You’ve Got Your LMW License. Now What?
Getting a Licensed Manufacturing Warehouse (LMW) license is often celebrated as a major milestone. In reality, it is only the beginning.
From our experience working with LMW companies across electronics, aerospace, automotive, and precision manufacturing, most compliance risks do not arise during application. They surface 6–18 months after licensing, when operations scale, people change, and assumptions go unchecked.
This article outlines what managers need to understand immediately after obtaining an LMW license—before issues surface during inspection or audit.
1. An LMW License Is a Living Compliance Obligation
An LMW license is not a static approval. It is a conditional operating framework under Section 65A of the Customs Act 1967.
Once licensed, Customs expects:
Continuous compliance with license conditions (Appendix C)
Alignment between actual operations, approved process flow, and monthly reporting
Internal controls that can explain what happened, why, and with evidence
Many companies fail not because they break the rules intentionally—but because they do not manage the license actively.
Key question for managers:
Who in your organization owns LMW compliance end-to-end?
2. Your Real Risk Starts with Daily Operations, Not Declarations
Most LMW issues do not come from incorrect forms. They come from:
Raw materials issued without BOM discipline
Production yield not matching approved ratios
Scrap and waste treated as operational loss, not customs-controlled goods
Goods moved out “temporarily” without formal subcontract approval
Customs audits reconstruct history, not intent. If your daily records cannot explain movements clearly, Customs will.
3. Monthly Statements (M1, M2, M4) Are Audit Documents
Monthly reports are often treated as routine submissions. Customs treats them as legal declarations.
Common post-license gaps we see:
M1 and M2 prepared manually without reconciliation to ERP
Scrap ratios not technically justified
M4 figures not tying back to audited financials
Late submissions becoming habitual
During audit, Customs will:
Test consistency across months
Recalculate usage and yields
Compare financial statements against customs reports
4. Local Sales and ATIGA: High Value, High Scrutiny
LMW allows up to 20% local sales, but this is where most exposure sits.
Two common misconceptions:
Local sales are “just K9 with duty payment”
ATIGA rates apply automatically if materials are ASEAN-sourced
In reality, ATIGA for LMW local sales requires:
Cost build-up analysis
Clear ASEAN content calculation or substantial transformation proof
Alignment between BOM, sourcing, and valuation
We regularly see ATIGA claims rejected years later during audit, triggering back-duties.
5. Subcontracting Is Allowed, but Poorly Controlled
LMW subcontracting rules are clear:
50% limit for local subcontracting
30% limit for overseas subcontracting
Combined cap of 50%
The challenge is monitoring by value, not volume.
Typical failures:
Subcontract approvals treated as permanent
Combined limits exceeded unintentionally
No tracking mechanism by finished goods value
Customs audits subcontracting retrospectively over the licensing period.
Manager insight:
Subcontracting needs governance, not just approval letters.
6. Waste, Scrap, and Disposal Are Customs Matters
From an operational view, scrap is inevitable. From Customs’ view, scrap represents duty-suspended material.
Red flags during audit:
No scrap ratio benchmark
Disposal approvals done after the fact
Mixing dutiable and non-dutiable waste
Missing disposal evidence
Customs may impose duty on assumed losses if disposal is not defensible.
7. Inspection vs Audit: Know the Difference
Many managers prepare well for site inspections and assume compliance is satisfactory.
They are not the same.
Inspection: Physical stock & layout, current condition and operational compliance
Audit: Historical records, past behavior, financial and customs linkage
Passing inspections does not guarantee audit readiness.
8. Value-Added Activities Can Create Hidden Exposure
LMW allows value-added activities (R&D, testing, remanufacturing, packaging), but only:
As secondary activities
Within approved scope
Within the 40% sales value cap (unless IPC/RDC)
Problems arise when:
Activities expand without approval
Sales attribution is unclear
IPC/RDC assumptions are applied without status
9. The Real Question: Is Your LMW Governed or Just Operated?
In most problematic cases we handle, the root issue is not knowledge—it is lack of governance.
Strong LMW operators have:
Clear SOPs
Ownership across Operations, Finance, and Logistics
Periodic internal reviews before Customs does
Final Thought
LMW is not just any tax incentive.
It is a regulated manufacturing environment.
Companies that treat LMW as a compliance system gain long-term benefits.
Those that treat it as an approval eventually face audits, adjustments, and disruption.
If your LMW license is more than 6 months old and you have never stress-tested your compliance framework, that is the right place to start.
At Baryk Partners, we work with LMW companies beyond applications—focusing on governance, audit readiness, and operational defensibility throughout the license lifecycle.
