Posted in Cross-border deals, Cross-border trade, Customs Law, GST/HST, origin, tariff classification, valuation
Small and medium sized
enterprises mistakenly accept costs and financial risk when they agree to
Incoterms without considering the consequences. SMEs should care about
Incoterms because mistakes can be costly – very costly.
What is an Incoterm?
Answer: Incoterms is an abbreviation of the phraseInternational Commercial Terms. The
Incoterms rules or are a series of commercial terms published by the
International Chamber of Commerce (ICC). The current version are the
Incoterms 2010.
Incoterms are used by buyers and sellers in international
and domestic commercial transactions to allocate costs, risks and
obligations/responsibilities. The Incoterms rules are so common that have
become an essential part of the daily language of trade. The Incoterms rules
have been incorporated in contracts for the sale of goods worldwide. However,
many small and medium sized businesses remain unaware of what these important
rules mean.
There are two groups of
Incoterms rules. Group I includes:
·
EXW (Ex Works),
·
FCA (Free Carrier)
·
CPT (Carriage Paid To)
·
CIP (Carriage and Insurance Paid to)
·
DAT (Delivered at Terminal)
·
DAP (Delivered at Place)
·
DDP (Delivered Duty Paid)
Group
II includes:
·
FAS (Free Along Ship)
·
FOB (Freight on Board)
·
CFR (Cost and Freight)
·
CIF (Cost, Insurance Freight)
Group I Incoterms are rules
that can be used for any mode of transport. Group II Incoterms are rules
for sea and inland waterway transport only.
The Incoterms rules set the
obligations of the sellers and the buyers (which can be changed by specifically
adjusting the Incoterm in a contract). It is important for SMEs to
understand, right at the beginning of contracts negotiations, which of the
above Incoterms should be selected, so that they know what type of costs, risks
and liabilities they will be accepting in the international trade transactions
under the contract.
For example, EXW (Ex Works)
imposes the minimum obligations on the seller. The seller delivers the
goods to the buyer at the seller’s warehouse and all cots, risks and obligations
are transferred to the buyer at that point. On the other hand, the seller takes
on more costs, risks and obligations when the goods are delivered DDP
(Delivered Duty Paid) because the seller takes on all shipping costs and
financial obligations and risks relating to outbound and inbound customs laws.
The correct use of Incoterms
can give buyers and sellers a competitive edge. They can also be used to
shift risk to an unsuspecting party who does not know anything about
Incoterms. For example, if goods are delivered Ex Works, then it could be
more difficult to for buyer reject the goods is they arrive damaged or
spoiled. The buyer would be responsible for the transport of the
goods. If the buyer did not have any marine insurance, the buyer could not
expect a claim to be processed by the seller whose obligations ended when the
goods were delivered to the buyer at the seller’s warehouse. The damaged
goods should have been rejected by the buyer at the seller’s warehouse.
Buyers should only use EXW when they have in country inspections (quality
assurance agents) prior to shipment.
Further, Incoterm rules may
place customs obligations on sellers and buyers in unfamiliar
jurisdictions. For example, if an American seller sells goods to Canadian
buyer DDP, the American seller will be responsible for Canadian customs duties
and border goods and services tax. The seller may be a non-resident
importer or may have a Canadian presence. The seller would have the
relationship with the Canada Border Services Agency (CBSA) . If the
seller uses the incorrect H.S. Code in Canada (it is not always the same number
as used to import into the United States), then the seller would be responsible
for additional duties and Administrative Monetary Penalties (AMPS) penalties.
The seller may also be required to be registered for goods and services tax and
charge, collect and remit GST/HST in Canada (since delivery would take place in
Canada). in other words, the seller may take on Canadian registration and
tax obligations.
What if a Canadian buyer buys
from a Chinese seller and agrees to FOB (ships edge). The buyer would be
the importer of record and would take all risks of reporting to the CBSA.
If the Canadian buyer does not know that the goods are subject to antidumping
and countervailing duties (e.g., fasteners, aluminum extrusions, stainless
steel sinks, copper pipe fittings, solar modules, certain steel products, etc.)
, the buyer could face significant duties. If the buyer had agreed to DDP
terms, the antidumping duty/countervailing duty liability would be on the
Chinese seller.
There are many other examples
that highlight why knowing about Incoterms is important. Please ensure
that you are using the correct Incoterm in your contract. Please review
your ongoing contracts to ensure that the Incoterm used is consistent with the
agreement between the parties. When
in doubt, call a professional.
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