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Inward processing

Inward processing
Pursuant to Article 143 of the Law on customs, active refining procedure in customs territory of the Republic of Serbia shall include application of one or more refining processes, for the following:
  1. foreign goods, for which custom duties are not paid, and which is not subject to market policy measures, and is intended for re-export from the customs territory in form of obtained products (delay system);
  2. foreign goods, which are placed into free trade with paid duties, for which return of customs duties or release of custom duties can be approved if the goods are exported from customs territory in form of obtained products (return system).
Refining process, in terms of the Law on Customs, means processing of goods, including assembling, commissioning and installation thereof into other products, recovery of products, repair of goods, including restoring and bringing them into proper status, as well as use of certain goods, as prescribed by the Government, which is not contained in the obtained products, even if they were completely or partially used in production processes.

The process of active refining shall be approved by customs authority at written request of a person implementing active refining process. The approval is granted:
  1. to persons with head office or address in customs territory of the Republic of Serbia, and to persons with head offices outside the customs territory of the Republic of Serbia if they import goods of non-market nature;
  2. if imported goods can be recognised in the obtained products, except in case of use of goods approved by the Government, in the event of use of equivalent goods pursuant to Article 144 of the Law on Customs; 
  3. if active refining will result in more favourable conditions for export or re-export of obtained products, provided that basic interests of domestic producers of similar or the same products are not jeopardised (economic conditions).
Customs authority shall determine a deadline in which the obtained products must be exported or re-exported, i.e. in which other allowed customs procedure or use must be required. When determining the deadline, customs authority shall take into account time needed for active refining and dispatch of the obtained products. The deadline is counted from the day when customs goods are placed into the procedure of active refining, and it can be extended based on timely and justified request from the approval holder. Unlike the provisions contained in previous law, which prescribed that the deadline cannot be longer than 12 months, this limitation does not exist anymore.
 
Customs authority shall determine a norm, or as necessary, the way in which such norm is determined for products obtained in the procedure of active refining from certain quantity of imported goods, i.e. when determination of such norm is possible. The norm is determined according o circumstances in which active refining is conducted or should be conducted. When circumstances allow for, especially when active refining is conducted with clearly determined technical conditions for goods of the same properties, and the obtained products are of equal quality, custom authority can determine standard norms based on previously established real data.
 
In compliance with Article 146 of the Law on Customs, the obtained products and goods in unchanged status must be re-exported. Exceptionally, the procedure of active refining can be ceased by placing the obtained products and goods in unchanged status into free zone, by placing them into customs storing procedure or by placing them into free trade.
 
Active refining procedure shall be conducted based on the submitted Template for active refining procedure and Single Administrative Document (hereinafter referred to as: SAD) with declaration – for placement of goods into the active refining procedure.
                              
Taxation in the customs procedure of active refining

 Tax aspect in placement of goods in the procedure of active refining includes:
  1. taxation of goods imported for the production of new products in the process of active refining;
  2. taxation of charges for the provision of services related to the production of new products in the process of active refining;
  3. taxation of export of products obtained in process of active refining.
Taxation of goods imported for the production of new products in the process of active refining
 
Pursuant to Article 26, paragraph 1, item 2) of the Law on Value Added Taxes, VAT is not paid for import of goods that are placed in the procedure of active refining in a delayed system. 

Tax exemption based on this instance shall be exercised under condition that the process of active refining is completed in compliance with custom-related regulations pertaining to the procedure of active refining in a delayed system, i.e. if the obtained products are exported. Tax exemption can be exercised in case that products obtained in active refining process are introduced into free zone or customs warehouse. The reason for this can be found in Article 26, paragraph 1, items 1) and 6) of the Law on Value Added Taxes, since this article prescribes exemption for VAT for goods introduced into free zone or customs warehouse.

If the active refining process is not completed in a prescribed way, or if products obtained in active refining process are placed in free trade in unchanged status, VAT is calculated and collected. Calculation and collection of VAT are carried out by competent customs authority.

Tax exemption for imported goods that are placed in the active refining process in a return system is not stipulated by law, and VAT is calculated and collected for imported goods in customs procedure related to placement of goods into free trade for the purposes of active refining process in a return system, and the person importing the goods, if such person is registered VAT obligor, is entitled to deduction of VAT paid at import of such goods as previous tax.

Taxation of charges for the provided operational services in the production of products in active refining processes
 
Pursuant to Article 24, paragraph 1, item 7) of the Law on Value Added Taxes, VAT shall not be paid for charges for the production of products in active refining processes. The manner and procedure for exercise of this tax exemption are prescribed by the Rulebook on the manner and procedure for exercise of tax exemptions in VAT procedures, with right on deduction of previous tax (Official Gazette of RS, number 120/12, 40/15, 82/15 and 86/15) (hereinafter referred to as: Rulebook on tax exemptions). 

Pursuant t Article 12, paragraph 1 of the Rulebook on tax exemptions, tax exemption referred to in Article 24, paragraph 1, item 7) of the Law on Value Added Taxes for operational services provided on movable goods imported for the purposes of refining, repair or installation, which after the refining, repair or installation are transported or dispatched abroad by service provider, foreign receiver of goods or third party as instructed by them, can be exercised by the obligor if he has: 
  1. declaration stating that goods are placed in the procedure of refining, repair or installation in compliance with custom-related regulations;
  2. contract on the scope, type and value of executed works;
  3. proof of the scope, type and value of executed works in accordance with the norm determined by competent customs authority for goods obtained from certain quantity of imported goods;
  4. original or certified copy of export declaration compliant with customs regulations for goods which after the provided service of active refining, repair or installation are transported or dispatched abroad. 
If the charges, or part thereof, were collected before the transport or dispatch of goods abroad, the obligor can exercise tax exemption before the obtainment of export declaration if he has:
  1. declaration stating that goods are placed in the procedure of refining, repair or installation in compliance with custom-related regulations;
  2. contract on the scope, type and value of executed works. 
If the goods intended for active refining are procured in the Republic of Serbia, tax exemption for the provided operational services on movable goods procured for the purposes of active refining, repair or installation, which after the refining, repair or installation are transported or dispatched abroad by service provider, foreign receiver of goods or third party as instructed by them, can be exercised by the obligor if he has: 
  1. proof that foreign receiver had procured goods in the Republic of Serbia (contract or invoice);
  2. proof of provided service of refining, repair or installation (contract or invoice);
  3. original or certified copy of export declaration or other document compliant with customs regulations stating that the goods are transported or dispatched abroad.
If the charges, or part thereof, were collected before the provided trade in services abroad, the obligor can exercise tax exemption before the obtainment of export declaration or other proof if he has a document referred to in item 1) herein and invoice for advanced payment issued in compliance with Law.

There is a common practice that works related to the production of products as a part of active refining processes are executed by several persons. This is the most common practice in case of the so-called lohn work. Pursuant to Article 300 of the Regulation on allowed customs handling of goods (Official Gazette of RS, no. 93/10, 63/13 and 145/14), the activity of refining (lohn work) is the production of imported goods which were directly or indirectly handed over to holder of the approval for use of goods for the purposes of production according to specifications and instructions, and for the account of the employer whose head office is located in third country, whereat payments usually include only the production costs. In these cases, foreign person shall sign a contract with several VAT obligors, which imposes the obligation for all VAT obligors to provide services to such foreign entity, i.e. obligation to work on movable goods placed in the procedure of active refining, whereat only one person is holder of the approval for active refining process. This led to a question whether other participants in the active refining procedure other than person who is holder of the approval for active refining procedure, can exercise the right to be exempted from taxes and in what way, taking into account that all customs documents pertaining to active refining procedure are entitled to that person only.

In the event that foreign person sings a contract with several VAT obligors, tax exemption referred to in Article 24, paragraph 1, item 7) of the Law can be exercised by all VAT obligors who entered into a contract with such foreign person, provided that they have:
  1. a copy of SAD for active refining;
  2. contract on the scope, type and value of executed works; 
  3. proof on the scope, type and value of executed works in compliance with the norm established by competent customs authority, for goods obtained from certain quantity of imported goods;
  4. certified copy of export declaration compliant with customs regulations for goods which after the provided service of active refining are transported or dispatched abroad.
When it comes to SAD for export of goods produced in active refining procedure, as one of proofs for exercise of the right on tax exemption for charges for executed works, it is necessary to fill in Box B of the declaration – details of calculation, listing all persons participating in export business.
 
There are cases in practice that foreign person signs a contract with one VAT obligor, but in that case, the contract contains data about other participants in active refining procedure. In these cases also, tax exemption for charges for executed works in the procedure of active refining referred to in Article 24, paragraph 1, item 7) of the Law can be exercised by other VAT obligors listed in the contract signed with the foreign person, provided that they have:
  1. a copy of SAD for active refining;
  2. contract on the scope, type and value of executed works; 
  3. proof on the scope, type and value of executed works in compliance with the norm established by competent customs authority, for goods obtained from certain quantity of imported goods;
  4. certified copy of export declaration compliant with customs regulations for goods which after the provided service of active refining are transported or dispatched abroad.
In these cases as well, SAD for export of goods produced in the procedure of active refining, as one of proofs for tax exemption in this case, all persons participating in the procedure of active refining must be listed.
 
With regard to exercise of tax exemption for charges for executed works related to the procedure of active refining, when production is carried out by several entities, the Ministry of Finance of the Republic of Serbia expressed its opinion in the document registered under number 413-00-2132/2010-04, dated 6 October 2010:
 
“Compliant with Article 3 of the Law on Value Added Taxes (Official Gazette of RS, no. 84/04, 86/04 – correction, 61/05 and 61/07 – hereinafter referred to as: the Law), the subject to VAT shall be delivery of goods and provision of services conducted by a tax obligor in the Republic of Serbia with collected charges, as a part of their business activities, as well as import of goods to the Republic. 
 
Trade in goods, in terms of this law, shall be transfer of rights on disposal of physical objects (hereinafter referred to as: goods) to a person who disposes of such goods as the owner, if this law does not provide otherwise (Article 4, paragraph 1 of the Law). 
 
Trade in services, in terms of this law, pursuant to Article 5, paragraph 1 of the Law, shall be all activities and actions conducted within their business activities which are not trade in goods referred to in Article 4 of this Law.
 
Deduction of previously paid tax, i.e. the provision that Vat is not paid for works on movable goods procured by a foreign entity who receives relevant services in the Republic, or which were imported for the purposes of refining, repair or installation, which after the refining, repair or installation are transported or dispatched abroad by service provider, foreign receiver or third person, as instructed by them, are exempted from tax or by virtue of Article 24, paragraph 1, item 7) of the Law. 
 
Tax exemption referred to in Article 24, paragraph 1, item 7) of the Law, and in compliance with Article 9, paragraph 1 of the Rulebook on the manner and procedure for exercise of tax exemptions in VAT procedures, with or without right on deduction of previous tax (Official Gazette of RS, number 124/04, 140/04, 27/05, 54/05, 68/05, 58/06, 112/06 and 63/07), for works on movable goods imported for the purpose of refining, repair or installation, which after the refining, repair or installation are transported or dispatched abroad by service provider, foreign receiver or third person, as instructed by them, can be exercised if the entity has: 
  1. declaration stating that goods are placed in the procedure of refining, repair or installation in compliance with custom-related regulations;
  2. contract on the scope, type and value of executed works;
  3. proof of the scope, type and value of executed works in accordance with the norm determined by competent customs authority for goods obtained from certain quantity of imported goods;
  4. original or certified copy of export declaration compliant with customs regulations for goods which after the provided service of active refining, repair or installation are transported or dispatched abroad. 
Paragraph 2 of the same article of the Rulebook prescribes that the obligor can be exempted from taxes before the obtainment of export declaration if the charges (or part thereof) were collected before the transport or dispatch of goods abroad, and if the obligor has:
  1. declaration stating that goods are placed in the procedure of refining, repair or installation (in compliance with custom-related regulations); original or certified copy of export declaration compliant with customs regulations for goods which after the provided service of active refining, repair or installation are transported or dispatched abroad 
  2. contract on the scope, type and value of executed works.
Pursuant to Article 26, item 2) of the Law, Vat shall not be collected for import of goods which are temporary imported and placed in the procedure of active refining in a delayed system as a part of customs procedure.
 
In compliance with the listed provisions of the Law and Rulebook, a VAT obligor who, based on the contract signed with a foreign person, provides services of goods refining (refining, processing, finishing or recovery) to a foreign client, shall not be obligated to calculate and pay VAT for the charges collected for the provided service, and he shall be entitled to deduction of previously paid tax in compliance with law, provided that he has proofs prescribed by Article 9 of the Rulebook. The proof referred to in Article 9, paragraph 1, item 7) of the Rulebook shall include Single Administrative Document for placement of  goods into the procedure of active refining issued in compliance with customs regulations (hereinafter referred to as: SAD for active refining), wherein the VAT obligor is stated as the receiver of goods and supplies.
 
In cases when foreign person signs a contract with several VAT obligors, which imposes the obligation for all VAT obligors to provide services to such foreign entity, i.e. obligation to work on movable goods placed in the procedure of active refining, and in which case the SAD for active refining states that one of the signatories is the receiver of goods, tax exemption referred to in Article 24, paragraph 1, item 7) of the Law can be exercised by all VAT obligors who entered into the contract with the foreign person, under the following conditions: they have SAD for active refining, contract on the scope, type and value of executed works, proof of the scope, type and value of executed works in compliance with the norm established by competent customs authority for goods obtained from certain quantity of imported goods, as well as certified copy of export declaration compliant with customs regulations for goods which after the provided service of active refining, repair or installation are transported or dispatched abroad, in which all these VAT obligors are listed as participants in export business (in Box B – calculation details of the Single Administrative Document for export of goods)”.
 
Taxation of export of products obtained in the procedure of active refining
 
Pursuant to Article 24, paragraph 1, items 2) and 3) of the Law on Value Added Taxes, the export of products obtained in the procedure of active refining is exempted from VAT. In order to exercise the right on exemption from VAT, it is necessary to provide verifies SAD for export of goods containing therein the certificate that goods are dispatched abroad.

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