(Last of a two-part column. For the first part, click here.)
Study Incoterms 2010*. International Commercial Terms (Incoterms) provides the international standard for international sales and purchase contracts (cross-border transactions) and sets the rules for interpreting the international trade terms. The term used (e.g., FOB or CIF) relates to the specific rights and obligations of the parties to a contract of sale with respect to the delivery of goods sold.
(*Editor’s note: Incoterms has since been updated although most terms remain the same. For details of Incoterms 2020, click here.)
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, defining responsibility for customs formalities, minimizing disputes in the absence of well-defined sales contracts, and supplementing international sales contracts. It defines the roles and responsibilities as to the following:
- Delivery (where and when the seller fulfills obligation to deliver/point of delivery)
- 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)
The trading term used will define which party will pay for the insurance, freight or transport costs and, in case of loss or damage to the goods, which party will claim against the insurance. Below are some pointers when using Incoterms:
- Purchase a copy of Incoterms 2010 from International Chamber of Commerce.
- Specify the term applicable to prevent misunderstandings and possible conflicts.
- Study the rights and obligations outlined in each term; make sure each party agrees to the rights and obligations provided in the term.
- Some of the terms refer exclusively to a specific mode of transport. FAS, FOB, CFR and CIF refer only to water transport while the rest apply to any mode of transport.
- Do not change or add to the duties or obligations provided in the term. If there are changes to any duty or obligation provided in the term used, this must be agreed upon and put into writing. Better still, include the changes in the standard sales contract.
- Confirm and verify the applicable term against the terms and conditions in the sales contract. In case of conflict, confirm with the trading partner that the contract prevails over the term used.
- Inform the bank and insurance company of the term used to notify them of the rights and obligations of the parties.
- The term used will determine the agreed price for the goods sold and the costs to be incurred or paid by the buyer.
- The term used shall determine the dutiable value to be declared to customs at the port of destination.
Know Import and Export Rules. Customs process in the Philippines is manual, archaic and tedious. In addition, there are import regulations issued by more than 40 government agencies and numerous parties involved when transacting across international borders. Importers need to plan how they import and need a minimum understanding of the following: process and risks in selecting suppliers abroad, payment terms and arrangements (e.g., letter of credit), role of forwarders and customs brokers, and basic import rules and regulations.
It would of course take some time to have a working knowledge of the whole import and export process and the alternative for traders is to hire an import/export specialist with proper experience and related training.
Ordering goods overseas will require the assistance of a freight forwarder. The role of the forwarder is to ensure that goods are properly packed, loaded and transported from the warehouse of the supplier, transferred to loading docks of shipping lines or airlines, unloaded at the port of destination, and finally delivered to the buyer. The forwarder will assist the importer in documenting the whole process. Most forwarders also provide customs clearance service. The importer may hire a service provider that will include forwarding, customs clearance and trucking into its services. Alternatively, the importer may hire a separate forwarder, customs broker and trucker.
It is imperative for importers to look at the track record and integrity of service providers. A good customs broker should ensure customs and trade compliance. Failing that, importers are at risk of incurring additional costs or failing to release their goods in time.
Comply with Trade and Customs Rules. The adoption of the World Trade Organization Agreement on Customs Valuation in January 2000 and the Post Clearance Audit system in June 2001 has brought about significant changes in how importers deal with customs. Prior to these developments, the responsibility to determine the correct valuation, classification and quantity of imported goods rested on customs. These developments now require that importers be responsible for ensuring the completeness and accuracy of declarations to customs and for compliance with trade regulations. In addition, importers are required to keep import and related business records for customs audit purposes.
Most traders look at the import process as a logistics process and as such, there is less focus on ensuring compliance with trade and customs regulations. When confronted with compliance issues, many importers hire “fixers” to resolve their issues. The main concern with short cuts is that the problem is only solved temporarily; the same issues may haunt the importer in the future especially when there is fraud involved and when a customs audit is conducted.
Importers therefore must always prioritize compliance with trade and customs rules even if doing so may result in delays in the initial stage of the import process. Importers must always prepare and plan properly. Non-compliance may result in goods being confiscated by customs, delayed releases and costly storage charges, or imposition of hefty fines and penalties.
An emerging need for corporate governance will involve the internal provision for a trade compliance and record-keeping system and a customs broker management system. A trade compliance and record-keeping system is basically a set of procedures and controls applicable to concerned units of the company (e.g., import, finance, transport, etc.) and to third-party suppliers (e.g. customs brokers and freight forwarders). This system will include periodic compliance and risk assessment of the company’s import operations and should provide procedures and controls for maintaining electronic and manual records. A customs broker management system will address the logistics requirements of the company and the need for compliance with customs and other trade regulating agencies.
(Updated on May 28, 2021, 10:39am, to reflect the 2020 version of Incoterms.)
The author is an international trade, indirect tax (customs) and supply chain practitioner. He is the Editorial Board Chairman of Asia Customs and Trade, an online portal on customs and trade developments affecting global trade and customs compliance in Asia. He was also Bureau of Customs Deputy Commissioner for Assessment and Operations Coordinating Group (2013-2016). For questions, please email him at firstname.lastname@example.org (www.customstrade.asia).