An Introduction to INCOterms & impact on transaction structuring PATRICK MAWIRE 3 June 2015
INCOterms 2010 International commercial terms World-recognized standard Should be incorporated into every sales contract
INCOterms- WHY / WHEN AND WHAT THEY CAN AND CANNOT DO FOR YOU?
INCOterms 2010 WHY? INCOterms standardize contract practices by enabling parties to: Use international generally recognized key commercial terms Agree on the most common understanding of such key terms Avoid misunderstandings in the use of them Define responsibility of seller and buyer by providing clarity between contracting parties
INCOterms 2010 WHEN? Any time you are dealing with country-tocountry shipments Any time you are dealing with multimodal transport (truck/air, truck/ocean, truck/rail/truck, etc.)
INCOterms 2010 - What They CAN Do The chosen INCOterm is a term of the contract of sale with respect to delivery of good sold INCOterms tell the parties what to do with respect to: Carriage of the goods from seller to buyer Export and import clearance Division of costs and risks between the parties
INCOterms 2010 - What They CANNOT Do Transfer of property rights of the goods transfer of (title) property rights must be specified separately in the contract or terms of the purchase order Relief from obligations and exemptions from liability in case of unexpected or unforeseeable events Managing your CIT and in some cases VAT risk
INCOterms 2010 - What They CANNOT Do Consequences of various breeches of contract, except when the buyer is in breach of his obligation to accept the goods or to nominate the carrier under an F-term INCOterms are ONLY rules for the interpretation of terms of delivery and not of other terms of the contract of sale
What do INCOTERMS define? WHO is responsible for customs procedures WHO is responsible for transport arrangements and booking procedures with the carrier and to what extent WHO takes care of insurance
INCOterms 2010 An INCOterm is a 3-letter term followed by a named place... EXW PRETORIA, RSA FOB DURBAN, RSA CIF MOMBASA, KENYA CFR LAGOS, NIGERIA DDP MAPUTO, MOZAMBIQUE
The 11 INCOterms MULTI MODAL EXW EX WORKS ( named place) FCA FREE CARRIER ( named place) CPT CARRIAGE PAID TO ( named place of destination) CIP CARRIAGE AND INSURANCE PAID TO ( named place of destination*) DAP DELIVERED AT PLACE (.named place) DAT DELIVERED AT TERMINAL ( named place) DDP DELIVERED DUTY PAID ( named place of destination)
The 11 INCOterms (continued) SEA OR INLAND WATERWAY FAS FREE ALONGSIDE SHIP ( named place) FOB FREE ON BOARD ( named port of shipment) CFR COST AND FREIGHT ( named port of destination) CIF COST, INSURANCE AND FREIGHT ( named port of destination)
Defining the Terms Source - Garvey Schubert Barer
Defining the Terms EX WORKS EXW (Ex Works): The seller s minimum obligation only to make the goods available for the buyer at the sellers premises Cost & Risk transfer to the buyer when goods are placed at the disposal of the buyer Note* This term should not be used if the buyer cannot carry out the required export formalities
Defining the Terms FCA FCA (Free Carrier Named place) Carriage to be arranged by the buyer or by the seller on the buyers behalf Risk & Cost transfers from the seller to the buyer when the goods have been delivered to the carrier at the named place If the buyer nominates a person other than the carrier to receive the goods the seller is deemed to have fulfilled his obligation when they are delivered to that person
Defining the Terms CPT CPT (Carriage Paid To Named place of destination) Carriage to be arranged by the seller Risk transfers from the seller to the buyer when the goods have been delivered to the carrier Costs transfer from the seller to the buyer at the place of destination. Buyer responsible for all costs not covered by the sellers account under the contract of carriage
Defining the Terms CIP CIP (Cost & Insurance Paid To named place of destination) Carriage and insurance to be arranged by the seller Risk transfers from the seller to the buyer when the goods have been delivered to the carrier Costs transfer from the seller to the buyer at the place of destination. The buyer is responsible for all costs not covered by the contract of carriage
Defining the Terms DAT DAT (Delivered At Terminal Named place) Carriage to be arranged by the seller Seller fulfills obligation when goods have been made available to buyer at names place, unloading of carriage included Risk transfers from the seller to the buyer when the goods have been delivered to the terminal Costs transfer from the seller to the buyer when the goods have been delivered at the terminal
Defining the Terms DAP DAP (Delivered At Place Named place) Carriage to be arranged by the seller Seller fulfills obligation when goods have been made available to buyer at names place, unloading of carriage included Risk transfers from the seller to the buyer when the goods have been delivered to the terminal Costs transfer from the seller to the buyer when the goods have been delivered at the terminal
Defining the Terms DDP DDP (Delivered Duty Paid Named place of destination) Carriage to be arranged by the seller Risk & Costs transfers from the seller to the buyer when the goods are placed at the disposal of the buyer Seller responsible for export and import clearance
Defining the Terms FAS FAS (Free Alongside Ship Named port of shipment) Carriage to be arranged by the buyer Risk & Cost transfers from the seller to the buyer when the goods have been placed alongside the ship
Defining the Terms FOB FOB (Free On Board Named port of shipment) Carriage to be arranged by the buyer Risk & Cost transfers from the seller to the buyer when the goods pass the ships rail FOB should only be used for sea or inland waterway transport. If parties do not intend to deliver goods across the ships rail the FCA term should be used
Defining the Terms CFR CFR (Cost & Freight Named port of destination) Carriage to be arranged by the seller Risk transfers from the seller to the buyer when the goods pass the ships rail Costs transfer from the seller to the buyer at the port of destination. Buyer pays costs not covered under the contract of carriage
Defining the Terms CIF CIF (Cost, Insurance & Freight named port of destination) Carriage and insurance to be arranged by the seller Risk transfers from the seller to the buyer when the goods pass the ships rail Costs transfer from the seller to the buyer at the port of destination. Buyers responsible for all costs not covered under the sellers contract of carriage
Transfer of Cost & Risk does not equal transfer of property rights In many jurisdictions, the transfer of property rights of the goods requires that the party take possession of the goods either directly or indirectly through the transfer of documents such as a maritime bill of lading, controlling the disposition of the goods. However, in some jurisdictions transfer of property rights of the goods the so called transfer of title may depend solely on the intentions of the contracting parties
Tax Risks and INCOterms 1. PE Risk 2. Force of attraction rules 3. VAT Liability 4. Revenue recognition Might be unavoidable with EPC contracts
PE RISK Tax Risks and INCOterms 1. Low PE threshold in some jurisdictions contrary to OECD Model 2. Carrying on business in some cases 3. DDP Incoterm for long term supply agreements poses a PE risk 4. Consider on shore registration if favourable INCOterm not possible
Tax Risks and INCOterms FORCE OF ATTRACTION RULES 1. Influence of Indian jurisprudence on African Tax Authorities 2. Risk arising from Split Contracts with unfavourable INCOterms 3. Jurisdiction seeking taxing rights where no clear PE threshold has been reached
VAT LIABILITY Tax Risks and INCOterms 1. Place of supply rules 2. INCOterms may trigger requirement for local VAT registration 3. Recovery of input tax by customer, especially for Drop shipments 4. Zero rating of exports
Tax Risks and INCOterms REVENUE RECOGNITION 1. Difference between invoicing and revenue recognition 2. Revenue reward under IFRS previously based on INCOterms 3. Now focused on transfer of control (IFRS 15) 4. Current and deferred tax implications
QUESTIONS
32 / GE / September 16, 2015