Customs

Inward Processing Regime: Tax-Exempt Manufacturing and Export

March 1, 20265 min read

What Is the Inward Processing Regime?

The Inward Processing Regime (IPR) is one of the most important customs regimes applied in Turkey to boost exports and strengthen international competitiveness. This regime provides exemption from customs duties, VAT, and other fiscal obligations on the importation of raw materials, semi-finished products, and packaging materials used in the manufacture of products destined for export.

The fundamental logic of the regime is straightforward: inputs imported into Turkey are processed into value-added products, and the resulting goods are exported. The government foregoes import duties during this process, providing exporters with a significant cost advantage.

According to 2025 data, approximately 40% of Turkey's total exports were carried out under the inward processing regime. This ratio clearly demonstrates the regime's critical importance in Turkish foreign trade.

The inward processing regime is the most powerful tax optimization tool for firms engaged in export-oriented manufacturing. However, its strict rules and commitment closure obligations make professional management essential.

Legal Framework

Legislative Basis

The inward processing regime is governed by the following legislation:

Customs Law No. 4458: Articles 108–122 (fundamental regime provisions)
Council of Ministers Decision No. 2005/8391 on Inward Processing Regime: General framework of the regime
Communique No. 2006/12 on Inward Processing Regime: Implementation principles
Circulars and directives: Current regulations issued by the Ministry of Trade

Methods of Application

The IPR is applied in two different forms:

1. Conditional Exemption System (Suspension)

The most widely used method. Under this system:

Import duties are suspended (not paid)
A guarantee is deposited (100% of the duty amount, or reduced for Authorized Economic Operator status holders)
The guarantee is returned after the processed product is exported
If exports are not completed within the commitment period, the suspended duties are collected

2. Drawback System

Under this system:

All duties are paid normally at the time of import
Duties paid are refunded after the processed product is exported
The refund application is made by documenting that the export has taken place
Less preferred in practice as it negatively impacts cash flow

Application Process

Who Can Apply?

Firms meeting the following conditions may apply for an IPR certificate:

Legal entity (company) registered in Turkey
Prior export experience or demonstrated export capacity
No outstanding tax or social security debts
No conviction for smuggling offenses
Ownership of a production facility or an existing contract manufacturing agreement

Application Documents

Documents required for an inward processing authorization certificate application:

Application form: Filed electronically with the Ministry of Trade, Directorate General of Exports
Capacity report: Chamber of industry document demonstrating production capacity
Export commitment project: Product to be manufactured, raw materials to be used, waste ratios, and export plan
Raw material-product conversion table (consumption table): Quantities of raw materials required per unit of finished product
Exporters' association membership certificate: Registration with the relevant exporters' association
Signature circular: Authorized signatories
Tax clearance certificate: Current document from the tax office
Social security clearance certificate: Current document from the Social Security Institution

Evaluation and Approval

The application process operates through the following steps:

The application is evaluated by the Ministry of Trade, Directorate General of Exports
Technical review: The consumption table and production capacity are assessed
The opinion of the relevant exporters' association is obtained
Approved applications are issued an Inward Processing Authorization Certificate (IPAC)
The certificate is typically finalized within 15–30 business days of application

Information Contained in the IPAC

The Inward Processing Authorization Certificate contains the following information:

Certificate holder details: Company name, address, tax ID number
Import list: Raw materials to be imported, HS codes, quantities, and CIF values
Export list: Finished products to be exported, HS codes, quantities, and FOB values
Consumption table: Raw material-to-product conversion ratios
Certificate duration: Period within which import and export commitments must be closed (typically 12 months)
Special conditions: Additional conditions and limitations, if any

Tax Exemptions

Tax exemptions provided under the IPR are extremely comprehensive:

Exempt Taxes

Customs duty: No customs duty is paid on raw material imports
Value Added Tax (VAT): No VAT is paid on imports
Special Consumption Tax (SCT): SCT is exempt if applicable
Anti-dumping duty: Exempt if applicable
Countervailing duty: Exempt if applicable
Additional financial obligation: Exemption from quota and surveillance measures
Resource Utilization Support Fund (RUSF): Exemption from the fund charged on deferred payment imports

Advantages for Domestic Procurement

Advantages also exist for inputs sourced domestically under the IPR:

VAT deferral-offset mechanism for domestic purchases
Ability to make domestic purchases under the certificate
Domestic suppliers can issue VAT-exempt invoices to IPR certificate holders

Commitment Closure Process

Closure Obligations

The IPAC holder must fulfill the following obligations by the end of the certificate period:

Export commitment closure: Documentation that exports of the specified quantity and value have been completed
Import-export balance: Proof that all imported raw materials were used in the exported finished products
Compliance with the consumption table: Actual production consumption must be consistent with the ratios specified in the certificate
Certificated and non-certificated export ratios: Compliance with specified ratios where required

Closure Documents

Documents required for commitment closure:

Export customs declarations
Foreign exchange purchase certificates
Invoices
Import customs entry declarations
Production reports
Waste and loss reports (if necessary)
Capacity utilization data

Closure Deadlines

The certificate period is typically 12 months
Extensions of up to 6 months may be granted with justified cause
Additional time may be requested in cases of force majeure (natural disaster, war, pandemic, etc.)
The closure process must be completed within 3 months of the certificate period's expiration

Waste and Loss Ratios

The Concept of Waste

The unavoidable loss of raw materials during the production process is known as waste. Accepted waste ratios under the IPR are determined by sector and product:

Textiles: 5–15% (fabric cutting waste)
Leather: 15–30% (natural material losses)
Metalworking: 3–10% (machining losses)
Food processing: 5–20% (processing and packaging losses)
Chemicals: 2–5% (reaction and evaporation losses)

Secondary Processed Products

Residues, shavings, and scraps arising from the production process are considered secondary processed products. The status of these products:

Customs duty is paid if released into free circulation
No duty is payable if exported
If destroyed, a destruction report is prepared under customs authority supervision
Residues with no commercial value may be disposed of upon notification to the customs authority

Penalties

Failure to meet obligations under the IPR results in serious penalties:

Commitment Violation Penalties

Failure to close export commitment: Collection of all exempted taxes with late interest
Partial closure: Collection of taxes and interest corresponding to the unclosed portion
Deadline expiration: Tax and penalty application if the certificate period expires without an extension

Administrative Fines

Using goods imported under the certificate for purposes outside its scope: Fine of twice the customs duty amount
Sale or transfer without certificate coverage: Tax collection + fine
Preparing misleading documents: Criminal prosecution under Law No. 5607

Other Sanctions

Rejection of the firm's IPR certificate applications for a specified period
Revocation of Authorized Economic Operator status
Exporters' association sanctions

Practical Examples

Example 1: Textile Sector

A garment manufacturer exports men's shirts to the EU:

Import under IPAC: 10,000 meters of Italian fabric (CIF $50,000, customs duty 8%)
Exempt taxes: Customs duty $4,000 + VAT $10,800 = $14,800 savings
Production: 5,000 shirts manufactured
Export: FOB $100,000 in exports
Waste: 12% fabric cutting waste (within the accepted ratio)

Example 2: Automotive Parts

An automotive spare parts manufacturer:

Import under IPAC: Aluminum ingots and special alloys (CIF $200,000, customs duty 6%)
Exempt taxes: Customs duty $12,000 + VAT $42,400 + RUSF $6,000 = $60,400 savings
Production: Engine components and chassis parts
Export: FOB $500,000 in exports to the EU and the US
Waste: 7% machining waste

Example 3: Food Sector

A biscuit manufacturer:

Import under IPAC: Cocoa butter, hazelnuts, and specialized packaging material (CIF $80,000)
Exempt taxes: Customs duty + VAT + additional agricultural duty = approximately $28,000 in total savings
Production: Chocolate-coated biscuits
Export: To Middle Eastern and African markets
Waste: 8% production waste

Tips for Successful IPR Management

Prepare the consumption table realistically: Exaggerated or understated waste ratios create problems
Plan the certificate period correctly: Account for production and export timelines
Establish a regular tracking system: Continuously monitor the import-export balance
Revise the certificate on time: Update the certificate in response to changing conditions
Obtain professional support: Work in coordination with your customs broker and exporters' association
Prepare closure documents early: Do not leave them until the last minute
Maintain meticulous waste records: Retain production reports through certificate closure
Remember the compensating duty: When exporting to the EU, a compensating duty may need to be paid for inputs originating from third countries

Conclusion

The inward processing regime is one of the most effective incentive instruments for enhancing the international competitiveness of Turkish firms engaged in export-oriented manufacturing. When used correctly, it provides significant tax savings, but its strict rules and obligations necessitate professional management. At Toko Trading, our expert team is at your service throughout every stage of the process, from IPR application to commitment closure.

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