Importance of incoterms on commercial invoices

With Madam Ngozi Okonjo–Iweala shoo at the helm of the World Trade Organisation (WTO), we look forward to the renewal of multilateralism and creation of a resilient rules based trading system that will restore the WTO to its former glory.

The WTO remains the apex body of rules based trade that contributes immensely to good trade governess. The 164 members are bound by the rules. Disputes that arise are handled by the WTO Dispute Settlement Appellate Body.

The AfCFTA gleaned a lot from the WTO and there a lot of similarities between the two agreements. Comparing the AfCFTA Protocol of Trade on Goods with WTO Agreement on Goods , all except Annex 5 have similarities. The AfCFTA will use the WTO Customs Valuation Agreement.

Years back Zimbabwe was signatory to the Brussels Definition of Value (BDV) premised on normal market price of the goods in that transaction.

In the BDV method it was crucial to identify the Free On Board point so as to determine the dutiable charges that will form part of the value on which ad valorem customs duties would be charged. These charges were associated with costs associated with goods, incurred before placing the goods on board on the means of transport for export.

The obligations of the seller were discharged once the goods were placed on board on the means of transport for export. The risk to the goods was immediately transferred to the buyer.

There were a lot of problems with the BDV method of valuation. It is in the early nineties that Zimbabwe became signatory to the General Agreement of Trade Tariffs under the WTO. Under the WTO Customs Valuation, the value of the goods is determined through an option of five methods of valuation depending on the type of transaction between the buyer and the seller. The method is largely influenced by the price paid or payable.

Under the BDV duty was collected based on the FOB, however, under the WTO Customs Valuation, duty is collected on the total cost of insurance and freight including any incidental costs accrued and associated with the movement of goods up to the border.

When conducting trade involving movement of goods it is important to establish the terms of the transaction be it at domestic or at international levels. This is very important to ascertain the implications of the of risks, delivery of goods, responsibilities the charges that will arise towards the seller, exporter, buyer or importer as determined by the terms of the transaction especially in the context of international or regional trade.

The International Chamber of Commerce in 1936 came up with the internationally recognised rules and standards that regulate the sale, trading terms and movement of goods across borders known as International Commercial Terms (incoterms). These rules are continuously revised to reflect the ever changing trade landscape.

The incoterms 2020 have been arranged into two categories that reflect the modes of transport. The first seven rules cover any mode of transport, while the other four specifically cover sea or land including inland waterway transport.

These rules assist to regulate the trading terms of the contract between buyer and seller. Incoterms are agreed upon after the buyer and the seller have agreed on the quantity and quality of the goods, the currency to be used and method of payment, documentation and the mode of transport. The incoterms assist to streamline the obligations arising to the seller and the buyer at particular stages so that there is no confusion on responsibilities and the point of transfer of risks within the chain.

It is important to know what incoterms cover and what they do not cover. The incoterms do not specify the documents to facilitate the customs clearance; it is the responsibility of the exporter or importer to liaise with the authorised economic operator who should be able to advise competently. The incoterms do not address the issues of wrongly supplied goods or the delayed delivery of goods. Understanding the incoterms of the invoice helps exporters to identify what needs to be done in terms of customs formalities such as duties and documents to be produced way ahead before the cargo is moved.

Incoterms 2020 rules are relatively easier to understand in comparison to incoterms that have been used in the past. Incoterms 2020 comprises of 11 rules that have been graphically illustrated with detailed explanatory notes. In incoterms 2020 traders are more informed on how to select an incoterm rule that will complement the sales contract and other obligations emanating from the transaction.

Traders can use any incoterms other than the 2020 version as long as the parties agree and both correctly identify the incoterms being applied for that particular transaction. This is usually distinguished by the year of that version, for example, incoterm 2010 and the location, for example CIF Beitbridge.

The importance of full comprehension of incoterms rule cannot be over emphasised because of the serious legal implications that can ensue due to misinterpreting the incoterms. Customs declarations demand amongst other data, the correct incoterms as these will determine the value on which the calculation of duty will be based otherwise known as Value for Duty Purposes. A wrong interpretation of an incoterm may prejudice the fiscus with further legal ramifications on the importer or exporter.

The number of incoterm rules may appear intimidating however, traders need to know that have an overview appreciation of these rules. Choosing a competent authorised economic operator to handle such issues becomes very important. Some countries are now insisting on authorised economic operators that have a trade law back ground to enhance smooth trade facilitation through correct knowledge of incoterms.

Trade incoterms lend transparency and predictability to the trade system. These are important attributes of good trade governess. These rules are dynamic so as to remain in sync with the ever changing trade environment.

Studies by WTO have revealed that there are few MSMEs that participate in international trade. Trade at international level becomes more complex and most MSMEs lack the capacity to engage authorised economic operators that may unpack the incoterms for them. Women are overly represented in the informal sector as well MSMEs. The WTO has embarked on ensuring that barriers to international trade that affect MSMEs are addressed. This is one of the urgent tasks among a host of other challenges that the incoming WTO director-general will ensure that it is carried forward. -herald.cl.zw