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Use of INCOTERMS in Valuation

Stephen Otieno

Use of INCOTERMS in Valuation

  1. The term “Incoterms” is an acronym meaning International Commercial Terms. 
  2. It is a trademark owned by the International Chamber of Commerce (ICC) and registered in several countries. 
  3. There are eleven incoterms which are updated from time to time. The latest version is the Incoterm®2020.
  4. The incoterms rules are universally accepted and understood by all traders across the globe. 
  5. When conducting Customs valuation, Incoterms are very important in disclosing optional adjustments under Article 8.2 of the Agreement. 
  6. The Incoterms 2020 are categorised into:
    1. Rules for any mode or modes of transport 
    2. Rules for sea and inland waterway transport

  1. (i) Rules for any mode or modes of transport 

    EXW: Ex Works

    • Under EXW the seller places goods at the disposal of the buyer at the seller’s premises or any other. Here the seller is not obligated to ship the goods on behalf of the seller for export even if there is need to do so.

    FCA: Free Carrier

    • The supplier or seller delivers goods to the carrier or any other nominated person at the seller’s premises or another appointed place. The parties are advised to state the place of delivery very clearly as it is at this appointed place that risk passes from the buyer to the seller.

    CPT: Carriage Paid to

    • The seller delivers to the carrier or another nominated by the seller at an agreed place. The seller pays for the carriage costs to bring the goods to the place of destination

  1. CIP: Carriage and Insurance Paid to

    • The seller has the same responsibilities as CPT however in addition he /she procures for insurance to cover the goods against risk of loss and damages during carriage. The buyer should note that under CIP the seller is required to obtain insurance only on minimum cover. 

    DAP: Delivered at place

    • The seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination. The seller bears all risks involved in bringing the goods to the named place.

  1. DPU: Delivered at Place Unloaded 

    • DPU replaces the former Incoterm® DAT (Delivered At Terminal).  The seller delivers when the goods, once unloaded are placed at the disposal of the buyer at a named place of destination. The seller bears all risks involved in bringing the goods to, and unloading them at the named place of destination.

    DDP: Delivered Duty Paid

    • The seller delivers the goods when the goods are placed at the disposal of the buyer, cleared for import on the arriving means of transport ready for unloading at the named place of destination. The seller bears all the costs and risks involved in bringing the goods to the place of destination. They must clear the products not only for export but also for import, to pay any duty for both export and import and to carry out all customs formalities.

  1. (ii) Rules for sea and inland waterway transport

    FAS: Free Alongside Ship

    • The seller is considered to have delivered the goods when they are placed alongside a vessel nominated by the buyer at a port of shipment. The risk of loss or damage including all other costs passes to the buyer immediately the goods are placed alongside.

    FOB: Free on Board

    • The seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the products are on board the vessel. The buyer bears all costs from that moment onwards.

  1. CIF: Cost Insurance and Freight

    • The seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes when the products are on the ship. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination. The seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. The buyer should note that under CIF the seller is required to obtain insurance only on minimum cover. Should the buyer wish to have more insurance protection, it will need either to agree as much expressly with the seller or to make its own extra insurance arrangements.

    CFR: Cost and Freight

    • The seller delivers the goods on board the vessel or procures the goods already so delivered. The risk of loss of or damage to the goods passes to the buyer when the products are on board the vessel. The seller must contract for and pay the costs and freight necessary to bring the goods to the named port of destination.

     

Learning Activities

  1. Case Study 1

    • Keja of Country I imported 15,000 iron sheets from Dom Roofing of Country X at $30 per /sheet (Total payment was $450,000.). Customs had doubts regarding the value declared and requested Keja to provide supporting documents. According to the documents, it was found out that Keja supplied Dom Roofing a mould valued at $125,000 which can produce 25,000 iron sheets, besides the direct payment to Dom Roofing. After analyzing the documents provided by Keja, Customs found that:
      • Keja supplied to Dom Roofing a mould through a Mould Supplier, valued at $125,000, which can produce 25,000 sheets.
      • Keja imported 15,000 sheets from Dom Roofing.
      • Sales Contract between Keja and Dom Roofing indicates that the iron sheets are supplied at $ 30 per sheet, thus the total payment to Dom Roofing is $450,000 for 15,000 iron sheets.
      • Dom Roofings manufactures Iron sheet products using the mould provided by Keja free of charge.

  1. Required:

    State whether the value of the mould supplied free of charge by Keja to Dom Roofing is part of the Customs Value by supporting with relevant Articles and legislation.

Learning Activities

  1. Case Study 2

    • ICO in Country I imported televisions from XCO in Country X and paid license fees separately to XCO. Shall the license fees be included in Customs value?
    • ICO declared invoice price of $150,000 for the Televisions. Customs requested the contract of sale from ICO. The sales contract concluded between ICO and XCO showed that ICO must pay 3% of contract price as royalty and license fees to XCO before the shipment of goods. Two separate invoices were issued to ICO, one for the contract price, another for royalty and license fees. There is no relationship between ICO and XCO in the meaning of Article 15.4 of the Agreement. The importer challenged the inclusion of the second invoice on royalties and licence fees as part of PAPP.

    Required:

    • Advice the importer based on provisions of the WTO-ACV and the EACCMA 2004 Fourth schedule

Assignment

  1. Question One

    Review the conditions for use of the transaction value method and provide insights to the following scenario.

    • Employee I purchased a used motor vehicle in Country X then shipped to Country Z. XCO in Country X decided to sell used motor vehicles which were more than 5 years old to the company’s employees at low prices as payment of some part of their salary. The employee I of XCO is one of the buyers of the used motor vehicle who later moved to country Z with the Motor vehicle. At the time of verification by Customs in country Z, it was found that XCO sold used motor vehicles to its employees at a low price as part payment of their salary (but the value of the salary was not found). 

      Required:

      Is the purchase considered as subject for condition to determine the Customs value in the country of importation?

    • Question Two

      KMP Ltd imported 5,000 units of product X at the cost USD 25/Unit. It was agreed that the goods were to be picked by the importers agent from the Manufacturer premises. He then transported the goods to the port of exportation.

      Additional information: –

      • Cost of transport to the port of exportation $350.00
      • The agent charged both the supplier and the importer 10% as his fees. The supplier paid him on collection but did not include the amount on the invoice.
        • The freight was $2,500 while handling charges were @200
        • There was no insurance debit note thus insurance was estimated at an agreed rate of 1.5% of C&F
        • 20% of the product were supplied under license at a cost of 2% of the cost of the goods.

        Required:

        1. Identify and explain the terms of delivery (INCOTERM) used in this Transaction. 
        2. Calculate the Customs Value. 

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