Subject: This article is prepared to share with you some of the customs scenario in Turkey, and it was prepared to identify alternative methods for raw material procurement without VAT and Customs Duty for the Projects in order to report the different situation advantages and disadvantages of the methods.
All of these methods contain many difficulties, advantages, and disadvantages and all method need good relationship departments and need the best team for custom issues
The purpose of my article is to give my colleagues who manage or consult Accounting and Finance departments from the perspective of a Financial Advisor, different perspectives on customs issues related to our professional works.
Even if these methods cannot be applied for the all projects, it is to emphasize the importance of Customs procedures and the relevant part for companies and to emphasize the importance of working with competent personnel and consultants in this regard, and it has completely proceeded through scenarios .
General Information about the Project;
The information presented to you ;
- Under the scope of the “Supply of M.B.T. Project.” (For istance)
- The delivery of these vehicles to Project Owner will be exempt from VAT (VAT will not be charged.)
- Project Owner has declared that it will receive Investment Incentive Certificate (IIC) in order not to pay VAT.
- Main Contractor is M.B.T. Ltd. (For instance).
- The vehicles will be produced by M.B.T. Ltd. (For instance)..
- %30-40 of the raw materials / materials required for the production of vehicles shall be supplied from abroad and %60-70 shall be supplied from domestic suppliers.(for example)
- M.B.T. Ltd. (For instance) doesn’t want to pay VAT for purchasing of materials (Due to the VAT refund process takes for a long time, it is considered to be the last choice to request a refund based on the VAT refund report).
- Project Ownerhas a representative office in Turkey and the invoices will be issued to Project Owner by representative office or Project OwnerHQ .
M.B.T. LTD. (For example) buys materials by paying VAT. Vehicles are produced and sold to Project Owner without VAT (Project Owner has an investment incentive certificate);
According to this scenario;
- 60-70% of the raw material required for the production of vehicles will be purchased by the JV (JV company M.B.T. LTD. (For instance) from various domestic suppliers. VAT will be paid for these purchases.
- 30-40% of the materials required for the production of the vehicles are provided from China, USA and Europe Country by JV/Rep. Office , HQ Or M.B.T. LTD. (For instance).
- VAT is not paid if the JV/Rep. Office. transfers this material to the Project Owner out of the Turkish custom area without importing it (according to the VAT Code 16/1-c). Project Owner makes the import of goods.
- VAT is paid if these materials are imported by JV/Rep. Office HQ Or M.B.T. LTD. (For instance).
- JV Produces vehicles and sells to the Rep.office. JV will receive 18% VAT for this sales from Rep. Office.
- Office will sell vehicles to Project Owner without VAT (it is assumed that Project Owner has got an Investment incentive certificate).
- office requests a tax refund from the Tax Office for the VAT paid to JV.
Advantages of this Method;
- JV can sell the vehicles by cost + profit to Rep. Office.In this case, R.O may receive a refund of VAT higher than the input VAT of the production cost.
- No further work is required to determine the VAT to be refunded.
- The VAT refund process will take a short time. (VAT Return Report is prepared in less time, the tax office takes less time to review the report).
- No guarantee is given to any institution,
- No complex transaction, no tax risk.
- No Big Logistic and Free Trade Zone Funds and other fees.
Disadvantages of this Method;
- Additional financing is required due to VAT on raw material purchases during the production process. So, additional financing cost occurs.
- İf All of the raw materials must be mentioned on the Project Owner ‘s investment incentive certificate one by one. Therefore, the material list must be prepared carefully. Revision of the list will take time.
- VAT and Customs Duty will be paid if JV imports materials from Project Owner directly.
- Sworn Accountant Report for VAT Refund will be needed.
The schema prepared by M.B.T. LTD. (For instance) for this scenario is presented in Appendix-1.
| SCENARIO – 2 |
Establishment of Firm in Free Zone and Obtaining Inward Processing Permit (IPR) by JV
NOTE: There are two types of Inward Processing Permits. These are; ”D1” coded document and “D3” coded document.
There is VAT exemption and customs duty exemption for raw materials purchased under the document D1.Finished vehicles must be exported to abroad under this document.
There is no VAT exemption for the raw materials purchased under D3 coded document but there is a customs duty exemption. Within the scope of this document, the finished vehicles can be exported and their domestic deliveries are also accepted as export (provided that the conditions in Article 5 of the Communiqué No: 2005/2 are met).
The following scenario was prepared based on the assumption that the D1 type Inward Processing Permit would be received.
According to this scenario;
- The Main Contractor Establishes (Or Only Rent Warehouse Area Best One) a Company in the Free Zone,
- Collects necessary raw materials in Free Zone,
- JV takes the Inward Processing Permit IPR. The type of IPR should be (D1).
- JV Imports raw materials from Free Zone without VAT,
- JV Produces vehicles,
- JV Exports vehicles to the Free Zone within the Scope of the IPR Commitment,
- In the Scope of Investment Incentive Certificate, Project Owner imports vehicles from Free Zone without VAT.
Advantages of this Method;
- VAT and Customs Duty are not paid for domestic and foreign material purchases to be made by the company in the region,
- JV does not pay VAT for materials to be imported from Free Zone under IPR.
Disadvantages of this method;
- In and out is paid to free zone.
- In the scope of the inward processing permit, the materials to be purchased must be determined in detail and a list of the IPR should be established.
- Importation of guarantees taxes will be required.
- The amount of the material to be taken within the scope of the IPR shall be specified and the amount shall not be exceeded.
- It is mandatory to import or export to a third country by IPR within 3 months after the export of the finished exploration to the Free Zone.
- In the scope pf the imported vehicles are imported from the free zone by the inward processing permit, it should be clarified whether there will be a situation contrary to the rate of localization in the tender specifications.
- Rent and similar costs will arise for free zone companies.
- We have to give Guarantee letter %120 Percentages to all Custom Tax and VAT for set by set. (Logic How Many item in your custom warehouse custom authority will take this material guarantee when we sale they release letter and when we import new one we have to give or 1 Guarantee Letter we will give for example 100.000 USD this Guarantee stay till end of project. According to this method we will be use our Bank Limit and we have to pay Bank Fee.
- Supplier have to take tax refund (They can want charge sworn auditor and accounting work time to us.
- When company sale Vehicle Sworn Auditor has to prepare and we have to give all supplier. Supplier will give to tax office and tax office will cancel remaining tax for our invoice (xx times) Sworn auditor will charge fee to us.
- When we sale Vehicle Project Owner will create new custom declaration or they give authorization to Custom company and custom company do it all ise un behalf of Project Owner XX Times
- Before each sale 1 Engineer has to come from Chamber of industry and we have to give all material information and maybe project detail. He/She will come XX times for all project and we have to pay XX times Fee.
- This system give allow for 1 year and they can extend for 6 months (Maybe not but high possible they are giving) This means We have to apply throughout 4 times (if they give we can but if they are not give new one this will be problem. When we search friend and custom companies, they said high possible give new one) but still this is potential problem.
- System need some competences (Qualifications) Camera, Security as we heard iso 27001 (We don’t have yet) but I think we can provide these qualifications.
- As we heard some company has punishment but we don’t know why 😊 Maybe Related D1 or D3 authorization logic different.
- This system is not widely used in Turkey. So we don’t know for Future potential risks. Before this article I contacted some friend, they said “after 1 year all remaining material was problem for explanation.”
- When we use this method according to Process Diagram 1 or 2 times (Material and Vehicle) transfer need. This is big Logistic and Free Trade zone area cost.
- All vendor or big part has to agree this Methods (IPS and PUCC) Maybe Vendors can want additional fee for tax issues.
- When we purchasing with IPR, 1 or 1,5 Year later (closing period of IPR) all remaining Material ( import with IPR) we have to transfer to Custom area for again import with new IPR or without IPR (Logistic Fee) But when you explain situation they can come your factory and if you show clearly they will report.
Other Issues to be considered;
– DİBB is given for a certain period of time (maximum period of 12 months, but the duration of the production process for products exceeding 12 months can be determined as the time of the project), within this period of production is mandatory to complete and export.
– Purchases and exports made within the scope of IPR shall be involve into the Ministry of Commerce System via electronic environment.
– The amount of materials in IPR should be followed carefully. In case of overdue, it may result in a very fine penalty.
The schema prepared by M.B.T. LTD. (FOR İNSTANCE) for this scenario is presented in Appendix-2.
| SCENARIO – 3 |
Processing Under Customs Control (PUCC),
According to this method;
- Processing under customs control center resident companies will receive a certificate in Turkey,
- Guarantees given for import which taxes,
- Imports necessary stock/ materials without customs duty,
- Performs the production,
- Products which are finished are imported,
- During to import, taxes are paid which subject to the finished.
Advantages of this method;
- VAT and Customs Duty are not paid for the raw materials which collected in the free zone,
- For the materials to be imported from the Free Zone within the scope of processing under customs control, VAT and customs duty are not paid.
- Supplier will not create any custom declarations
Disadvantages of this method;
- It is not a frequently used in Turkey,
- Materials which can be considered as duty-free will be required,
- Additional work should be done to determine the tax value during the import of the finished product.
- Rental area which aims to rent in the free zone will arise costs.
- Customs Consultant and Sworn Accountant will need to prepare a report.
- You can take authorization for 2 years but when you compare IPR it is more possible extend till and of project (especially in long-term projects). The Law says 2 Years.
- Company have to give %10 Percentages to all Custom Tax and VAT for set by set. (Logic How Many item in your custom warehouse custom authority will take this material guarantee when we sale they release letter and when we import new one we have to give or 1 Guarantee Letter we will give for example 100.000 USD this Guarantee stay till end of project. According to this method we will be use our Bank Limit and we have to pay Bank Fee.
- Supplier have to take tax refund (They can want charge sworn auditor and accounting work time to us.
- When we sale Product Company’s Sworn Auditor has to prepare and we have to give all supplier. Supplier will give to tax office and tax office will cancel remaining tax for our invoice (XX times) Sworn auditor will charge fee to us.
- Every invoice from supplier need Antrepo Declaration (Custom Warehouse Declaration) each declaration 100,00.-TL in Ankara Project approximately 2.000 invoice was reach to us. If project reach 4.000 invoice Company have to pay 400.000,00.-TL for only this declaration.
- When we sale Vehicle Project Owner will create new custom declaration or they give authorization to Custom company and custom company do it all use un behalf of project owner XX Times
- YGM (Authorization custom counselor) have to work out factory from start purchasing to sale last Vehicle. Minimum Salary 7.500,00.-TL (2020 About)
- We have to apply Custom Warehouse in our factory.
- PUCC allow only over than 1,7% Custom Tax Material. For Less than 1,7 Custom Tax we mustn’t use this method for only less than 1,7. This materials we have to import with VAT and Custom or Project Owner ’s IIC (But Project Owner ’s IIC have to contain this specific material (Not Vehicle) and Project Owner has to agree material invoice not only Vehicle. I think they don’t want.
- Before each sale 1 Engineer has to come from Chamber of industry and we have to give all material information and maybe project detail. He/She will come XX times for all project and we have to pay XX times Fee.
- We have to pay Member fee of PUCC & Custom Warehouse for 2019 15.000,00.-TL
The schema prepared by M.B.T. LTD. (FOR İNSTANCE) for this scenario is presented in Appendix-3.
| SCENARIO– 4 |
Obtaining VAT Exemption Certificate
To explain the issue with an example;
The delivery of the vehicles made to taxpayers whose activities are partially or wholly owned by the railway vehicles, renting or operating in various ways within the scope of the article 13 / a of the VAT Law is exempt from VAT.
The delivery and services which is related to the manufacturing and construction of these vehicles and the changes, repair and maintenance of these vehicles are exempt from VAT.
VAT Exemption Certificate is taken within the scope of Article 13 / a of VAT Law. The sale of VAT to the Office and the purchase of the raw materials required by the JV can be provided without VAT.
According to this method;
- Project Owner Receives VAT Exemption Certificate (as operator),
- Office gains VAT Exemption Certificate (as main contractor)
- JV VAT Exemption Certificate (as a company which will make the production on order)
- JV obtains the necessary raw material without VAT within the scope of VAT exemption certificate.
- JV produces vehicles,
- Office vehicles are free from JV,
- Project Owner buys vehicles from Rep. Office without VAT.
Advantages of this method;
- It does not require any additional costs such as establishment of a company in a free zone or warehouse leasing.
- No collateral for purchases.
- VAT is not paid for domestic and foreign raw material purchases.
- No report required.
Disadvantages of this method;
- For the raw material to be used in production, preparation of project and material list should be done.
- Revision of material lists may be required.
- The VAT exemption certificate shall not cover the customs duty, the customs duty for the imported material shall be paid. %30 (A and C Part) 1,7 (Custom Tax) = app 5.000.000-7.000,000TL (this will be cost.)
- Apply process 2 months and if they are not give Tender Company, Producer Company This will be problem. But law is clear they should give tax exempt.
Best Regards
Financial Advisor & Certified Public Accountant
Serkan ATASOY
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