What are transit trade and the transfer of goods in a bonded warehouse?
In transit trade, goods are purchased from a supplier in a foreign country and sold to a buyer in another country without being released for free circulation in Turkey. The goods may never enter the customs territory of Turkey, or they may pass through it under the transit procedure or via a customs warehouse.
In a transfer in a bonded warehouse, the goods are located in a customs warehouse in Turkey, but the import duties have not yet been paid — that is, the goods have not been nationalised. Goods with this status may be transferred to another company in Turkey or abroad without being removed from the warehouse.
What is the legal basis of the VAT exemption?
Under Article 16/1-c of the Value Added Tax Law, goods to which the transit and customs warehousing procedures and the temporary storage and free zone provisions of the Customs Law apply are exempt from VAT. Administrative practice and the rulings of the Revenue Administration show that deliveries of goods held under these procedures are also treated as falling within the exemption.
Because this exemption is not among the full exemptions listed in Article 32 of the Value Added Tax Law, it is a partial exemption. Its consequences are as follows:
- No VAT refund may be claimed in respect of these transactions.
- Under Article 30/a of the Value Added Tax Law, input VAT incurred in connection with exempt deliveries cannot be deducted.
- The non-deductible VAT is taken into account as an expense or cost item within the framework of Article 58 of the Value Added Tax Law; it is accepted as an expense in determining the corporate tax base (it is not a non-deductible expense).
How is an invoice issued using code 235?
- Invoice type: the invoice is issued as an electronic invoice or electronic archive invoice of the “EXEMPT” type.
- VAT rate and exemption code: the VAT rate is entered as 0 per cent; in the exemption code field, 235 — delivery of goods to which the transit and customs warehousing procedures and the temporary storage and free zone provisions apply (Article 16/1-c of the Value Added Tax Law) — is selected.
- Invoice description: the wording “Exempt from VAT under Article 16/1-c of Value Added Tax Law No. 3065” is entered. Depending on the nature of the transaction, the date and number of the transit accompanying document (T1/NCTS) or of the warehouse declaration is also included. (The transit trade form previously required was abolished in 2013 and is no longer issued.)
- Invoice to a buyer abroad: on an electronic archive invoice, 2222222222 is entered in the buyer’s tax identification number field; the buyer’s trade name, address and country are stated in full. Under Article 215 of the Tax Procedure Law the invoice is issued in Turkish; a foreign currency may be used, and it is not compulsory to show the equivalent in Turkish lira on invoices issued to customers abroad. The invoice is accompanied by a commercial invoice in English.
- Transfer invoice to a buyer in Turkey: where the buyer is registered for electronic invoicing, an electronic invoice is issued; where the invoice is issued in a foreign currency, the equivalent in Turkish lira is shown.
How is it shown on the VAT return, and can a refund be claimed?
The consideration for the exempt delivery is declared under code 235 in the “Transactions Within the Scope of Partial Exemption” table of the VAT return for the period in which the delivery is made. No VAT refund may be claimed under this type of exemption.
Input VAT incurred domestically in connection with the transaction — for example VAT on transport, insurance, commission or storage services — is not deducted. Where such amounts have been deducted in earlier periods, they are corrected through the “VAT to be Added” line on the return for the period in which the delivery takes place, and transferred to expense or cost accounts.
Which goods may be transferred without VAT?
The test for the exemption is not the type of the goods but their customs status. Regardless of sector, machinery and equipment, spare parts, electronic products, chemicals, textile products or commodity goods may be transferred without VAT being calculated; what is decisive is that at the moment of delivery the goods have not entered free circulation and are held under one of the following procedures:
- Goods moved under the transit procedure (within the scope of T1/NCTS)
- Goods stored in a general or private warehouse under the customs warehousing procedure
- Goods held in temporary storage places
- Goods to which the free zone provisions apply
By contrast, the following do not fall within the exemption:
- Delivery of goods that have entered free circulation (been nationalised); sales of such goods are subject to VAT under the general provisions even where the goods are in a bonded warehouse.
- Goods withdrawn from the warehouse and imported; at the import stage VAT is paid to the customs administration.
- Ordinary deliveries of goods within Turkey.
What documentation applies in transit trade?
In transit trade the purchase invoice is received from the supplier abroad; the sales invoice is issued by the company in Turkey to the buyer abroad without VAT being calculated. The invoice is accompanied by a commercial invoice in English. For evidencing the transaction, it is important to retain the transport documents (bill of lading, consignment note), the transit accompanying document where there is one, and the bank transfer records.
The difference between the purchase and sale price is included in the corporate tax base as commercial income. The income deduction added to Article 10/1-i of the Corporate Tax Law by Law No. 7582 in respect of transit trade income is covered in a separate article.
How does the customs process work on a transfer of goods in a warehouse?
Under Article 333 of the Customs Regulation, goods stored in customs warehouses may be transferred to another person by way of sale. For this, the transferor and the transferee must notify their requests in writing to the relevant customs directorate, and the necessary changes must be made in the warehouse stock records. With the transfer, the customs obligations relating to the goods pass to the transferee.
Where the transferee company releases the goods for free circulation, VAT on importation is paid to the customs administration; the base is calculated on the customs value, which also reflects the transfer price. This VAT paid on importation may be deducted by the importer under the general provisions.
Can any goods be placed in a bonded warehouse?
There is no tariff list stating item by item that goods “may or may not enter” a warehouse; the rule in Article 94 of the Customs Law is permissive: any goods that have not entered free circulation may be placed in a warehouse. Restrictions operate not through a product list but through three filters:
1. Goods that cannot be taken into a warehouse at all
- Goods whose entry into Turkey is prohibited (narcotics, contraband, prohibited waste and chemicals and the like) are not taken into a warehouse.
- Goods in free circulation (nationalised or domestic) cannot as a rule be placed in a warehouse either; the warehousing procedure is for goods that have not been nationalised. The exception is goods benefiting from export-related measures and export goods stored in a warehouse before actual exportation.
2. Goods that may be taken only into a suitably equipped warehouse
- Flammable and explosive goods, and products that create a danger or harm for the goods stored alongside them, may only be placed in warehouses built specifically for goods of that nature.
- Fuel products and products within the scope of list (I) annexed to the Special Consumption Tax Law require fuel warehouses equipped with tanks.
- Food products requiring a cold chain may only be taken into warehouses with cold storage facilities.
3. Administrative restrictions
- Mobile telephones are not taken into the warehousing procedure under administrative arrangements on combating smuggling, and are made subject to importation directly.
- For products carrying high special consumption tax, such as tobacco products and alcoholic beverages, lump-sum or reduced guarantees do not apply; an increased guarantee is sought item by item, and the number of warehouses able to accept these products is limited in practice.
In practice the decisive factor is the scope of goods stated in the warehouse’s opening and operating permit: each warehouse may only store the types of goods specified in its permit. The answer to the question “can this product go into a warehouse” is therefore found first in the scope of the target warehouse’s operating permit, rather than in the legislation.
Example accounting entries
| Transaction | Debit | Credit |
|---|---|---|
| Purchase of goods | 153 Trade Goods (transit trade goods) 4,000,000 | 320 Suppliers 4,000,000 |
| Sale | 120 Customers 4,800,000 | 601 Foreign Sales 4,800,000 |
| Cost of goods sold | 621 Cost of Trade Goods Sold 4,000,000 | 153 Trade Goods 4,000,000 |
VAT on domestic expenses relating to the transaction (transport, commission and the like) is not deducted and is recorded in expense or cost accounts on the VAT-inclusive amount; where VAT has previously been deducted, it is corrected through the “VAT to be Added” line on the return. On a transfer of warehoused goods to a company in Turkey, the sales revenue is followed in account 600 Domestic Sales, and on a transfer to a company abroad in account 601 Foreign Sales.
Frequently asked questions
Can a VAT refund be claimed on these transactions?
No. Deliveries within the scope of Article 16/1-c are a partial exemption and, because they are not listed in Article 32 of the Value Added Tax Law, they do not give rise to a right of refund. The input VAT is taken into account as an expense or cost.
What happens to input VAT incurred in connection with the transaction?
Under Article 30/a of the Value Added Tax Law it cannot be deducted. Where it has already been deducted, it is corrected through the “VAT to be Added” line on the return for the period in which the delivery is made. Non-deductible VAT is accepted as an expense or cost in determining the corporate tax base within the framework of Article 58 of the Value Added Tax Law.
Can the invoice be issued in a foreign currency and in English?
Under Article 215 of the Tax Procedure Law the invoice is issued in Turkish; a foreign currency may be used. It is not compulsory to show the equivalent in Turkish lira on invoices issued to customers abroad. In international transactions the invoice is accompanied by a commercial invoice in English.
Is the sale of nationalised goods also within the exemption?
No. Delivery of goods that have entered free circulation is subject to VAT under the general provisions, even where the goods are in a bonded warehouse. The exemption applies only to goods that have not entered free circulation and are held under the relevant customs procedures.
Is code 235 also used where the goods are sold without ever entering Turkey?
Where the goods are delivered abroad without ever entering the customs territory of Turkey, the transaction is outside the scope of VAT; it is appropriate to show that turnover on the line for transactions outside the scope of the tax (code 501) in the “Other Transactions” table of the return. Code 235 is used where the goods are delivered while under the transit procedure or in a bonded warehouse in Turkey.
How is VAT calculated if I import goods I have taken over in a warehouse?
VAT on importation is paid to the customs administration on the customs value, which also reflects the transfer price. This VAT paid at customs may be deducted by the importer.
Can any goods be placed in a bonded warehouse?
As a rule any goods that have not entered free circulation may be placed in a warehouse (Article 94 of the Customs Law). Goods whose entry into Turkey is prohibited are not taken into a warehouse; flammable or explosive products, fuel products and products requiring a cold chain may only be placed in suitably equipped warehouses. In addition, each warehouse is limited to the types of goods stated in its opening and operating permit.
