goods are coming back for repair only. They would clear the shipment through UK customs under ‘Inward processing relief’ with the duty and Tax suspended.
If you did not clear the goods under IPR duty and tax on the full value declared would need to be paid!
- The company repairs the machine and fits new parts to the value of $1000.
- The company could now contact the customer to give them the good news and the invoice for $1000 repair costs and advise its ready for collection.
- Now the customer needs to collect the repaired machine and get it back to the USA.
- As before, they contact their shipping agent and arrange the collection and shipping back to the USA.
Using Outward Processing Relief (OPR)
Once the shipment arrives back in the USA the shipment once again needs to be cleared through US customs. This time the customs entry is a bit more complex.
The customer would need to instruct their clearing agent that the machine was exported for repair, has been repaired, and has come back. All documentation would need to be provided to prove this.
The clearing agent would need:
- Copies of the first import invoice and shipping paperwork (copy AWB’s or Bill of lading) showing when it was originally purchased and imported
- Copies of the export invoices and shipping paperwork showing it being sent back for repair
- The invoices showing the repair costs and return shipping paperwork.
This is to prove you did own the machine and have already paid duty and tax on the machine value.
The clearing agent will collate all the information and carry out the customs clearance. Duty and Tax would only now be paid on the repair cost (and return freight cost).
Failure to instruct they clearing agent properly or provide all the back up documentation as proof will result in you paying duty and VAT on the whole machine value again.
With this kind of procedure it reiterates how important it is to keep detailed record of your imports and exports.