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.
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.
