- EXPORT MANUFACTURING: The Overlooked Tax Exemption Conditions — What Businesses Need to Do in 2026
- Duty exemption is not unconditional
- Five commonly overlooked duty exemption requirements
- Actual Penalties in the Event of Import Duty Reassessment
- Case Study: An FDI Garment Factory in Binh Duong
- Immediate Action Checklist for Import-Export and Accounting Teams
- What Businesses Should Remember
- Need Support Reviewing Your Export Manufacturing Records or Preparing Your Customs Finalization Report?
EXPORT MANUFACTURING: The Overlooked Tax Exemption Conditions — What Businesses Need to Do in 2026
The issue nobody talks about openly
The goods have all been exported. The container has arrived at the destination port. The overseas customer has completed final acceptance. The company breathes a sigh of relief.
Then, 18 months later, an official letter arrives from Customs requesting a post-clearance audit. The outcome is an import duty reassessment—plus administrative penalties and late payment interest—covering all imported raw materials over the past three years.
This is not a hypothetical scenario. It is a real situation facing many export manufacturing enterprises in Vietnam, especially small and medium-sized FDI companies that are not yet fully familiar with Vietnam’s customs regulatory framework.
The problem is not necessarily that the company made mistakes. The problem is that many businesses have not fully understood one critical point: being granted duty exemption upon importing raw materials does not mean the exemption is unconditional or permanent.
Duty exemption is not unconditional
When an export manufacturing enterprise imports raw materials under customs declaration type E31 (raw materials imported for export production), it is exempt from import duty and input VAT. This is a significant incentive that can save businesses from hundreds of millions to tens of billions of VND each year, depending on the scale of operations.
However, what many businesses overlook is that the duty exemption is only confirmed after the actual use of the imported materials—not at the time of importation. Customs authorities have the right to conduct inspections for up to five years from the declaration date. If the enterprise cannot prove that all imported materials were used for their intended purpose—manufacturing products that were subsequently exported—the portion that cannot be substantiated will become fully subject to import duty.
The current legal framework includes Circular 38/2015/TT-BTC, Circular 39/2018/TT-BTC, and Circular 121/2025/TT-BTC (effective from February 1, 2026). Circular 121 further strengthens requirements for Customs Finalization Reports and digital data synchronization, and applies directly to the 2026 finalization period.
Five commonly overlooked duty exemption requirements
1. Selecting the correct customs declaration type is only the beginning
This is one of the most common misconceptions. Many businesses believe that simply declaring imports under customs declaration type E31 is sufficient to secure the tax exemption.
In reality, the opposite is true. The E31 declaration merely establishes the company’s intention to use imported raw materials for export manufacturing. The actual tax exemption is verified throughout the entire process—from the moment the materials enter the warehouse, through production, until the finished products are exported and the Customs Finalization Report has been completed.
If the data chain is broken or inconsistent at any stage of this process, the risk of customs duty reassessment immediately arises.
2. Material consumption norms are not updated
Material consumption norms (also known as the Bill of Materials – BOM) define the quantity of raw materials required to manufacture one unit of finished product, including the allowable production loss rate.
A common mistake is that the BOM is established at the beginning of production and never updated—even after the factory changes machinery, switches raw material suppliers, or optimizes production processes. As a result, the documented consumption norms gradually diverge from actual production consumption. Over several years, even a small monthly variance can accumulate into a discrepancy significant enough to attract Customs attention.
When questioned, many businesses cannot provide documentation explaining why the BOM changed or when those changes took effect—and this is precisely when operational risk turns into actual financial exposure.
Key principle to remember:
Material consumption norms should be established before mass production begins, supported by trial production records and technical reports. Whenever production processes change, businesses should prepare written explanations and officially update the revised consumption norms with Customs authorities.
3. Preparing the Customs Finalization Report at the last minute
Many accounting and import-export teams only begin working on the Customs Finalization Report when the submission deadline is approaching—typically within 90 days after the end of the fiscal year.
This is fundamentally the wrong approach. The Customs Finalization Report is not a year-end summary exercise—it is the result of 365 days of continuous data monitoring. If data has not been consistently updated throughout the year, compiling everything at year-end will inevitably create discrepancies, and those discrepancies become compliance risks.
The Customs Finalization Report requires three sets of data to reconcile perfectly: the actual warehouse inventory, accounting records, and customs records (compiled from E31 import declarations and E62 export declarations throughout the year). If even one of these three data sources does not match, the company will be required to provide an explanation.
4. Inventory discrepancies that accumulate silently over time
This is the direct cause of import duty reassessments in the majority of real-world cases.
A shipment of raw materials is received, but the warehouse records are short by 2 kilograms. A production issue slip is recorded using the wrong material code. A pilot production batch is manufactured and discarded, but the consumed raw materials are never recorded. Scrap materials are generated but not properly accounted for.
Each of these seemingly minor incidents accumulates over months and years. During a post-clearance audit, Customs compares the records. If the inventory shown in the accounting system is higher than the actual inventory, or if the recorded material consumption exceeds the approved BOM multiplied by the exported production volume, Customs will inevitably ask one question: where did the discrepancy go?
If the company cannot provide a satisfactory explanation, the discrepancy will be presumed to represent raw materials that were not used for their tax-exempt purpose, resulting in import duty reassessment.
5. Incomplete retention of internal production records
During a post-clearance audit, Customs does not only review customs declarations and commercial invoices. Officers may also request Production Orders, raw material issue slips, finished goods receiving reports, periodic inventory count reports, quality inspection records, and documentation related to scrap and defective goods disposal.
Many companies do not have a standardized document retention system for these records. When explanations are required, it may take weeks to locate the necessary documents—or they may not be found at all. The business may be fully compliant in practice but unable to demonstrate compliance through proper documentation.
Actual Penalties in the Event of Import Duty Reassessment
Understanding the applicable penalties helps businesses accurately assess the severity of compliance risks related to export manufacturing materials.
- Errors voluntarily identified and amended before a Customs inspection: A penalty of 10% of the underpaid tax, plus late payment interest at 0.03% per day.
- Errors identified by Customs during a post-clearance audit: A penalty of 20% of the underpaid tax, plus late payment interest as prescribed by law.
- Late submission of the Customs Finalization Report without a valid reason: An administrative fine ranging from VND 2 million to VND 5 million.
- Cases involving fraudulent conduct: May be subject to criminal prosecution under the Criminal Code.
For a manufacturer importing approximately VND 50 billion worth of raw materials annually, import duty may range from 5% to 15% depending on the product category. If Customs reassesses duties for three consecutive years, the additional import duty alone may range from VND 7 billion to VND 22 billion, excluding administrative penalties and late payment interest.
Case Study: An FDI Garment Factory in Binh Duong
A Korean-invested garment manufacturer operating in an industrial park in Binh Duong manufactures products exclusively for export. The company imports fabrics and accessories under the E31 customs declaration type and exports finished garments to the European Union and the United States. All import and export procedures were carried out under the correct customs regime.
The issue arose when the factory upgraded its production line during its second year of operation, reducing fabric consumption by approximately 8%. However, the warehouse management system continued using the old Bill of Materials (BOM). After two years, the inventory records showed approximately four tons more fabric than the actual physical inventory—a relatively small discrepancy compared to the hundreds of tons imported annually.
During a post-clearance audit, Customs determined that the four tons of fabric could not be adequately accounted for and therefore imposed full import duty reassessment together with administrative penalties. Although the additional tax amount itself was not substantial, the factory was forced to suspend operations for nearly three weeks to support the audit process, seriously affecting delivery schedules for European customers.
Key Takeaway
Even a minor production process improvement that is not reflected in the approved material consumption standards can create significant legal and financial risks for the business.
Immediate Action Checklist for Import-Export and Accounting Teams
The following items should be reviewed during this quarter before beginning preparations for the 2026 Customs Finalization Report.
Material Consumption Standards (BOM)
- Review all current Bills of Materials (BOMs) and compare them with the actual production process.
- Identify all machinery, raw material, or production process changes made since the previous customs finalization period.
- Prepare formal documentation recording any BOM changes, signed by both the technical department and management.
- Register updated BOMs with Customs whenever significant changes have occurred.
Raw Material Inventory
- Conduct a physical inventory count and reconcile it with accounting records.
- Verify that scrap and defective materials generated during production have been properly recorded and handled in accordance with regulations.
- Reconcile inventory management system records with actual warehouse issue slips on a monthly basis.
- Ensure that any raw materials borrowed from overseas business partners (if applicable) are tracked separately.
Production Documentation
- Verify that all Production Orders have been properly retained and sequentially numbered.
- Confirm that each raw material issue slip clearly references its corresponding Production Order.
- Review periodic inventory count reports (at least once every three months) to ensure all required signatures are present.
- Check documentation related to defective goods, trial production, and non-conforming products.
Customs Finalization Report
- Confirm the submission deadline for the current fiscal year’s Customs Finalization Report (typically within 90 days after the fiscal year-end).
- Reconcile the total quantity of imported raw materials declared under E31 with exported finished products declared under E62 and ending inventory.
- Ensure that warehouse records, accounting records, and Customs records are fully consistent before submitting the report.
- Retain all supporting documentation and records for a minimum of five years.
2026-Specific Compliance Risks
- Review all transactions between Export Processing Enterprises (EPEs) under Circular 121/2025. From 01 February 2026, these transactions must follow standard import-export customs procedures.
- If the company sells goods into the domestic market (including scrap materials), confirm that all corresponding import procedures and tax obligations have been fully completed.
- Update the newly required Customs Office Codes (mandatory from 01 July 2026) across all customs declaration software currently in use.
What Businesses Should Remember
The import duty exemption available for raw materials used in export manufacturing is a valuable incentive that provides significant financial benefits to manufacturers. However, it is not an unconditional entitlement.
It can be compared to a bank account with conditions attached—you continue enjoying the full benefit as long as all eligibility requirements are maintained. If any condition is no longer satisfied, even unintentionally or due to inadequate internal controls, Customs authorities may require the company to repay the exempted import duties, together with administrative penalties and late payment interest in accordance with applicable regulations.
As Vietnam Customs continues to accelerate digital transformation, data integration, and post-clearance audits based on big-data risk analysis, discrepancies between customs declarations, accounting records, warehouse data, and actual production activities are becoming increasingly easier and faster to detect.
Companies that maintain robust internal data management systems, accurate Bills of Materials (BOMs), inventory controls, and customs finalization records will not only reduce the likelihood of post-clearance audit issues but will also be better positioned to safeguard the tax incentives to which they are legally entitled.
Key Takeaway
Managing material consumption standards, production records, and Customs Finalization Reports should not be viewed merely as a compliance obligation. It is a practical strategy for protecting valuable import duty incentives while minimizing the risk of future tax reassessments.
Need Support Reviewing Your Export Manufacturing Records or Preparing Your Customs Finalization Report?
THT Cargo Logistics provides customs consulting and compliance solutions for FDI manufacturers operating in industrial parks throughout Southern Vietnam. We assist businesses in reviewing material consumption standards (BOMs), validating duty exemption documentation, reconciling customs and inventory records, preparing Customs Finalization Reports, and conducting compliance assessments before post-clearance audits.
If your company needs to review its raw material management system or prepare Customs Finalization documentation in accordance with current regulations, contact THT Cargo Logistics for practical, industry-specific consulting tailored to your manufacturing operations.
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