Friday, March 11, 2011

Importer of Record


If you purchase things internationally for resale to customers one of the issues that may arise is who will be the Importer of record? Most customs organizations require that the “Importer of Record” be the “Owner or Purchaser of the Goods”. This means that for the Supplier to be the importer of record they would need to own the goods at the time of import.  If you are purchasing from a Supplier subsidiary, it means that the Subsidiary owns the goods at the time of Import.

Most Suppliers would be reluctant to be the importer of record in a foreign location. The reason for that is if they do the import, when they sell the product to either their local subsidiary or Buyer that becomes a local sale.  To do a local sale:
  1. The Supplier must be legally registered to do business in that country and have an entity in that country.
  2. The Supplier becomes subject to the laws of that country as they are operating within its borders,
  3. The Supplier will be taxed on the profit made on that sale in the import country at the import country's tax rate. 
  4. The Supplier may be required to conduct the sale using local currency subjecting them to currency exchange risks
  5. The Supplier has to manage the repatriation of their profit from the Country
Having a supplier sell in a different country can significantly impact their profit and risks.

To avoid the impact of all these potential costs and risks Suppliers will sell into other countries three different ways;
  1. They will sell through an established subsidiary where they sell the Product to the subsidiary at “transfer price” (the standard price they sell to all subsidiaries) and the Subsidiary will be responsible for import and be the importer of record.
  2. If they don’t have an established subsidiary they may sell through a third party distributor. The distributor will purchase the product at a discount off the Supplier’s list price or at a target price specified by the Supplier. The distributor will then be responsible for the import and be the importer of record as they are owner of the product,
  3. The Supplier may sell direct to the Customer and the delivery terms or point where title is transferred will have the transfer occur outside the country and the Customer is responsible for the import.

If the Supplier won’t sell in a manner that makes them responsible for import (and most won’t) and they don’t have a local subsidiary that you could buy from, the decision comes down to whether you purchase it from their Distributor or buy it from the Supplier and manage the import yourself.  There are a number of factors that you would need to take into account. 

First and foremost is who is getting the better deal from the Supplier in the first place? If you buy from a Distributor, two things will impact the price charged. The margin the Supplier provides them in terms of their purchase discount and the margin the Distributor needs or wants to make from the sale.

The second issue with Buying through a local distributor is that the distributor may see your purchases as direct competition to their sales, which can make the relationship tenuous. Further, by placing your business through them, they become a potential larger competitor in that market as the more business they generate the higher the discounts they will get which can make competing with them more difficult.

The third issue is contract related. Once you purchase through a distributor, your purchases no longer have privity of contract with the Supplier. This means that unless you get the Supplier to agree that for all purchases through those channels, you can enforce the terms of your agreement directly with them, all the terms of your contract would not apply and the only company you can legally look to in the event of a problem is the Distributor.

Asking the Customer to be the importer of record, reduces the value added you provide and may cause them to look for another supplier which also isn’t good as many times product purchases frequently generate service revenues for the seller and losing the sale can cut off that annuity stream.

What’s the best solution?  If the Supplier or Supplier subsidiary will sell locally that’s best. If a distributor has a better deal than you, they may be viable. If not it will only add additional cost and complications to the relationship and you’d probably be better off managing the import directly or having the customer manage the import.

The issue of Importer of Record is frequently an issue when companies want their Suppliers to have stocking hubs close to their point of use. A common solution to that is having the Supplier either establish a hub or use a third party hub in a free trade zone where title transfers at the hub and the Buyer is responsible for import.  Sales that occur in free trade zones are not local sales as the Buyer takes title before import. 

2 comments:

  1. could IOR help save import duty?

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  2. The answer to your question will depend upon where the supplier wants to take the majority of their profit. If they want to have the profit occur in the country of import, the import duty would be based upon their internal transfer price between subsidiaries, not the purchase price. So the amount of duty that will be collected will be based on the transfer price which is less than the sales price so the duty would be less.

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