Introduction to Incoterms and their impact on indirect tax

Incoterms are a set of internationally recognised definitions and rules of interpretation that cover most common commercial scenarios used in contracts for the sale of goods. They are three-letter trade terms describing the practical arrangements for the delivery of goods from sellers to buyers and set out the obligations, costs and risks between the two parties. They are produced by the International Chamber of Commerce (ICC) and updated periodically to reflect changing trade practices.

Incoterms set out:

• where the goods will be delivered
• who is responsible for arranging transport
• who handles and pays for insurance
• who handles customs procedures and is the importer of record
• who pays any customs duties and import VAT

The latest version of incoterms, “Incoterms 2020”, came into effect on  January 1, 2020. This new version is similar to the previous one (“Incoterms 2010”) but updates the rules to make them easier to use. There are 11 incoterms in Incoterms 2020, with several that can be used for any mode of transport and specific ones for sea and inland waterway transport.

1. Ex Works (EXW)
   The seller makes the goods available at the seller's location (e.g., at the warehouse gates), so the buyer can take over all the transportation costs and also bears the risks of bringing the goods to their final destination. It is possible that purchasing and selling EXW could trigger a VAT/GST registration requirement depending on the local country rules. In the EU, following the “Quick Fixes” on intra-community supplies of goods, selling EX-W can lead to additional and onerous requirements on substantiating exemption / zero-rating on cross-border sales.
2. Free Carrier (FCA)
   The seller is responsible for delivery of goods to a named carrier at a named place of delivery. Responsibility for cost and risk then passes to the buyer.
3. Carrier and Insurance Paid to (CIP)
   The seller pays for the carriage and insurance to the named overseas destination point, but risk passes when the goods are handed over to the first carrier.
4. Carriage Paid To (CPT)
   The seller is responsible for delivering the goods to the carrier or another person nominated by the seller at an agreed place (if any such place is agreed between parties) and that the seller must contract for and pay the costs of carriage necessary to bring the goods to the named place of destination.
5. Delivered at Place (DAP)
   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.
6. Delivered at Place Unloaded (DPU)
   The exporter arranges carriage and delivery of the goods, ready for unloading at the named place. The seller is required to unload the goods at this destination. After the goods’ arrival, the customs clearance in the importing country needs to be completed by the buyer at his own cost and risk, including payment of all customs duties and taxes.
7. Delivered Duty Paid (DDP)
   The seller is responsible for delivering the goods to the named place in the country of the buyer, and pays all costs in bringing the goods to the destination. Under this Incoterm, the seller acts as the importer of record and is responsible for clearing customs and paying any customs duties and import VAT. Generally a DDP delivery will require a local VAT registration in the country where the goods are cleared.

1. Free Alongside Ship (FAS)
   The seller must place the goods alongside the ship at the named port (e.g. FAS Dover). The risk of loss or damage to the goods passes when the goods are alongside the ship, and the buyer bears all the costs from that moment on.
2. Free on Board (FOB)
   The seller is responsible for all costs involved in the process up until the goods are loaded onto a vessel at the named port (e.g. FOB Rotterdam). Once goods have been loaded, the buyer is responsible for any costs and risks involved in the onward shipment.
3. Cost and Freight (CFR)
   The seller must pay the costs and freight to bring the goods to the overseas port of destination. The buyer pays costs and takes the risk from then on.
4. Cost, Insurance and Freight (CIF)
   This is the same as CFR. However, in addition the seller must also obtain and pay for the insurance.

While Incoterms are generally only indicative for VAT purposes, DDP is a red flag from an indirect tax perspective and will generally always result in Import VAT being paid by the seller as they will be acting as the importer of record. The onward sale could trigger a mandatory VAT registration requirement. In addition, in some countries a VAT registration number is required in order to act as an importer and account for Import VAT under the reverse charge, for example France.  EX-W can also increase the risk of local VAT being incurred and more onerous documentation requirements in order to substantiate an exemption or zero-rating for exports.

DDP transactions will also require the seller to consider complex Customs implications, including:

• classification of the goods
• valuation of the goods
• evidencing origin of the goods
• completing customs declarations
• paying customs duties
• appointing a customs agent
• obtaining an EORI number

• effects of sanctions 
• imposition of tariffs
• export or import prohibitions
• force majeure or hardship
• intellectual property rights
• method, venue, or law of dispute resolution in case of such breach
• transfer of property/title/ownership of the goods sold
• whether prices are inclusive or exclusive of VAT

The above should therefore be considered, reviewed closely and specifically covered in the contract.

• quotations
• purchase orders
• order acknowledgements
• commercial invoices
• tax invoices (in some countries) and intrastat reporting (European Union)
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