In the Philippines, most importers pay a lot more taxes (indirect taxes) to customs than to internal revenue authorities. The landed cost of importations has a direct impact on the selling price when offered for sale in the domestic market and will directly influence the bottom line or operating profit of the company.
The massive growth in international trade and the proliferation of regional and bilateral trading agreements has made international trade and customs law a highly specialized and complicated field particularly for the trading community and those engaged in the cross-border exchange of goods. We have outlined below the focus areas in import and export management.
Understand the Global Trading Environment. Globalization has changed how companies source materials and sell products. Regional markets have opened and tariffs have fallen; international trading rules are more complex. The full implementation of numerous free trade agreements and the advances in online technology has greatly impacted on the supply structures and sourcing strategies of companies.
Managing international trade require multiple skill sets and integration of customs and trade understanding. While we have yet to fully recover from the effects of the pandemic, globalization continue to provide growth opportunities. On one hand, competition has heightened and supply chain risks must be managed to prevent recurring disruptions across international borders.
Many of the rules relating to customs valuation, rules of origin, duty preference, tariff classification, supply chain security and many others are based on international agreements. To date, the Philippines has numerous bilateral and regional free trade agreements (FTAs) and memorandum of understanding (MOUs) with various countries and regional groups to expand its trade and economic relations. In addition, the country is still engaged in the negotiation or implementation of numerous bilateral and regional (and cross regional) agreements.
Trading companies has to understand the dynamics of both the domestic and international markets. Understanding the benefits of free trade agreements can result in duty privileges for both imports and exports. For importers, that can result in lower landed goods while for exporters, that can mean more sales arising from the lower costs and from gaining access to export markets. Understanding the role of free trade agreements and free zones (free ports and export processing zones) can help traders maximize trade opportunities in the global market.
Study INCOTERMS 2020. 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.
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. Each of the 11 terms 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:
- Buy a copy of INCOTERMS 2020 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 agree to the rights and obligations provided in the term.
- Some of the terms refer exclusively to a specific mode of transport. The terms 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 any change to any particular 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 as against the terms and conditions in the sales contract, if there is any. 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.
(To be continued.)
Atty Agaton Teodoro Uvero is an international trade lawyer and a logistics and supply chain consultant. He previously served as Deputy Commissioner for Assessment and Operations at the Bureau of Customs and later, as Legislative Liaison of the Department of Finance. For questions, please email him at agatonuvero@yahoo.com.
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