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In this third part of a series of podcasts on Incoterms - important contract terms for international freight delivery - Ursula Johnston discusses the customs obligations under the various Incoterms and how these might inform which you choose for your international trading arrangements.
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Ursula Johnston: Hello! I am Ursula Johnston. I am a director for the Customs and Export Controls team at Gowling WLG. So my colleague, David, has presented two podcasts on Incoterms and, really, when we talk about Incoterms within an international trade setting, you cannot fail to talk about customs and what the customs obligations are under the various Incoterms. Therefore, today we thought it would be interesting just to spend ten minutes or so running through some of the key considerations from a customs perspective when selecting your Incoterm for international trade. So I just want to spend a couple of moments thinking about where does customs fit within your business organisation and where within your organisation might you be talking about customs obligations that may be driven by decisions that your business has made around Incoterms.
So, quite frequently we see that customs is managed out of the legal team, or the tax team, or internal audit, because it is seen as a regulatory obligation that the business must comply with. However, customs is also fairly operationally driven as well, and therefore we quite frequently see that really the people that are handling customs on the ground - and need to be aware of the clients' requirements - are from your logistics, warehouse or arrivals teams. Then thirdly, of course, customs can be a cost to the organisation; not only in terms of the duties that you may have to pay on your goods on arrival, but also because of the costs associated with filing customs declaration. Therefore, we quite frequently see that procurement teams need to keep abreast of customs as a cost in the supply chain and, as such, that is partly driven by the Incoterms upon which you decide to trade.
The customs obligations vary under the different Incoterms, as you will have heard from David previously. So to spend a few moments going through the overview of the customs obligations:
- So if you trade on Ex Works terms, that is EXW, the buyer is the exporter from the country of the goods' departure and the buyer is also the importer into the country of the goods' arrival. So this is quite frequently difficult for those buyers who may not have an establishment in the country of import or indeed export.
- Under the terms that include FCA, CPT, CIP, DAP, DPU, the seller is the exporter from the country of goods' departure but the buyer is obliged to be the importer into the country of the goods' arrival.
- Then at the other end of the scale, we have Delivered Duty Paid. In this scenario, the seller is the exporter from the country of goods departure and the seller must also be the importer into the country of the goods' arrival.
Therefore, when we talk to businesses about selecting Incoterms, it is important to think about what obligations your company can and, indeed, would like to make in terms of its customs compliance. Most frequently, the seller will typically be the exporter and the buyer will be the importer since probably, nine times out of ten, each of those entities will have a local presence.
So just to talk very briefly about what does an export or, indeed, an import involve. Well, first of all, it is important to think about, from a customs perspective, an importer and exporter involves goods crossing a customs border. Therefore as it stands, at least, if I sell my goods to France and I need to move them across the UK/French border, there is no customs obligation triggered because the goods have not moved across a customs border.
However, if I buy goods from China then you will therefore create both an export transaction when the goods are shipped out of China and then a subsequent import transaction when the goods arrive in the UK. In that scenario, it would be most common for the exporter to be my Chinese manufacturer and the importer to be the local UK business that will make a subsequent sale of those goods. Of course, there are exceptions where you may choose to appoint a freight agent or another local customs representative as the importer, but typically those services are exclusively used for foreign entities that have no local presence.
When we talk about customs in the context of Incoterms we refer to "customs formalities". Now these are the mandatory requirements to fulfil the customs obligation at the border, rather than the nice to have arrangements such as bonded warehousing, for example, or being in a position to apply a free trade agreement. Therefore, what we look at is the bare bones of what is really needed to comply at that moment the customs obligation arises with the local domestic rules and regulations. The customs authorities will need to be provided with all the necessary import and export documentation. You may have to pay customs duties, VAT and other indirect taxes, such as excise duties. You will need to ensure that the documents that you submit are accurate and you should be prepared for post-import or post-export customs checks and audit activity.
The import/export declaration has a number of key fields of data, which you really need to be aware of if you are involved in the international supply chain and have a role either as an importer or an exporter.
- The first consideration is, well, which legal entity will be the named importer or exporter of record and that is typically the goods' owner at the moment the goods cross the customs border.
- You will also need to indicate what the goods are on the customs declaration and that is determined by applying the right ten-digit code, which will define to customs authorities what the goods are and what rate of duty is payable.
- You will also need to assign a value to those goods. Typically, that is the invoice price but there are exceptions to that, or there may be additional charges that you will need to add to that value to create a customs value.
- You need to declare where the goods have originated from and, in some circumstances, where you are using a free trade agreement - because you are, for example, trading goods between South Korea and the EU, which have a trade agreement in place – you may be able to indicate that your goods qualify for preferential origin and therefore a lower or zero-rate of duty may be applicable.
- You also need to provide a description of the goods and the weight, which can become very critical for post-audit activity. You need to determine whether the goods are being imported or exported under some particular customs regime.
- You also need to provide details of any licences or authorisations that are required for the import or the export of those particular goods.
Just to wrap up the discussion today, I just want to spend a few moments thinking about some of the typical trade challenges that may arise when looking at what Incoterm to select for your international trade arrangements. So, particularly when you are looking at using DDP or Deliver Duty Paid or Ex Works terms, you may need to think about whether, indeed, in that particular market for import or export, you can, indeed, be the importer or exporter of record. There are some rules from some customs jurisdictions that say that non-locally established entities cannot be an importer or exporter.
The Incoterms also note that the buyer should provide assistance with export clearance. You may want to very carefully define what this assistance should consist of and whether it would, for example, extend to assistance to acquiring export licences if necessary. We also see that with some Incoterms, such as FCA and DOP, there is a potential for misalignment, since the point of import or the point of export may not be clearly obvious because the goods have not yet crossed an international border.
You also need to consider what the VAT consequences are for using a particular Incoterm and whether you may either trigger a requirement to register for VAT, or find yourself in a position where VAT is irrecoverable. Therefore, there may be many circumstances when you are negotiating an international agreement that you will want to use very carefully drafted terms around customs reporting and obligations.
So that concludes my short presentation on Incoterms and customs requirements, and I hope that you find this helpful and please do not hesitate to reach out to me with any questions.