Monday, May 7, 2012

Incoterms versus Valuation

Paulo Werneck

The International Commercial Terms (Incoterms) are a very useful tool in negotiating purchase and sale between the exporter and importer because they clarify the exact responsibilities of each.

Therefore customs administrations require the importer to declare which Incoterm was used in the operation as a source of information for determining the customs value, basis of calculation of import tax.

The customs value is the price actually paid or payable for the goods in a sale for export to the importing country, as defined by the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade.

Each country could decide about the inclusion (or not) of transportation costs and insurance to the country of importation in the customs value. Brazil, for example, included them.

We can better understand the relationship between Incoterms and the customs value, by studying some examples, considering a country that has chosen to include international shipping and insurance in the customs value.

Incoterm CIF – Cost, Insurance and Freight (named port of destination)

The seller must pay the freight to bring the goods to the port of destination, as well as the insurance.

The customs value will be exactly the price of the goods as stated in the CIF invoice (paid by the buyer to the seller).

FOB – Free on Board (named port of shipment)

The seller must load the goods on board of the vessel nominated by the buyer, so the buyer has to pay the transportation from the named port to his country.

The customs value will be the price of the goods as stated in the FOB invoice (paid by the buyer to the seller) plus the freight and insurance of that transportation (paid by the buyer to the transporter and to the insurer).

EXW – Ex Works (named place of delivery)

The seller makes the goods available at its premises, so the buyer has to pay all transportation and insurance costs to their final destination.

The customs value will be the price of the goods as stated in the EXW invoice (paid by the buyer to the seller) plus the other costs (transportation, armazenation, insurance, etc) the buyer had suffered to bring the goods to his country (border, port or airport), but not the remaining costs (from the border to his premises).