Thursday, June 21, 2012

Delivery terms versus title transfer

In a post I had another individual tell me that under Ex-Works delivery terms that you would be subject to things like local fees and taxes such as VAT. He recommended using FAS or FCA. Barring anything else in the agreement he would have been right about ex-works. FAS would not automatically avoid those costs as the buyer takes possession of the goods prior to export clearance so technically a sale occurring within that country. FCA should avoid those costs as the seller has the responsibility for export clearance with FCA and usually once something has cleared customs it is treated as an international sale.

Tax and fees are based on the location of sale. INCOTERMS only deals with shipping responsibilities, payments of costs and duties and when the risk of loss transfers. They do not establish where the title transfers, and that can be a completely different location than where you take delivery responsibility and risk of loss. It is the point at which title transfers that creates the sale. The sale is then subject to taxes and fees.

You don’t need to have title to an item to export an item. In fact a supplier may want to retain title until payment is made. This means that if you used EX-Works, if you wanted to avoid those taxes and fees, you would want to specify that title transfer occurs after export customs clearance or even while the item is in transit in "international waters". That makes it an international sale and avoids paying VAT and local country fees that are applied to local sales.

Having the title transfer in a different location is common when you buy an item from a supplier in one country and want to sell it to a customer in another country without actually receiving the item. In that case you don’t want to buy it and take delivery and sell it from the supplier’s country, as you would then be conducting business in that country. If you conduct business there you would need to have a license to operate there. It would make you subject to the laws and taxes of that country. You don’t want to take delivery of it in the customer’s country for exactly the same reasons. There are three options on where you would want to take title.
1. You could take title after customs clearance in the supplier’s country location.
2. You could have title pass on the high seas.
3. You could also have title pass prior to the customs frontier at the port of import such as in a bonded warehouse prior to customs clearance.

You could do a simultaneously sale and transfer of title where the supplier transfers title to you and you transfer title to the customer at any of those locations. You could also acquire title at one location and transfer it at a different location. The main concern of either the Supplier or Customer is to ensure that their risks are covered contractually and with insurance. For example, when you agree to Ex-Works delivery terms you have assume the risk of loss or damage in transit. As further protection the Supplier may want you to also insure the goods for loss. The customer may be concerned with taking title and risk of loss with a delivery term that shifts the risk of loss to them while the item is in-transit, but that can be overcome by insuring the shipment, usually at 110% of the value.

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