An export processing enterprise (EPE) enjoys tariff preferences on one foundational assumption: its entire operation sits inside a customs-supervised perimeter, separated from the domestic market. The two most-asked activities — outsourcing certain production stages to a domestic enterprise and selling products into the domestic market — are both “controlled breaches” in that perimeter: the law permits them, but each must pass through its own specific supervision mechanism, and using the wrong mechanism is treated as breaching export processing conditions.
The EPE supervision foundation: physical conditions under Article 26 of Decree 35/2022/ND-CP
Before the two specific activities, remember that an EPE keeps its export processing status only while continuously meeting the customs inspection and supervision conditions in clause 2, Article 26 of Decree 35/2022/ND-CP on industrial park and economic zone management: a hard fence separating it from the outside area, a camera system monitoring operations 24/24 connected to the customs authority with image data stored for at least 12 months, and software managing imported raw materials and supplies as required by customs so that the path of each material lot from import to product can be traced. These are existential conditions, not one-time procedures: a prolonged camera disconnection, an unrepaired fence breach, or management software that cannot reconcile with declared data are all grounds for customs to inspect and act on the EPE’s status. One point often wrongly advised must be recorded clearly: the law sets no hard export percentage threshold for an EPE — an export processing enterprise is not forced to export 100% or any minimum ratio of its output; domestic sales are permitted under their own tax and procedure mechanism and do not forfeit export processing status.
Outsourced processing: permitted, but the processing facility must be notified in advance
Under point a, clause 1, Article 28a of Decree 134/2016/ND-CP, an export processing enterprise may hire domestic organisations and individuals to process part or certain stages of its products. The core operating condition is that the EPE must notify the processing facility to the managing customs authority before raw materials and supplies leave the export processing perimeter, and the entire physical flow of the outsourced processing is managed on the logic of processing trade: materials sent out must reconcile with the norms and output of products received back, scrap and surplus materials from the processing must be handled as prescribed and fully declared, and the domestic processing facility gains no tax preference on those materials merely by processing for an EPE. The most dangerous practical errors are sending materials out for processing before notifying, or letting the processing facility mix EPE materials with its own purchased materials for other orders — both break the traceability the EPE’s supervision system must guarantee, and when a post-clearance audit finds quantities irreconcilable, the consequence for the EPE is tax assessment on the materials whose path cannot be proven, together with a re-evaluation of its supervision conditions.
Selling into the domestic market: treated as an import from abroad
When an EPE sells goods into the domestic market, the transaction is handled on the principle that goods from a non-tariff zone into the domestic territory are imports: customs procedures are performed as for goods imported from abroad, and import duty together with value added tax is computed at the time the import declaration is registered, at the value and rates of that moment. The domestic enterprise buying from the EPE performs on-the-spot import procedures under customs guidance, and only after procedures are completed do the goods circulate as domestic goods — with products in the categories requiring declaration or goods labelling under domestic rules having to meet those requirements upon circulation. The EPE should pre-compute three governance consequences. First, the domestic selling price must be modelled on a price inclusive of import duty and VAT obligations at the time of sale, not built on the export price. Second, the materials management software must be able to separate the material content embodied in domestically sold products to serve reconciliation when customs inspects ratios and values. Third, regular large-scale domestic sales should be notified and discussed in advance with the customs authority managing the EPE, because although there is no hard export threshold, an EPE operating in substance as a domestic-market factory will attract supervision questions about the validity of its whole preference model — preparing a business model explanation file from the start is far cheaper than explaining inside an audit.
Frequently Asked Questions
When an export processing enterprise (EPE) outsources processing, what customs procedures apply to the movement of goods and materials?
Notify the processing facility to the customs authority managing the EPE before sending raw materials and supplies out for processing, under point a, clause 1, Article 28a of Decree 134/2016/ND-CP. After notification, the entire flow of materials sent out and products and scrap received back must be managed and declared under the processing goods mechanism so customs can reconcile norms and quantities. Sending goods out before notifying, or failing to segregate the EPE’s materials at the processing facility, are the errors sanctioned most heavily when a post-clearance audit finds the materials’ path untraceable.
Under what mechanism do import duty and VAT apply to each flow when an EPE sells into the domestic market?
Goods sold by an export processing enterprise into the domestic market are treated as imports from abroad: import duty and value added tax are computed and paid at the time the import declaration is registered, at the customs value and rates applying at that moment. The domestic buyer performs on-the-spot import procedures, and only after procedures and tax duties are completed do the goods circulate as domestic goods. The EPE must therefore structure its domestic selling price on a basis inclusive of these obligations, rather than applying the export price level as-is.
Are materials bought domestically and brought into an EPE treated as exports eligible for the 0% rate?
It is treated as an export under the on-spot export mechanism — the reverse flow channel of the EPE model. Goods sold by a domestic enterprise to an export processing enterprise — a non-tariff zone — are handled as exports: the domestic seller opens an on-spot export declaration, the EPE completes the corresponding import procedure, and the seller applies the 0% VAT rate for exported goods if the tax law conditions are met — a sale contract, a cleared customs declaration and bank payment proof for the shipment. Materials entering the EPE through this channel are managed in the processing enterprise’s materials supervision system like every other input. The point domestic enterprises stumble on is treating this transaction as an ordinary domestic sale: a missing on-spot export declaration or non-bank payment gets the 0% rate denied on tax inspection, even though the goods physically entered the export processing zone.
Must an EPE outsourcing processing register the processing contract and settle accounts with customs?
The processing contract registration mechanism for enterprises processing for foreign traders does not apply, but two substitute obligations are no lighter. First is notification: under point a, clause 1, Article 28a of Decree 134/2016/ND-CP, the EPE must notify the processing facility to its managing customs authority before sending raw materials and supplies out for processing — this notification is the condition for the goods flow out of the processing zone belt to be treated as lawful. Second is management and settlement: the entire flow of materials sent out and products, scrap and surplus materials received back must be managed and declared under the processing goods mechanism so customs can reconcile norms and quantities, and the EPE files settlement reports on materials usage as prescribed to its managing customs authority. Sending goods out before notifying, or failing to segregate the EPE’s materials at the processing facility, are the errors handled most heavily when post-clearance audit finds the materials’ path untraceable.
Audit the EPE supervision perimeter before expanding outsourcing with FLAT Law Firm
FLAT Law Firm reviews the EPE’s customs supervision conditions under Article 26 of Decree 35/2022/ND-CP, designs the processing facility notification file under Article 28a of Decree 134/2016/ND-CP and models taxes for the domestic sales channel — so two expansion activities never endanger export processing status.
This article has been quality-reviewed by the FLAW AI Legal Council