Blok No. 8:
Incoterms
Content
• General background (GB) – definition, history, structure, delivery, scope,
limitations
• Impact of Incoterms on accounting and VAT treatment – revenues and
expenses (recognition, measurement), VAT (definitions, tax treatment)
• References
GB - definition
• International terms of sale, often called simply INCOTERMS – Being an
integrated part of international sale contracts, pro forma invoices or
purchase orders, INCOTERMS are probably the world’s best-known
import/export tool. They stand for universal trade terminology developed
by the International Chamber of Commerce (ICC) aimed to clarify: (1) who
in international supplies of goods is responsible for what expenses (in
essence, it is a way of letting the buyer know what is ‘included’ in the sales
price, e.g. transport costs, insurance costs, duties etc.); and (2) where all
risks for the consequences of loss of or damage to the goods supplied are
transferred from the seller to the buyer (i.e. place of delivery).
International terms of sale are an area of concern for many businesses
that are just beginning to export, because international terms of sale differ
greatly from those used in domestic sales. Although originally INCOTERMS
were designed for international sales contracts, they also can be used in
domestic ones.
INCOTERMS have been longest known and understood in Europe. This may
be due historically to the large number of exporting countries in Europe
and the fact there is a high amount of intra-European trade. ICC is
encouraged to see that understanding and use of INCOTERMS has been
growing exponentially around the world and nowadays there is
GB - history
hardly a country in the world whose traders are unfamiliar with the idea of
INCOTERMS.
• INCOTERMS are in fact based on venerable precedents in international
trade customs, as evidenced by an 1812 British court decision involving
FOB. In the 19th century, as international trade expanded rapidly, usage of
terms such as FOB and CIF became a common international trade practice
that arose from the need to clearly specify, in international transactions,
the respective risks and responsibilities of seller-exporter and buyerimporter.
International traders in those early times were not compelled by
any laws to use terms such as FOB or CIF – rather, these terms were
voluntarily adopted as a convenient shortcut for negotiating international
contracts. Thus, custom of usage of international trade terms arose
because they filled a practical business need.
ICC recognizes that the practice of international trade is not static, but
rather evolves with developments in technology and other global changes.
So, for example, when in the 1960s and 1970s the rapid expansion of
containerized and multimodal transport substantially changed the conduct
of international trade, ICC updated INCOTERMS to meet these new
transport practices.
GB - structure
• There are 11 INCOTERMS in the current version of the rules known as
‘Incoterms® 2010’ (ICC Publication No. 715) – 7 rules that may be used for
any mode or a combination of different modes of transport (frequently
known as ‘multimodal’ transport), and 4 rules that may be used only for
sea and inland waterway transport (frequently known as ‘maritime’
transport). Traders should distinguish carefully INCOTERMS rules used
under different modes of transportation.
Regardless of mode of transport, all INCOTERMS rules can be thought of
as representing a stepladder of increasing responsibility from seller’s
premises to buyer’s premises. Thus, in the rules for use with any mode or
modes of transport, INCOTERMS rule that represents the minimum
responsibility for the seller is EXW (Ex Works), which is generally used in
cases involving delivery at the seller’s factory or warehouse. A buyer on
EXW terms knows that nothing ‘extra’ (in terms of transport, customs
clearance or insurance) is included in the sales price – the buyer must
handle the entire transport operation itself. At the other extreme,
INCOTERMS rule DDP (Delivered Duty Paid) represents maximum
responsibility on the part of the seller, with delivery generally at the
buyer’s premises. A buyer on DDP terms (‘Delivered Duty Paid’) knows
that the quoted price includes all transport costs, risks and formalities up
GB - structure
GB - delivery
to the final destination. Between these two extremes, there are nine other
INCOTERMS, representing a range of options for the division of costs/risks
between the parties.
• Under INCOTERMS (unlike many sales laws) the place of delivery is also
the place where the risk for the consequences of loss of or damage to the
goods transfers from the seller to the buyer under the contract of sale.
Both notions – delivery and risk - are crucial since the physical delivery
and transfer of risk mark the point at which the seller performs what is
usually its most significant obligation under the contract of sale, i.e. to
pass the goods to the buyer.
Since delivery and transfer of risk can be defined differently under the law
applicable to the sales contract, it may often be complicated to determine
under a particular sales contract when exactly the seller performs its
delivery obligation and when risk passes to the buyer. This may cause
misunderstandings and conflicts between the parties to the contract of
sale.
CISG fixes delivery at the place where the goods are handed over to the
first carrier. It is at the point of delivery that the risk passes from the seller
to the buyer (subject to some narrow exceptions). This is clarified and
explained in INCOTERMS. The clear identification of the place of delivery
GB – scope
therefore avoids the confusion that could arise because different
applicable laws might fix the passage of risk to diverging places.
• INCOTERMS are applied to sales contracts only. All other contracts are
outside of their scope. In this context it is necessary to distinguish contract
of sale and contract of carriage:
o Contract of sale – an agreement between the seller and the buyer.
INCOTERMS are part of such these contracts.
o Contract of carriage – an agreement between the shipper and the
carrier (transporter). INCOTERMS are not part of these contracts if they
stand alone. However they are used in these contracts indirectly only if
such contracts are linked to corresponding contracts of sale. In this
case (if contract of carriage is linked to the contract of sale) the shipper
may be either the seller or the buyer – depending on that who is
obligated under the contract of sale to take care of transport. That side
which has this obligation becomes the shipper who will have to enter
into a carriage contract with a carrier (a company offering transport
services, like a marine shipping line, and airline, or a freight
consolidator).
Traders often do not distinguish contract of sale and contract of carriage
GB – limitations
from perspective of impact that INCOTERMS have on each of these two
types of contracts. One reason for confusion is that terms in the contract
of carriage may resemble the INCOTERMS (for example, in their usage of
the word ‘free’) – but traders should remember that these are separate
contracts with separate sets of responsibilities.
• Traders need to understand the nature clearly, extent and limitations of
INCOTERMS’ coverage.
o In most countries, INCOTERMS are NOT explicitly referred to in laws or
statutes, so INCOTERMS are not ‘laws’ in the sense of rules that are
developed by a government and are obligatory for all market
participants.
o INCOTERMS do not cover all possible legal or practical issues arising
out of an international sale. The INCOTERMS are merely a sort of
contractual shorthand that allows the parties to easily specify their
understanding as to: 1) the transport costs that the seller will cover; 2)
the point at which risk of loss will be transferred from seller to buyer;
3) who must handle customs formalities and pay duties; and, 4) in the
case of CIF and CIP, what are the responsibilities of the seller to provide
insurance cover. All other important details should be dealt with
specifically in the contract of sale.
GB – limitations
INCOTERMS cover only those cases where one party has an obligation
to the other party to do something. INCOTERMS do not indicate when
a trader should do something because it is prudent or advisable. This is
frequently misunderstood. Thus, traders will ask why the seller is not
obliged to insure the merchandise under a DDP sale, since it would
seem obvious that the seller has to be responsible for the goods all the
way to destination. Yet this approach confuses a business need with a
legal obligation – INCOTERMS refer only to the legal obligations, and
are silent on matters of common business needs and usages.
o One of the key areas not governed by INCOTERMS is that of the
transfer of property or title to goods. In fact, there is no international
legal harmonization as regards the transfer or title or property in
international transactions.
Since the law on transfer of property rights differs from country to
country, the parties to a contract of sale may wish to specifically
provide for this matter in the contract, but only after determining what
is permissible under the applicable law. Under many jurisdictions it is
possible for the seller to retain title and ownership of the property
until the purchase price is paid in full, even if this takes years. This
GB – limitations
‘retention of title’ by the seller is usually set out in a clause in the
contract of sale. Thus, one typical question raised by newcomers to
INCOTERMS is: Where are the provisions on transfer of property in
INCOTERMS? This questions remain largely governed by national law
alone. It is possible for the parties to add to their contracts, in addition
to INCOTERMS, a clause that clearly establishes the place and manner
of transfer of ownership/title in the goods. Drafting such clauses
requires knowledge of the transfer of property laws of both countries
involved, as well as their respective conflict of law rules with regard to
such property laws. Seeking specialist advice is advisable.
Impact of INCOTERMS on revenue recog-n
• For an entity, which uses INCOTERMS in its business activity, faces them
while recognizing its expenses (e.g. during purchase of material) and
revenues (e.g. during sales of products). when closing its accounting books
an entity must not forget the principle of prudence, which states that
while compiling the annual financial statements an entity should include
into them not only the incomes that were achieved, but it should also take
into account any foreseeable risks and possible losses relating to such
recognized incomes and about which an entity knew at the date of
compilation of its financial statements.
Example: On December 31, 2015 an entity withdrew its goods from
warehouse and passed them the carrier. Delivery to the customer takes 3
days.
o Goods are supplied at condition FCA (Free Carrier). In this case an
entity (seller) carries risks associated with the delivery only until the
moment it passes them to the carriers, which is about take place on
December 31, 2015. In practice this means that on the basis of the
certified document from the carrier an entity can recognize revenue
from this sale even though the customer will receive the goods after
December 31. Naturally in context of this business operation on
December 31 an entity also will derecognize the goods sold.
o Goods are supplied at condition DAP (Delivered At Place). At this
condition a seller pays all fees connected with delivery, that is,
transport, duties, insurance etc. up to the point where delivery is made
available for customer at transportation vehicle sent by the customer.
In practice this means that an entity (seller) carries risks for the supply
in the course of its delivery and any damage occurred due to, for
example, an accident. Therefore an entity should not recognize
revenue from sale in the moment of withdrawal of goods from its
warehouse and passing them to the carrier on December 31, 2015.
Instead the entity will recognize this revenue and derecognize the
goods sold in January 2016. Thus this revenue will be already part of
revenues included into annual financial statements 2016.
• As it can be seen from these examples, while compiling its financial
statements an entity should always take into consideration the impact of
INCOTERMS used in its business operations. However, INCOTERMS should
not be taken too dramatically, but in context of sales contract of which
they are a part.
Impact of INCOTERMS on revenue recog-n
Impact of INC-S on VAT – types of supplies
• Czech Republic, as well as other members of the European Union,
differentiates 2 modes of sale of goods outside its territory: (1) supply of
goods to another member state (aka intercommunity supply); and (2)
export, that is, supply of goods to third countries.
• Intercommunity supply
o System of imports and exports between EU member states functions in
from of intercommunity acquisitions and supplies. Member states
must tax the imported goods with the same VAT rates as their domestic
goods. Exporters exempt their supplies from VAT. VAT should be
calculated and paid by buyers (i.e. importers). VAT is paid in the state of
final consumption (destination VAT model). Exports and imports of
goods for personal consumption are not exempted from VAT.
o Domestic exporters have right to reimburse (refund) VAT paid, but only
in situation when such goods were purchased for the performance of
their economic activities in another EU member state and if in that
state entities-exporters are not registered as VAT payers, they do not
have branches or head offices and do not carry out their business
activities. On the same conditions, foreign entities, registered as VAT
payers in other member states, have a right to refund VAT paid in the
Czech Republic.
Impact of INC-S on VAT – types of supplies
o Cases of intercommunity supply:
 Domestic supplier is VAT payer in CZ and foreign customer is VAT
payer in another member state. Domestic supplier exempts its
supply from VAT by means of documentary confirmation that the
goods supplied have left CZ. On the issued tax document the
domestic supplier does not write either VAT rate or VAT amount,
but writes down a reference to VAT exemption, such as, for
example, Directive 2006/112/EC. Foreign customer will recognize
and pay VAT in its home country (where it is registered as VAT
payer).
 Domestic supplier is VAT payer in CZ and foreign customer is not
VAT payer in any other member state (or it is the so-called person
without obligation to register for VAT, that is, citizen purchasing
goods for personal consumption). In this case, Czech supplier
should indicate Czech VAT on the tax documents which it issues to
the customer. This transaction is counted as domestic supply but
not as intercommunity one.
 Domestic supplier is not VAT payer in CZ and foreign customer is
VAT payer or is not VAT payer in another member state. Since Czech
supplier is not registered for VAT this transaction is not subject to
Impact of INC-S on VAT – types of supplies
VAT in CZ.
 Domestic supplier is VAT payer and it supplies its goods to another
member state for foreign customer, which is not registered as VAT
payer in this particular state (to which the goods are supplied), but
it is registered as VAT payer in other member state. In this situation
Czech supplier needs to register as VAT payer in the state to which it
supplies but only if the value of such supply exceeds certain defined
threshold. Such threshold is given by the aggregate value of all
goods supplied during one calendar year. if the threshold is not
reached, than such supply is exempted from VAT with right to
recovery through procedure called “reverse charge”.
• Export/import
o Export –
 stands for supply of goods to third countries, that is, to nonmember
states of the EU. It is different regime therefore its VAT
treatment is also different. Exports are exempt from VAT but only
under certain conditions: exemption is granted to supplies of goods
carried out by VAT payer in CZ which is may be a seller or its agent,
or a buyer but only with condition that such buyer does not have
legal address in CZ or does not carry out its business activities in CZ.
Impact of INC-S on VAT – types of supplies
export is considered as exempted supply with right to recovery
input VAT regardless of regardless whether the recipient (buyer) is
registered to VAT or not in its home country. Transaction is subject
to VAT in the country of buyer. Exporter is entitled to exemption on
the basis of customs declaration.
 During export there are charged export duties and export charges
Note: export duties and other charges and taxes are calculated on
the basis of supply’s customs value. Usually this is the so-called
transaction value, i.e. price indicated on supplier’s invoice.
 Note: as exports there are recognized deliveries of goods to free
zones or free warehouses within the territory of CZ. This is evidenced
by submission of export SAD or decision on the location of goods in
a free warehouse or zone.
o Import –
 is charged with import duties, import charges, VAT, excise duties
and other indirect taxes. Note: the basis for calculation of VAT is
generally everything that supplier has received as consideration in
the underlying chargeable event, including the amount of excise
duties import duties, other taxes or fees, subsidies to the price and
incidental expenditures.
Impact of INC-S on VAT – time of supply
• Date of chargeable event
o Date of accounting recognition = date of taxable recognition, that is,
date of chargeable event. For the sale of goods in terms of accounting
recognition is not important where the goods are supplied to domestic
customers or abroad. It is recognized just as a sale of goods, both in the
case of domestic and foreign or EU supply. Note: a small difference can
occur in the way how an entity distinguishes such sales from the
territorial aspect and records such sales on its analytical accounts (i.e.
domestic sales, EU sales, exports). In the same way an entity may
differentiate its trade liabilities.
o Date of accounting recognition ≠ date of taxable recognition, that is,
date of chargeable event. VAT payer has to recognize output VAT on
the date of the chargeable event and on the date of adoption of
consideration transferred (payment received). In practice it means,
that purchase of the goods with the date of chargeable event May 31,
2015 for which the tax document was received on June 2, 2015, such
purchase will be recognized and accounted for (i.e. payment for
delivery including recognition of VAT liability) on May 31, while the
right to recover will arise only on June 2, that is, on the date when
buyer receives tax document. The same situation occurs when buyer
Impact of INC-S on VAT – time of supply
pays advance on May 31, 2015 for which seller issues immediately
confirmation of advance received. In this case seller needs to recognize
VAT receivable in May. Goods are delivered on June 2, 2015 - on that
day buyer issues an invoice and recognizes revenue on that day.
In the context of difference between date of accounting recognition and
date of chargeable event in context of VAT there is arises problem conversion
of foreign currency into CZK. Exchange rate for accounting
treatment will be different from the rate used when VAT receivable or
payable is recognized, because on the tax document there is written
statistical value of goods and for conversion of this value into CZK there
was used special customs rate (i.e. rate recorded on the last Wednesday of
each calendar month is used throughout the following calendar month.
Current customs rates can be found on the website of the customs
administration). If an entity for conversion of its trade liabilities in foreign
currency uses the daily rate of CNB, it will use it for estimation of VAT
receivables from its imports and intercommunity acquisitions. The
accounting and tax price in CZK will probably be different if taxable event
does not occur on the same date. On the contrary, if an entity uses fixed
exchange rate the accounting and tax price will be the same (of course, if
this transaction occurs within the period for which such rate is valid).
Impact of INC-S on VAT – place of supply
Note: question of exchange rate difference while correct determination of
VAT receivable makes sense only in case of imports or the acquisition of
goods from another member state. Exports and supplies of goods to
member states are exempted from VAT that is why such question does not
arise here. However if an entity issues an invoice in foreign currency, it
should use appropriate exchange rate (daily or fixed) from CNB.
• Place of chargeable event - determination of correct place of chargeable
event influences the way how the whole business transaction is assessed
in the light of VAT - whether it is subject to tax or it is an event with place
of charge in other member state or in the third country.
Importance of place of chargeable event is crucial for determination of the
law by to which VAT recognition will be managed by. In the following cases
we will distinguish whether the goods are supplied: (1) without
transportation; (2) with transportation; (3) with transportation, assembly
and installation.
o Goods are delivered without transportation: place of chargeable event
is the place where goods are located at the time when supply takes
place. Typical example is EXW term. Seller passes its goods in its plant
in CZ, which is the place of chargeable event. This such supply will be
regulated by Czech law. Next step is to decide whether goods are
Impact of INC-S on VAT – place of supply
intended for CZ or abroad, if abroad, then if within EU (intercommunity
supply) or outside of it (export). If goods are intended for abroad
(regardless if it is within EU or outside of it), such supply can be
exempted from VAT, but only with condition of submission by supplier
of confirmation that goods left the territory of CZ (i.e. there was real
export but not supply to domestic buyer).
o Goods are delivered with transportation organized by supplier or
buyer: place of chargeable event is the place where goods are located
at the time when transportation starts. If transportation starts in CZ
and the goods are transported to Ukraine, then place of chargeable
event is CZ. But if Czech exporter proves that its goods have left the
territory of CZ and EU, then it can be exempted from VAT. Another
example is when Czech entity supplies goods to Russian buyer, which is
registered for VAT in Poland, but goods supplied should be transported
to the Slovak Republic (not to Poland, where Russian buyer has its VAT
registration). Russian firm that is registered for VAT in Poland (not in
Slovakia, where it is going goods). Place of chargeable event is CZ,
because it is a starting point of transportation route of supply. That is
why it is necessary to apply Czech law to this supply. In this context it is
important to take into consideration the destination point of supply,
Impact of INC-S on VAT – place of supply
not the place where buyer has its legal address and VAT registration. In
our case it is intercommunity supply to Slovakia. Next step is to decide
if buyer has VAT registration in some EU member state. Russian entity
has VAT registration in Poland, thus this condition is fulfilled. So this is
the case when Czech supplier, VAT payer, supplies its goods to another
member state for foreign customer, which is not registered as VAT
payer in this particular state (to which the goods are supplied), but it is
registered as VAT payer in other member state. In this situation Czech
supplier needs to register as VAT payer in the state to which it supplies
but only if the value of such supply exceeds certain defined threshold.
Such threshold is given by the aggregate value of all goods supplied
during one calendar year. If the threshold is not reached, than such
supply is exempted from VAT with right to recovery.
o Goods are delivered with transportation, assembly and installation:
place of chargeable event is the place where assembly and installation
takes place.
Comments to individual terms:
o Under EXW term buyer has no obligation in regard of supplier to
provide it additional information, for example, information
Impact of INC-S on VAT – place of supply
(confirmation) that goods have left the territory of CZ. Thus supplier
may get into trouble with confirmation of evidence (i.e. that goods left
the territory of CZ and/or EU). Supplier may have a signed delivery
note, but if place of chargeable event is CZ than such note cannot be
used as a means of proof. Therefore in case of EXW term it is better to
state in the sales contract that buyer will provide supplier with written
declaration that goods have been shipped to another EU member state
or abroad.
In accounting system of supplier under EXW there will be no
transportation and insurance expenses. Supplier has only invoice
issued. The problem occurs when supplier does not know in advance
whether goods supplied will be exempted from VAT as intercommunity
supply or as export, because it does not have documents proving that
goods have left territory of CZ and/or EU. If invoice is issued before the
actual time when goods cross the borders of CZ and/or EU, for supplier
it is appropriate to recognize such supply as domestic transactions,
that is, charge VAT on output. If supplier sends to the buyer its invoice
on the basis of buyer’s confirmation that goods have left the territory
of CZ, then supplier can exempt its supply immediately.
Impact of INC-S on VAT – place of supply
o Under terms from group "F" it is easier for supplier to confirm the fact
that goods have left the territory of CZ and/or EU. In the case of FOB
and FAS supplier transports goods to the port of loading. In this way
supplier has confirmation that goods have left the territory of CZ
because it itself insures its transportation. In case of FCA term, the
situation is a bit more complicated because in this case transportation
is insured by buyer. That is why when under FCA supplier makes goods
available in its plant, it is possible to observe analogy with EXW term.
Thus supplier finds itself in confirmation trouble and its solution is the
same as in case of EXW.
o Under terms from group "C" buyer arranges transport contract up to
defined place of destination. Therefore supplier receives
transportation contract as necessary confirmation on the basis of
which goods so may exempt from VAT as intercommunity supply or
export.
o Under terms from group "D" supplier is responsible for complete
transportation and, if necessary, assembly and installation. Thus
supplier will have all the necessary documents on the basis of which
goods so may exempt from VAT as intercommunity supply or export.
References
• CAPELA J. John (2008). Import/Export For Dummies. Wiley Publishing, Inc.
ISBN: 978-0-470-26094-4.
• edited by O’CONNOR Emily (2013). INCOTERMS 2010 Q&A. International
Chamber of Commerce, France (Paris). ISBN 978-92-842-0197-6.
• JANOUŠKOVÁ, Michala (2011). Bakalařská práce “Vztah dodacích
podmínek INCOTERMS 2010 a daně z přidané hodnoty”. Právnická fakulta
Masarykovy univerzity, Katedra mezinárodního a evropského práva.