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Country experience: Czech Republic

14.36.        In the movements of goods within the European Union, the processing services cannot be estimated by the difference between goods crossing borders before and after the processing (e.g., a long-term negative margin on outward processing with other European Union countries has been recorded). There are at least three main reasons for this: 

(a) The non-resident principal has the goods, after processing, shipped directly from the economy of the processor to a third economy. The resident processor had reported receiving the goods for processing in Intrastat (system for collecting information and producing statistics on the trade in goods between European Union countries), but the non-resident did not report them as goods sent after processing, but rather as a simple merchandise export; 

(b) Goods, after processing, are sold by the non-resident principal to a resident of the processor’s economy (i.e., without the goods leaving the processor’s economy). The non-resident principal must be registered in the processor’s economy for VAT purposes. The processor had reported only acquiring goods for processing in Intrastat, but there is no cross-border movement of goods after processing between the principal’s and processor’s economies; 

(c) Goods sent for processing, and especially those received after processing, may be significantly affected by misreporting or asymmetrical reporting. Goods sent for processing within the European Union are not under customs control in the Czech Republic. For that reason, it is difficult to report consistently on both sides in manufacturing chains. For example, processor A reports the physical entry of goods into the country (for processing) in a certain value, eventually processes them and transfers them to processor B, which, after its own processing, reports the exit from the country with a completely different value.[1] 

14.37.        The reasons mentioned under (a) and (b) lead to differences between processing services and margins resulting from gross cross-border flows in goods for processing. Since the compilation of the export and import of goods is based on the change-of-ownership principle[2] (not on the cross-border principle), there is no need for any additional adjustments. In the case of (a), the goods sent for processing by the non-resident are excluded from the non-resident’s exports of general merchandise and all cross-border exports, even though they are reported as general merchandise by the resident processor. In the case of (b), the goods received for processing by the resident processor are excluded from the non-resident’s general merchandise exports, and only sales by non-residents within the Czech market are recorded as the import of goods. The sales of non-residents are known from the VAT statements they submit. 

14.38.        However, the difference caused by point (c) must be eliminated by the additional adjustment of goods excluded from general merchandise in order to avoid affecting the balance of trade of goods and services. In fact, the first adjustment is done mostly at the level of Intrastat data collection by comparing the processing services (declared by exporters or importers of services) and declared cross-border movements of goods (reported into Intrastat by the same reporting units, as those units are usually the same – exempt from chain-linked processing). The adjustment requires sufficient data comparison of both data sources at the individual level of the reporting units. Nonetheless, other adjustments may be needed at the aggregate level, mostly because of the misreporting caused by chain-linked processing. 

14.39.        For the purposes of those adjustments, an ad hoc annual survey on a voluntary basis alongside the regular survey on international trade in services is conducted among the processors (exporters of services) and the principals of goods to be processed abroad (importers of services). Detailed information is collected on the relationship between services exports and imports and the related movements of goods across the border and the transfer of transformed goods to the principal within the processor’s economy. The additional adjustment of goods owing to misreporting may be carried out in order to keep the margin between goods after processing and goods before processing in accordance with the particular processing services related to the movements of the goods (especially when the goods are returning after processing; see box 14.1).


Back to B.1. Goods-related services

[1] Holding gains/losses or overheads are not likely to be among them as the entity obliged to report the movements of goods across the borders in the Intra-community trade statistics (Intrastat) is the processor (not the owner of the goods).

[2] The national concept of foreign trade in goods, which represents a change-of-ownership approach, takes into account sales and purchases by non-residents within the Czech market, and eliminates all cross-border movements of goods reported by non-residents,  since those cross-border flows cannot be considered as transactions related to the Czech economy.