Scenario. AutoHaus Germany (AG) is a global manufacturer of luxury vehicles. It recently shipped 50 completely built units (CBUs) of OPRA 242 to Autohaus Pinas (AP), a sales and distribution subsidiary. AG has an agreement with Pan Global, a third party logistics (3PL) provider, for the global distribution of its vehicles and auto parts. As a logistics provider, Pan Global provides AG with the following services: (a) air and sea freight, (b) multi-modal transport, (c) customs brokerage, and (d) warehousing and distribution. Pan Global arranged the shipping, transport and delivery of the 50 OPRA units to the Philippines under the following trading term: “DDU AutoHaus Sta Rosa Laguna Phils Incoterms 2000”. While the units were being transported to Sta. Rosa, one truck loaded with 6 units was “hijacked”. The rest of 50 units were safely delivered to the AP warehouse in Sta. Rosa, Laguna.
- What is obligation of the buyer AP? The seller AG?
- What is the dutiable value of the goods?
- Who is responsible for customs facilitation and clearance?
- Who is responsible for the payment of duties and taxes?
- Is the transport cost from Port of Manila to Sta Rosa dutiable?
- Who takes the risk for the 4 units that were “hijacked”?
The answer to the above questions will require a serious study of the meaning of the term Delivered Duty Paid (DDP).
Incoterms in International Trading. Logistics in international trade generally involves the use of international trading terms (e.g. Incoterms, UCP 500, etc.). 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, logistics 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; and
- customs clearance, inspection, security and compliance.
International Commercial Terms 2000. Introduced by the International Chamber of Commerce (ICC) in 1936, with the latest version (2000) involving 13 terms, Incoterms provides an international standard for international sales and purchase contracts (cross border transactions) and 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 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 defines 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); and
- Costs (who pays for what).
Implication to Customs Valuation. Under Section 201 of the Tariff and Customs Code, as amended (TCCP), 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 the following costs: 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.
Importers normally negotiate their trading terms on a 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 FOB invoice value, we normally add freight and transport costs and insurance to arrive at the dutiable value.
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 the some of the Incoterms 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 (especially terms other than CIF or FOB) when determining what is to be declared to customs as the dutiable value. Otherwise, importers run the risk of committing overpayment or underpayment in the taxes and duties on imported articles.
Atty Agaton Teodoro Uvero author is an international trade, indirect tax (customs) and supply chain expert. He is the Editorial Board Chairman of Asia Customs & 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). He authored the book “Understanding International Trade, Traiff and Customs”. For questions, please email him at agatonuvero@yahoo.com and agatonuvero@customstrade.asia
