INTERNATIONAL Commercial Terms (INCOTERMS) play a very important role in international trade. As transactions among buyers and sellers across international borders continue to grow exponentially, more and more companies are faced with the challenge of addressing, or at least minimizing, the risks involved in such transactions. While transactions among related parties may involve lesser risks, it is still very important for buyers and sellers to agree in clear and equivocal terms the responsibilities and obligations on costs, delivery terms, risk coverage and import/export formalities.
Incoterms and Logistics
Logistics services across international borders generally involve the use of international trading terms and letters of credit. The use of these terms determines the obligations and rights of the buyer and seller in the movement of goods in the supply chain, from sourcing and procurement of raw materials and supplies to customer order fulfillment. From an operational perspective, logistic services will involve the following:
- adoption of international trading terms (INCOTERMS and documentary credits)
- use of transport providers, freight forwarders and shipping agents
- availment of warehousing and distribution centers
- customs clearance, inspection, security and compliance
Incoterms was first introduced by the International Chamber of Commerce (ICC) in 1936, with the latest version (2000) now involving 13 terms. The terms provide an international standard for international sales and purchase contracts. It also sets the rules for interpreting the international trade terms. As a standard trading term used by the buyer and seller in an international sale transaction, it is widely accepted by governments, legal authorities and the trading community.
In general, the use of Incoterms serves to protect the interest of the buyer and the seller by managing risks in case of loss, by allocating transport and insurance costs between the parties, by defining responsibility for customs formalities, by minimizing disputes in the absence of well-defined sales contracts and by supplementing international sales contracts.
Specifically, Incoterms define the roles and responsibilities as to the following:
- Delivery (where and when the seller fulfills obligation to deliver/transfer of ownership)
- Documents (who provides what documents, whether manual or electronic)
- Risks (who bears the risk of loss or damage at any point of transit / Transfer of Risk)
- Costs (who pays for what)
Implication on Customs Valuation
Under existing customs rules and regulations, the dutiable value of an imported article is the “transaction value, which shall be the price actually paid or payable for the goods when sold for export to the Philippines”, adjusted by adding certain costs such freight and transport costs, insurance, royalty payments, assists, subsequent payments and commissions. Thus, the dutiable value is computed by getting the price paid or payable plus the adjustments mentioned above.
Many traders negotiate their trading terms on a CIP or CIF basis. The question here is whether the CIF invoice value is equivalent to the dutiable value. The term CIF presupposes that freight and transport costs including insurance have been included in the invoice price and thus, we may assume that the invoice price (which is the transaction value for the imported goods) is the dutiable value. In case of an FCA or FOB invoice value, we normally add freight and transport costs and insurance to arrive at the dutiable value.
Addressing Risks, Reducing Costs
In recent years, we have seen the increasing use of terms such as Free Carrier (FCA), Delivered Duty Unpaid (DDU) and Delivered Duty Paid (DDP), Carriage Paid To (CPT) and many other unfamiliar terms. A study of some of these terms will indicate that the standard costs provided in the invoice may include costs which are not necessarily dutiable. As an example, the DDP invoice value normally includes the amount for taxes and duties payable and as such, the amount to be declared to customs should be less than the invoice value (i.e., after deducting the taxes and duties payable at the port of destination).
In conclusion, importers, forwarders and customs brokers should carefully review the Incoterms not only to ensure responsibilities but also to determine what is to be declared to customs as the dutiable value. Incoterms may help traders reduce their transaction costs. Poor understanding of the impact of the terms used on customs valuation may result in additional costs at the customs border.
The author is an international trade consultant, and a licensed customs broker. He is a lecturer on logistics, indirect tax and customs, and a lecturer of Ateneo and BayanTrade on Supply Chain Management. Please contact firstname.lastname@example.org for your comments.