Incoterms® (2020) – The hidden champions of efficiency Your guide to improving business performance across the entire value and supply chain Investing in Germany | A guide for Chinese businesses
02 Incoterms® (2020) – The hidden champions of efficiency | Your guide to improving business performance across the entire value and supply chain
Abstract 04
1. Introduction to Incoterms® rules 06 1.1 What are Incoterms® rules 06 1.2 Naming Convention 06 1.3 Cluster Methods 08
2. Incoterms® Example/Use Case: CPT Trieste Shanghai 10
3. Power of the Hidden Champions 14 3.1 Legal 14 3.2 Financial Considerations from a Restructuring Perspective 15 3.3 Tax 16 3.4 Global Trade Advisory – Import, Export and Export Controls 21 3.5 Accounting 24 3.6 Strategy – Considerations for Procurement and Sales of Goods 26 3.7 Process Reflection in Software 27
4. Changes 2020: What are the Threats and Opportunities? 31 4.1 Overall Changes 31 4.2 Transport Document in FCA and its Impacts 32 4.3 Urge to use Named Place(s) Incoterms® 34 4.4 New Incoterms® rule: DAT becomes DPU 34 4.5 Security Clearance 35 4.6 Insurance 35 4.7 Own Means of Transport 35
5. How to Approach 36
6. Graphic: Incoterms® 2020 37
Conclusion 40
Authors & Contact 42
03 Investing in Germany | A guide for Chinese businesses
Abstract
Incoterms® rules 1, short for International Commercial Terms, have had a major impact on world trade for more than 80 years.
They influence all business aspects from sourcing to sales, from legal to finance, from business operations to corporate strategy, to software algorithms. Despite the fact that many enterprises already interact closely with Incoterms® rules in their day-to-day business, their power is often underestimated.
The Incoterms® 2020 update was released on September 10, 2019. It is not surprising that Incoterms® rules were changed after nearly 10 years, as has regularly been the case since the 1980s, but in this case as well, it is up to the stakeholders to analyze and adapt to those changes.1
Jointly authored with specialists from a variety of functional perspectives, Deloitte intends to provide its professional view on the key opportunities and threats arising from the Incoterms® 2020 update. A high-level analysis will be presented in this Point of View (PoV) after outlining the conventional wisdom on the vast impact area of Incoterms® rules in the introduction.
1 Incoterms ® and the Incoterms® 2020 logo are trademarks of ICC. Use of these trademarks does not imply association with, approval of or sponsorship by ICC unless specifically stated above. The Incoterms® rules are protected by copyright owned by ICC. Further information on the Incoterms® rules may be obtained from the 04 ICC website iccwbo.org. Incoterms® (2020) – The hidden champions of efficiency | Your guide to improving business performance across the entire value and supply chain
Reader’s Guide The Point of View's main focuses are: This PoV is designed to serve Incoterms®- •• their usage in daily business and their Newbies as well as Incoterms® Professionals, challenges across related end to end revealing the key benefits of Incoterms® processes rules for everyone from the Head of Purchasing to the Head of Sales, IT and •• to illustrate mainly the perspective from a Logistics. For experienced readers, the European seller/buyer perspective following chapters will likely be of interest: Chapter 2 Use Case CPT, Chapter 3 Power of •• to highlight the difficulties in correctly the Hidden Champions with the respective reflecting them in software. business area relevant to you, Chapter 6 Graphic. Summarizing chapters are Thus, this document cannot be considered Abstract, Chapter 5 How to Approach and as a finished/full-fledged analysis but Conclusion. should serve the purpose of raising awareness about their Hidden Power of Additional key facts can be found in the Efficiency. footnotes.
The core chapter is “Power of The Hidden Champions” in which we describe the power Abbreviations of Incoterms® rules. The impact analysis FF Freight Forwarder LoC Letter of Credit targets the core processes determined by FCL Full Container Load ERP Enterprise Resource and related to Incoterms® rules, such as: FTL Full Truck Load Planning System logistics, finance, global trade, procurement and sales, accounting, tax, as well as LCL Less Than Container Load CRM Customer Relationship software. LTL Less Than Truck Load Management LSE Loose cargo (airfreight) TMS Transportation Management The main changes in the Incoterms® 2020 CTR Ocean freight container System update are visualized in the diagram in ULD Unit Load Device Airfreight WMS Warehouse Management chapter 6 or briefly explained in chapter 4. Container System ® TEU Twenty Foot Equivalent Inco Incoterms Companies that are aware of the cost- Unit (small ocean freight BGB Bürgerliches Gesetzbuch cutting potential and committed to container) (German Civil Code) adhering to the 2020 changes will be able SO Sales Order LSP Logistics Service Provider to improve processes and save money. BoL, Bill of Lading CIS Commonwealth of B/L Independent States Please note that Incoterms® is a very MBL Master Bill of Lading VGM Verified Gross Mass (of the complex topic and this Point of View is (carrier – freight forwarder) ocean freight container) only able to consider certain aspects while omitting others. Its intention is not to HBL House Bill of Lading (freight focus on the Incoterms® rules themselves. forwarder – seller/buyer) Thus chapters 1 and 2 only provide a brief introduction, for beginners. For more detailed information please refer to the ICC rule book.2
1 Based on ICC information available, Incoterms® rules become “effective” on 1st January 2020. However, some ICC information states that they can be implemented immediately. See details in chapter 3.1. 2 Incoterms® 2020 by the International Chamber of Commerce 05 Investing in Germany | A guide for Chinese businesses
1. Introduction to Incoterms® rules
1.1. What are Incoterms® rules •• Who is responsible for loading/unloading 1.2 Naming Convention “Incoterms®” stands for International the goods, clearing customs, filing When we talk about Incoterms®, it is Commercial Terms. Since 1936, these terms documentation, etc.? often not sufficient to simply consider of trade have been defined and regularly the 3-letter abbreviation, i.e., “EXW” (Ex updated by the International Chamber of •• What is the correct tax determination Works), to understand the situation and Commerce (ICC). Sellers and buyers across logic? manage obligations. There are as many the globe use Incoterms® rules in their as three factors that we need to consider contracts for goods in order to clarify which •• How much to boost a firm’s foreign when negotiating Incoterms® in a sales/ obligations each party has with regard to currency trade? purchasing contract. freight costs, risk and insurance, often with visualizations like Fig. 1. Based on these •• To what extent can we improve cashflow? 01. 3-letter abbreviations three core areas, the terms define various The abbreviation identifies the chosen processes across departments, functions, •• Efficiency in Letter of Credit procedures? trade term for this Incoterms® rule. companies and countries. The following examples will give you an idea of the vast •• The extent of intercompany invoicing 02. Place of Incoterms®-Delivery = range of areas in which Incoterms® rules required within the logistics enterprises? Place of risk transfer (bar in the have a direct or an indirect impact: middle, in blue, in Fig. 1) •• How much additional money a freight Defines the point at which the seller’s •• Who bears the risk when goods are forwarder can earn by acting as a bank risk is transferred to the buyer, e.g., damaged during transport? for customs disbursements? the responsibility for loss or damage of goods.4 (In some Incoterms® •• What freight costs are paid by the seller/ Having provided a rough overview of rules this Named Place has to be buyer? Incoterms®, the next sub-chapter will mentioned explicitly.) The wording provide a basic introduction of their most Place of Incoterms®-Delivery has been •• Is the seller obliged to contract insurance important characteristics. introduced in order to underline that cover against the buyer’s risk? it should not be mixed up with the Place of Delivery in other contexts e.g. •• How many freight forwarders do the relating to invoicing. seller and the buyer have to contract? 03. Place of Incoterms®-Destination = •• At what point is the seller allowed to Place of cost transfer (bar at the recognize revenue based on the “Proof of top, in green, in Fig. 1) Delivery”?3 Defines the place to which it is the seller's obligation to deliver the goods – that is not to be confused with the good’s (Final-)Place of Destination at the order/delivery level, which usually denotes the final physical destination for the goods, e.g., the buyer’s premises. (In many Incoterms® rules this place has to be mentioned explicitly.)
3 Please note “Proof of Delivery” can easily be misinterpreted. There are three types of “Proof of Delivery” relating to the: a) Place of Delivery (risk transfer), b) Location of (Incoterms®) Destination (cost transfer) and c) Proof of Delivery at the Final Destination. It is vital to distinguish between them, as wording and availability in software may vary greatly. Details will follow within this PoV. 06 4 This important Named Place plays a vital role in the area of finance and tax, and will be described further in the following chapters. Incoterms® (2020) – The hidden champions of efficiency | Your guide to improving business performance across the entire value and supply chain
Fig. 1 – Popular way to present Incoterms® 2010 rules (not relating to Deloitte's Graphic in Chapter 6)
e er er escr t on
or s
ree arrier
arriage aid to
I arriage and nsurance aid to
® r es
mo es o tr ns ort elivered at erminal
elivered at lace
elivered uty aid
ree longside hip ote o r to resent Incoterms
ree on oard t conce t se not re t n to e o tte s r c n ter
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Salesman Buyer
Costs Risk Insurance 07 Investing in Germany | A guide for Chinese businesses
Example 1.3 Possible Clustering Criteria for Ease •• With CFR and CIF, it is also clear as their Company XY is located in Frankfurt of Memorizing Point of Delivery is the Port of Load (risk) (Germany) and leases agricultural In the following, some popular methods and their Point of Incoterms®-Delivery machines. In this instance, the company are introduced on how Incoterms® rules (costs) is the Port of Discharge. decides to sell a machine that is physically could be grouped. They don't reflect official located at Client AB’s site in Zagreb clustering but rather serve the purpose of •• With DAP – Delivered at Place, it is not (Croatia) at the moment. The machine is easing memorization of certain aspects. completely clear ‘which place’ is the sold to Company CD, a buyer in Wuhan point at which the goods and risk are (China). 1. Clustering Criteria: Place of Delivery transferred to the buyer. Seller and buyer and Place of Destination have to attach the agreed place to the The pre-carriage entails shipping the All incoterms® rules starting with the letter 3-letter-code, e.g., DAP Houston (buyer’s machine by truck from Zagreb to Trieste "C" indicate that the above-mentioned premises). Port (Italy), the main-carriage is a container places differ. All other incoterms® rules ship to Shanghai Port (China) and the have the same place to transfer risk and •• When using CPT – Carriage Paid To, it is on-carriage is in a truck again, this time costs. not immediately clear at which places the from Shanghai Port to the buyer’s location goods (=Place of Incoterms®–Destination) in Wuhan. 2. Clustering Criteria: Mode of and the risk are transferred (=Place of Transport Delivery). Note: the default position is that A complete naming could be: Group 1 (FOB, FAS, CFR and CIF) may be risk transfer takes place when goods are CPT – Trieste Port – Shanghai Port5 used only for
•• With FOB, it is clear that the Named Place is the Port of Load. The cargo must be delivered and paid by the seller until “(Free) On Board (the vessel)” and from that point on, the risk of loss and damage rests with the buyer. Note: this point in time describes the “Shipped on Board” date which is captured on a (Master) Bill of Lading.6
5 See our Incoterms® 2020 overview graphic in chapter 6. 6 This is an important legal document issued by the carrier (e.g. the shipping line) which gives information such as type, quantity and destination of goods. It serves as a shipment receipt and in addition plays an important role for the letter of credit (see further details in Chapter 4 on FCA 08 and LoC). Furthermore, the original serves as a document of title of goods: whoever possesses the documents owns the goods. Incoterms® (2020) – The hidden champions of efficiency | Your guide to improving business performance across the entire value and supply chain
Fig. 2 – Geographical Supply Chain Seller – Buyer (CPT – Port of Load – Port of Discharge)
e er er ran furt ompany Y uhan ompany es ontr ct rieste ort hanghai ort
n ort
re ustomer ompany re carriage n carriage
r este ort
ain carriage
r este ort lace of ncoterms elivery is er s rem ses n inal lace of estination n ort lace of ncoterms esitnation
09 Investing in Germany | A guide for Chinese businesses
2. Incoterms® Example/ Use Case Having gained a basic understanding of Incoterms®, we now turn our attention to the role of cross-functions and cross-parties using the previous CPT example.
CPT – Trieste Port, vessel – Shanghai The seller and buyer determine the Port, vessel Incoterms® rules in their sales contract. (See Fig. 3) •• Seller = Company XY in Frankfurt, Germany The seller must organize transport and •• Buyer = Company CD in Wuhan, China pay for freight costs until the vessel arrives at Shanghai Port. Once the container is •• Port of Load = Trieste, Italy, vessel loaded on the vessel at Trieste Port7, the •• Goods located at = company XY’s buyer bears the risk for damage or loss of customer in Zagreb, Croatia goods. The buyer must organize transport from Shanghai Port onwards. •• CPT = Carriage Paid To
•• Place of Delivery = Trieste Port
•• Place of Incoterms®-Destination = Fig. 3 – Seller – Buyer relationship (high level) Shanghai Port, vessel ontract level
goods material
e er er
money for goods
7 Depending on the company’s insurance position, it may be worthwhile choosing CIP rather than CPT. However, some import countries do not 10 accept foreign insurance. Incoterms® (2020) – The hidden champions of efficiency | Your guide to improving business performance across the entire value and supply chain
In keeping with their contractual Fig. 4 – Seller & Buyer – Freight Forwarder(s) relationship (high level) obligations, the seller contracts freight ontract level a forwarder 1 (FF) to arrange pre-carriage depending on ncoterms rules or freight for ards could be contracted and main-carriage (pre: up to the port, main: from port to port) and the buyer contracts FF 2 to arrange on-carriage from e er er the unloading port to the final destination. ervice ervice FF 1 does not own trucks or vessels, so organi ing organi ing FF 1 outsources this task to Carrier 1 = transport transport trucker and Carrier 2 = shipping line. In addition, FF 1 manages documents handling, customs export declaration, re t or r er re t or r er potential (security) filings, etc. Carriers 1 and 2 invoice the freight costs to FF 1. FF 1 passes them on to the seller, adding a margin and logistics costs, e.g., for handling customs, filing. etc. FF 2 subcontracts the transport to Carrier 3 and provides additional support with customs administration and potentially Fig. 5 – Freight Forwarder – Carrier relationship (high level) also import clearance (then acting as the ontract level a so-called broker). re t or r er n or
depend on ncoterms rules to other factors
ervice ervice ervice conducting conducting conducting transport transport transport
rr er rr er
truc er truc er rr er
shipping line
11 Investing in Germany | A guide for Chinese businesses
Based on this information, we can already •• Does the seller have to contract answer in part the following introductory insurance cover against the buyer’s risk? questions from chapter 1 for CPT – Trieste ––No (to be agreed on in CIF, CIP). Port – Shanghai Port: •• How many freight forwarders do the •• Who bears the risk if the goods are dama- seller and the buyer contract? ged during transport? ––One by the seller, one by the buyer. ––The seller until Place of Delivery (Trieste Port, vessel) and then the buyer. In order to answer any further questions, we will provide further input in the following •• Which freight costs are paid by the seller/ chapters. Please use the supply chain buyer? location and date table to the right as a ––The seller has to pay for pre-carriage reference for subsequent chapters. and main-carriage until the Place of Incoterms®-Destination (Shanghai Port, The following graphic serves as an vessel), and then the buyer. additional visualization.
Fig. 6 – Supply Chain Seller – Buyer (CPT – Port of Load – Port of Discharge)
re
ood ssue oods leaving the arehouse
re r este ort
ransfer is at lace of elivery vessel
re r este ort n ort
ransfer osts at lace of ncoterms estination vessel
re r este ort n ort n
ood eceipt
12 Incoterms® (2020) – The hidden champions of efficiency | Your guide to improving business performance across the entire value and supply chain
Fig. 7 – Important Supply Chain Places and Dates relevant supply based on example process process impact meaning chain point
Legal Place of Sales •• Place = Frankfurt, Street ABC •• Legal party who holds the liablility of Note: the seller may be located at a (does not have to be the sales, selling party. different place, where the goods are •• Date = date relates to Place exporter) physically stored. of Delivery Date •• e.g. Invoicing
Place of Origin •• Place = Zagreb, Street XYZ •• Goods are collected (i) This point in time can serve as one of the three determinants for 3-way- •• Date = Goods Issue •• Cargo leaves shipper's warehouse match (automated control for revenue recognition)
Place of Delivery •• Place = Port Trieste, on vessel •• Seller is liable up to this point for Risk transfers from seller to buyer damage & loss (i) transfers of ownership •• Date = Shipped on Board time stamp on BoL •• When cargo reaches this agreed (i) earliest point in time for material Named Place invoice issue date (“Proof of Delivery Date 1“ in sense (i) earliest point in time relating to of Place of Delivery) potential adjustments of payment terms
(i) point in time for revenue recognition
(i) potential indicator for transfer of the power to dispose over the goods from the VAT perspective (i) and other
Place of Incoterms®- •• Place = Port Shanghai, on •• Seller to organize transport up to Costs transfer from seller to buyer Destination vessel this point (i) freight cost calculation is determined for pre-,main- and •• Date = ATA (Actual Time of •• ATA time stamp on seller's freight on-carriage Arrival) forwarder's Proof of Delivery (signed BoL, Packing List, Track & Trace time (i) potentially customs disbursement stamp …) costs apply and are relevant for (“Proof of Delivery Date 2“ in sense invoicing from freight forwarder to of Place of Incoterms®-Destination) seller/buyer
(i) potential determination of the transport initiative for the main carriage for VAT purposes (collect or prepaid Incoterms® rules)
Place of Destination •• Place = Wuhan, Street ABC •• Goods are delivered Buyer can make use of goods
•• Date = Goods Receipt •• Cargo arrives in buyer's warehouse/ at final destination (“Proof of Delivery Date 3“ in sense of Place of Final-Destination)
Legal Place of Purchase •• Place = Wuhan, Street ABC •• Legal party who holds the liablility of Buyer can make use of goods. (does not have to be the purchases. Ordering party. •• Date = Goods Purchase Note: The buyer may be located at a importer) •• Various. e.g. Payables Invoice pos- different place from where the goods ting date, payment terms related are stored. payment run date etc.
13 Investing in Germany | A guide for Chinese businesses
3. Power of the Hidden Champions The fact that Incoterms® have such diverse and wide-spread impact areas is what makes them so powerful, whether they explicitly determine processes or have a more indirect influence. In addition to the basics introduced in chapter 1, the goal of this chapter is to give practical insights into their many areas of application.
3.1. Legal in writing or stipulate any other formal cases. If, however, there are issues with Generally speaking, Incoterms® Rules requirement. the sales contract itself, Incoterms® rules are not codified law. The binding set of cannot provide support, as they are only laws for Incoterms® rules at the national Since the Incoterms® rules do not possess part of the contract, not a substitute for the level, e.g. within Germany, is the German the legal status of a statutory provision, sales/purchase contract. Other parameters Civil Code (Bürgerliches Gesetzbuch, or but are rather standard business clauses that Incoterms® rules do not determine BGB) and at the international level is the drawn up privately, the contracting parties need to be defined in a sales contract. For United Nations Convention on Contracts were able to apply these new conditions to instance: for the International Sale of Goods their contractual relations even before the (CISG). Art. 14 CISG and Art. 11 CISG are official entry into force of the last update of •• Information on the time, place and cur- particularly relevant for this paper, the the Incoterms® rules by the ICC on 1 January rency of payment first one referring to the conclusion of a 2020. contract itself, while the latter outlines the •• Potential legal remedies in case of a requirement as to form. In order to apply the Incoterms® rules, breach of contract you must first ensure that you use the In terms of concluding a contract, we correct naming convention (as outlined in •• Effect of sanctions and import/export must consider the following: depending the previous chapter) and specify which prohibitions on the context in which Incoterms® rules version of the Incoterms® rules were used are used, either the relevant national laws for the rule in question. For example: •• Domestic or international law applicable on the conclusion of a contract apply (e.g. to the contract (e.g. CISG) §§ 145 et seqq. BGB) or – in the absence CPT – Trieste Port specified place – of provisions to the contrary – the rules Shanghai Port specified place – Even within a core logic of the Incoterms® and regulations of the CISG, in particular Incoterms® 2020 rules, there are other matters to define. For Art. 14 et seqq. CISG, shall apply in the Incoterms® rules can be altered where example, in the case of FCA, a seller has international context. In both cases, the necessary, but there is a potential for risk to provide evidence that the goods have offer must be sufficiently specific for in doing so. If, for instance, you want to been delivered. The contract of sale should the other party to accept it (e.g., goods, adjust how costs are allocated, you have specify the exact form this evidence should quantities and prices must be defined or at to state this very clearly in the contract take. It could be a freight forwarder’s least ascertainable). and you might want to vary the Place of Bill of Lading or just a signature on the Delivery as well. commercial invoice. With regard to the requirement as to form, we should note that neither German As one of its major advantages, contracting We will address the legal requirements national law nor the regulations of the CISG parties can use Incoterms® rules to clearly relating to Receivables, Invoice Creation and (see Art. 11 CISG) mandate that regular state which party is liable for loss or Taxation in later sub-chapters on Audit & purchase contracts must be concluded damage, so as to avoid expensive court Assurance and Tax.
14 Incoterms® (2020) – The hidden champions of efficiency | Your guide to improving business performance across the entire value and supply chain
3.2 Financial considerations from a Saving Potential (buyer and seller) Customs Disbursements restructuring perspective Freight Costs The ultimate buyer’s Incoterms® rule could Incoterms® rules primarily determine From the seller’s perspective, the objective be DDP buyer’s premises, indicating that which party has to pay what amount of is to pay as little for freight as possible the seller is responsible for organizing freight costs, service taxes, import taxes and to have as little risk as possible for transport to the buyer’s location as well and duties (customs disbursements) and insurance claims due to damage or loss. as all the customs charges. These latter are therefore seen as a supplement or As a consequence, the recommendation charges can be quite substantial, often amendment – but not a replacement – of would be EXW for domestic sales or FCA many times higher than the overall freight relevant sales law. Regulatory areas not seller’s premises for cross-border sales. cost. It is therefore common for buyers to covered by the Incoterms® rules (e.g., the These Incoterms® rules allow buyers to use their LSP as a bank and ask them to pay transfer of title or the consequences of exploit a wide range of efficiency potential customs charges to government entities a breach of contract) shall be governed to reduce the overall costs of the shipping on their behalf. The freight forwarder’s by express conditions in the purchase process. Efficiency can be improved conditions are sometimes better than the contract or by the law underlying this through labor optimization, choice in mode government’s strict payment terms and contract. These types of costs can all have of transport and, of course, the ability to interest charges. a strong impact on the sales margin per maximize payload, load consolidation and item if they are not correctly factored into backhauls, among other things. That said, DDP should only be chosen the full cost calculation. Likewise, they after carefully considering these and other can also influence cashflow positively From the buyer’s perspective, you might reasons, including the seller's ability to carry or negatively during the procurement think that the most ideal Incoterms® rule out import formalities in their own name. process. Incoterms® rules have so far for saving freight costs is DAP buyer’s received little attention as part of the premises, as the seller is responsible debate on operational and financial for organizing transport to the buyer’s restructuring. This is quite astonishing location. However, losing the ability to given that logistics costs (storage, merge buying power with logistic service transport, picking and handling) accounted providers in order to optimize unit rates is for at least 9 percent of the gross domestic a downside. What is more, the seller's sales product of industrialized countries in 2018 surcharge, which is priced into the sales (Statista, 2019), with approximately half price, is often higher than the pure freight of these costs being freight-related (Prof. costs for own pickup, since the seller will Hofmann et al., 2012). This therefore begs often add shipment related costs to the the question whether Incoterms® rules can pickup costs (handling charges, cleaning, be used as a lever for companies in a profit etc.). As a result, DAP would be the cash- or liquidity crisis. saving method of procurement in the first instance, but not the best for its own input margin in most cases. If necessary, by choosing a suitable Incoterms® rule, the company could improve its own margin (by reducing freight costs) or, on the contrary, boost its own liquidity by expanding payment terms using, for example, DAP as an Incoterms® rule.
15 Investing in Germany | A guide for Chinese businesses
3.3 Tax These specifications need to be taken into Incoterms® rules are relevant to tax for account from a direct tax perspective as various reasons. they may influence …
Particularly in terms of VAT, the Incoterms® •• … the risk of an (unwanted) creation of rules are relevant. VAT is not generally permanent establishments (PE) in the supposed to become a cost element country/countries where the legal title is for transactions between VAT payers transferred. This may result in a limited (except for businesses rendering certain income tax liability in that respective VAT-exempted services like healthcare, country. education, financial transactions, etc.). However, there may be adverse •• … the valuation of goods purchased inclu- consequences such as the administrative ding or excluding incidental costs versus burden and the lack of cashflow even for treating those costs as an element of the fully compliant businesses. direct expenses. The initial valuation will – of course – influence (future) depreciation The chosen Incoterms® rule for the supply as well. of goods in this context might have an impact on the VAT treatment of the •• … the potential for imposing withholding transaction, the determination of the party taxes for certain elements of the pay- responsible for VAT payment in a certain ment during the transaction (e.g., ser- jurisdiction as well as the ability to recover vices provided in addition to delivery of VAT paid for certain transactions. goods, financing, capital gains).
While the Incoterms® rules are relevant In the following we will focus on the VAT for the VAT taxation of the traded goods implications for traded goods between between seller and buyer, indirect taxation seller and buyer. issues may also arise for freight charges of the forwarding agent to seller or buyer. Impact of Incoterms® rules on chain For example, destination terminal handling transactions charges may be charged with local taxes Successive sales by several entrepreneurs and become a cost that is ultimately borne with multiple transfer of ownership on by the supplier or the buyer of the goods. the same item are called “VAT chain This is therefore an issue worth considering transactions”. The goods have to be moved when agreeing Incoterms® rules. directly from the first supplier to the last purchaser during the transport or dispatch. Incoterms® rules (may) also impact direct These particular transactions are referred taxation as well, especially with regard to in the Incoterms®2020 rules as “string to income tax. Depending on the tax sales”. When it comes to cross-border chain regulations in the respective location and transactions, the parties must determine the applicable measures in place to avoid which country’s VAT rules to apply and double taxation (unilateral measures as whether the goods are zero-rated for VAT. well as those from double taxation treaties), Under EU VAT law, only one of the sales there are two specific Incoterms® rules at transactions in the chain can qualify as issue that may affect direct taxation: zero-rated for VAT, i.e., as an export or as intra Community supply. •• the determination of the time and the place of the change of ownership and
•• the inclusion or exclusion of incidental costs for the purchaser.
16 Incoterms® (2020) – The hidden champions of efficiency | Your guide to improving business performance across the entire value and supply chain
Example 1 Fig. 8 – Chain transaction FR – DE – US A producer in France sells a machine to a German trading company. The ro cer r er n rc ser German trader sells the machine to the final purchaser in the US. The machine is sells sells dispatched from the plant in France to the final purchaser in Louisville, Kentucky. aris ortmund ouisville We must analyze whether to apply French VAT (the country of dispatch) if the sales transactions by FR and/or DE are zero- transport machine rated and which of the parties is recognized as the VAT payer for the transaction, which may result in VAT reporting obligations in France for either party.
To determine the place of supply for VAT purposes, the decisive issue is generally where the parties transfer the power to dispose the goods. While the “power to dispose” is not equal to the legal title and depends on factual circumstances, it is difficult to determine this place in practice. Several EU countries therefore consider the party who initiates the dispatch of the goods and the location at which the shipping risk and costs are shifted between the parties involved.
This is where Incoterms® rules come into play: by defining clear rules for the risks and costs of transport, Incoterms® rules are broadly accepted for the purposes of determining the place of supply for VAT.
17 Investing in Germany | A guide for Chinese businesses
Example 1 (continued) Fig. 9 – Chain transaction producer pre-paid Incoterms® rule (CPT) In the case that FR sells under the Incoterms® rule CPT – Le Havre Port, vessel e avre vessel ouisville arehouse ite e avre vessel ouisville arehouse ite – Louisville Plant, FR initiates the dispatch of the goods in the sales transaction and ro cer r er n rc ser FR’s export supply from France is zero- rated for VAT. sells sells ero rated If FR and DE sell FCA Plant Paris, the port in rance initiative for the dispatch of the goods is aris ortmund ouisville allocated to the sales transaction by DE to US. FR has to charge French VAT for the sales transaction to DE. DE must register transport machine for VAT purposes in France and must report its export supply from France as zero-rated for VAT.
However, there is a lot of uncertainty when Fig. 10 – Chain transaction producer collect Incoterms® rule (FCA) agreeing on the Incoterms® rules if one of the intermediate parties in the chain aris arehouse aris arehouse assumes the risk and costs of the freight. ro cer r er n rc ser
sells sells ero rated port in rance aris ortmund ouisville
transport machine
Example 1 (continued) Fig. 11 – Chain transaction collect and pre-paid Incoterms® rule If FR sells under the term FCA Paris Warehouse and DE sells under the term aris arehouse e avre vessel ouisville arehouse ite CPT – Le Havre Port, vessel – Louisville Plant, the initiative for the dispatch of the ro cer r er n rc ser goods can either be allocated to the sales transaction by FR to DE or by DE to US. sells sells Depending on the local rules, VAT reporting requirements may vary for each party. aris ortmund ouisville The parties will need additional criteria, such as the use of the VAT ID number by the intermediate party, to determine the transport machine VAT consequences.
18 Incoterms® (2020) – The hidden champions of efficiency | Your guide to improving business performance across the entire value and supply chain
Specific Incoterms® rule: DDP Example 2 (variation of example 1) The Incoterms® rule DDP has special impli- The supplier US sells spare parts to the cations in the export business from the German trading company under the term perspective of VAT: by shifting the import FCA Louisville. DE sells the machine to the obligations to the seller in the destination final purchaser FR in Paris under the term country, the seller usually has to both pay DDP Paris. The spare parts are dispatched import VAT and comply with VAT reporting from Louisville to the final purchaser in obligations in that country. Paris.
In many countries, the ability to potentially Under this Incoterms® rule, DE will be recover this import VAT is contingent on the liable for customs duties and import VAT seller having the power to dispose over the in France, i.e., it must pay the import VAT goods at the point of import. This is often there and has an input VAT credit position. a point of debate between tax authorities The sale to FR is a local supply which is and VAT payers. subject to French VAT. DE needs to fulfil VAT reporting obligations in FR and may have an administrative burden as a result.
Fig. 12 – Chain transaction including DDP
ouisville arehouse aris arehouse
er r er n rc ser
sells sells
ouisville ortmund aris
ransport spare parts
19 Investing in Germany | A guide for Chinese businesses
Requirements in the IT environment Impact of the updated Incoterms® 2020 The ERP system must be able to allocate rules on VAT … the correct VAT codes to the purchase and As Incoterms® rules are key parameters for sales transactions in order to account for the tax code determination for VAT, the use VAT in the correct jurisdiction, to apply zero of different Incoterms® rules from 2020 will ratings under certain conditions and to require VAT payers to review their existing issue invoices that take local requirements tax code determination logic. into account. In other words, you need a tax code determination logic. A logic such … and reciprocal impact of VAT legis- as this would contain various parameters lative changes on Incoterms® rules to like: origin and destination of goods, the be used location of the party receiving the invoice, With its so-called “Quick Fixes”, the EU Incoterms® rules, direction of trade (export, introduced a package of significant changes imports or domestic), tax group material to VAT law that are due to be implemented and business partner, also certain regional in local VAT law in all EU member states by requirements. It should be noted that even 2020. leading ERP software solutions do not provide a tax code determination logic in its Among other things, the Quick Fixes default settings and must be programmed provide strict rules regarding the with individual settings or other solutions.8 determination of cross-border chain transactions for goods that are zero- Example 1/Figure 9 Chain transaction rated for VAT, using VAT ID numbers and producer pre-paid Incoterms® rule the country in which the cross-border (CPT), (continued): transport of goods was initiated, which From the viewpoint of FR, the parameters (i) effectively rely on the Incoterms® rules sale under the term CPT and (ii) the shipping used for the transactions. address outside the EU should qualify the sales transaction as an export supply from In other words: VAT payers participating France that is zero-rated for VAT. in chain transactions should review their tax code determination logic under Obviously the complexity of the logic consideration of the changes in the legal increases significantly with chain framework for VAT with a special focus on transactions, because we must consider the Incoterms® rules. the flow of goods in its entirety and with all the parties and parameters involved. In this context, Incoterms® rules are of significant relevance for tax code determination.
8 The software challenges involved in presenting and working with all the relevant data (see Fig. 7) is 20 examined further in 3.7 Process Reflection in Software. Incoterms® (2020) – The hidden champions of efficiency | Your guide to improving business performance across the entire value and supply chain
3.4 Global trade advisory – import, ® export and export controls Incoterms 2020 Obligation of the seller Obligation of the seller It goes without saying that numerous to clear the sales item to clear the sales item obligations and responsibilities arising from for export? for import in the country EU and national (member state) provisions of destination? govern import, export and export controls. These provisions have to be considered EXW No No in every case of cross-border trade, since Incoterms® rules, theoretically, assign the FCA Yes No obligation for customs clearance to one FAS Yes No of the parties. From the seller’s view this obligation is assigned as follows: FOB Yes No
CFR Yes No
CIF Yes No
DAP Yes No
DPU Yes No
CPT Yes No
CIP Yes No
DDP Yes Yes
For the purpose of this overview, we would •• The only way to assess the roles of the have to include the following in a brief list of exporter for the purposes of customs the fundamental issues at the ‘intersection’ and for export controls is based on the between Incoterms® rules on the one hand related autonomous legal definitions and customs/export control provisions on and provisions in combination with the the other: facts. These parameters can however be misinterpreted and falsely applied. •• In our consulting experience, the Incoterms® rules mentioned on invoices •• Assessing the role of the exporter or in agreements often do not reflect the for VAT purposes and any related VAT actual handling of the transaction. The exemptions upon export is subject to Incoterms® rules agreed between the yet another set of autonomous rules parties involved in cross-border sales (see section 3.3 Tax above) and cannot transactions are therefore not binding simply be deduced from the exporter for when assessing which parties have which customs purposes. responsibilities in terms of customs/ export control law (for their legal status •• Under the Incoterms® rule DDP (assuming please see chapter 3.1 Legal). It is the that this reflects the facts), the seller facts that are decisive, e.g., the fact that assumes the obligation to declare the the agreement between seller and buyer goods for import into the country of refers to EXW alone does not allow us to destination, although his knowledge of the conclude that the buyer is the exporter local customs provisions may be rather for the purposes of customs law and limited. export controls in this case.
21 Investing in Germany | A guide for Chinese businesses
Customs clearance for export Customs Pursuant to Article 1 (19) (b) (i) As introduced briefly in the points above, If German Seller A sells EXW to a US Buyer UCC-DA, in cases where the exporter there is great potential for conflict between B9, the most simplistic conclusion would is not a private individual transport- the obligations arising from the agreed be to make Buyer B the exporter. ing the goods in his personal bag- Incoterms® and the customs-related gage, it is any person who is: obligations of the parties. This is often According to the way the exporter is true for exports, since not only (mainly EU) defined in the UCC-DA (Union Customs customs law provisions, but also both EU Code Delegated Act), Buyer B, as a •• established in the customs territory and national export control requirements non-EU establishment, cannot take on of the EU, and apply. It is important to take into account the role of the exporter for customs •• has the power to determine and that these two different legal regimes purposes. Instead, he must engage an has determined that the goods (and two different legislators!) may have EU-established freight forwarder to are to be taken out of the customs conflicting objectives. act as the exporter and to assume the territory of the EU. related responsibilities in exchange for We can best illustrate the potential a supplemental fee. Otherwise, Seller A conflict betweenIncoterms ®, customs may be appointed as exporter either by law and export controls provisions using assignment of the obligation to export the Incoterms® rule EXW in the following the sales item to non-EU territory or by example below: becoming the EU party of the “export agreement” where German Customs holds this view (this is a risk), Article 1 (19) (b) (ii) U CC- D A .
Fig. 13 – Role of the exporter in EXW sale to third country buyer
r o ntr
erman company company
oods route
ontract e or s
9 As an illustration, EXW is used for non-domestic trade, as is often the case in practice. According to ICC 22 recommendation, EXW should be used for domestic and intra-customs-union trade only. Incoterms® (2020) – The hidden champions of efficiency | Your guide to improving business performance across the entire value and supply chain
Export Controls Customs clearance for import Based on our consulting experience, Moreover, due to the fact that Seller A On the import side, there are of course we often find that they will instead is party to the contract with a non-EU risks of non-compliance as well as the act on behalf of the buyer, without his consignee (so-called export contract), obvious risk of import charges, especially knowledge. The liability in this case rests it is Seller A who is responsible for any import duties and VAT on import, and with the buyer from a legal standpoint, in obligations related to export controls and their post-clearance recovery. It is this violation of the agreed Incoterms® rules. any shortcomings that may arise. These latter risk that has a major influence on obligations are especially: the way sales prices are calculated. As a It is therefore vital for the contracting result, the parties must carefully consider parties to give these freight forwarders •• the correct classification for export who will assume the responsibilities of very precise instructions and to monitor controls purposes, the customs declarant. This is true for them closely in order to ensure the correct transaction parties not domiciled in the handling of the customs declaration, but •• the timely obtainment of export licenses European Union, e.g., if the seller acts this is rather difficult to accomplish in for restricted goods (esp. dual-use and as the customs declarant under DDP practice. military goods) from the national authori- conditions: ties before the actual export takes place, Under DDP conditions, the seller is Determining the correct customs value for responsible for the import and must the import declaration is quite challenging •• the screening of so-called sanctioned consider that the seller’s knowledge of the due to such complex factors as required party lists as well as local customs provisions in the destination costs, reduction factors, such as freight country is limited in most cases. costs incurred for transportation beyond •• the compliance with embargo provisions. the point of entry into the EU customs Third country sellers are also not legally territory, etc. In short, relying on EXW as the allowed to handle the import declaration Incoterms® rule for the underlying (i.e., to act as customs declarant). This As a consequence, the overall cost structure sales transaction will not only lead to leads to several difficulties: of the DDP seller might make it impossible in considerable reorganization efforts, but the long run to compete with those sellers may quite possibly also have hidden the The seller has to appoint someone (i) who do not assume the obligation to declare obligations related to export controls located in the European Union and (ii) the goods for import in the destination because seller A ‘trusted’ the Incoterms® responsible and liable for the import country. This is particularly when the third- rule EXW. It is important to note that into the European Union. In other words, country sellers – due to not being registered violations of these obligations can be the seller has to appoint an indirect locally for VAT purposes – are probably not sanctioned rather harshly, e.g., involved representative. Import freight forwarders, able to deduct the VAT on import in the case workers in the dispatch department however, might often refuse to act as an country of destination (see chapter 3.3). or a board member in charge of export indirect representative for a third country controls (so-called “chief export controls seller, as they do not want to assume officer”) can be personally prosecuted responsibility and liability for import under criminal law. This example also duties, etc. shows that, depending on how the exporter is defined, the business partners involved may have the flexibility to designate the entity that has to act as exporter. This is true as long as that entity complies with the definition of 'exporter'. The business partners would only have to be aware of the related risks.
23 Investing in Germany | A guide for Chinese businesses
3.5 Accounting EXW – Goods Dispatch Date > Transfer Accounting difficulty for the seller German Generally Accepted of Risk Date in this case Accounting Principles (German GAAP) According to the EXW clause, the risk for Still assuming that revenue is recognized According to German GAAP, revenue is damage to or loss of the goods transfers when the ERP system records the goods recognized when the sales transaction from the seller to the buyer as soon as the issuance, the revenue as of has been realized (Section 252 (1) no. seller deposits the goods at the seller's December 31, 20X1 would be understated. 4 of the Commercial Code), i.e., when premises, in which case the buyer must Similarly, the seller’s inventory would be the risk of accidental destruction and load the cargo onto the means of transport overstated as per December 31, 20X1. accidental deterioration passes to the when it arrives. Although the seller has already delivered buyer. According to German civil law, this the goods to the buyer on December 30, risk passes to the buyer upon delivery of Assuming that the buyer will need a day 20X1 based on the Incoterms® rules, the the goods sold (Section 446 of the German or two to organize a carrier to pick up the inventory has not been derecognized Civil Code). Contracting parties may agree consignment, the transfer of risk date from the balance sheet and revenue is to deviate from these regulations, e.g., by appears to be earlier than the date at which not recognized before the goods leave the agreeing on Incoterms® rules that specify the goods physically leave the warehouse warehouse on January 2, 20X2. the date when the risk of loss or damage to (goods dispatch date). the goods will transfer. From an accounting perspective, this is the date when revenue In this example, the seller informs the is recognized by the seller and the goods buyer that the goods are ready for pick-up are derecognized in the seller’s books and at the seller’s warehouse in Zagreb on recognized in the buyer’s books. December 30, 20X1 and this action triggers the risk transfer from the seller to the If the date when risk transfers is buyer. determined by the agreed Incoterms® rules, it may differ from the date captured in On January 2, 20X2, the carrier the system, e.g., the goods issue date subcontracted by the buyer picks up the (when the warehouse confirms that the goods at the seller’s warehouse, which goods have been dispatched and left the means that the goods have physically left warehouse). This may lead to incorrect the seller’s warehouse (goods issue date). accounting if the ERP system uses the goods issue date to trigger the accounting On January 29, 20X2, the goods arrive at entry. The following examples illustrate this. the buyer’s warehouse in Wuhan10 (goods receipt date).
10 As a result of various aspects, and that of Global Trade in particular, as described in the previous chapter, the CPT example from chapter 2 would have to be modified so that EXW is not used for international trade, but instead for domestic or intra-customs-community trade only. 24 As an example, EXW has been used in conjunction with the chapter 2 example from an accounting perspective only. Incoterms® (2020) – The hidden champions of efficiency | Your guide to improving business performance across the entire value and supply chain
CPT port of loading, vessel–buyer’s Fig. 14 – Place of Delivery – Risk Transfer – Goods Issue premises: Goods Issue Date < Transfer of Risk Date re If, for example, CPT is used, two named places play a role. The first one determines the Place of Delivery (transfer of risk), and the second one determines the Place of Incoterms®-Destination (transfer of costs) (see chapter 1.2 Naming Convention). If ood ssue the first named place is not the seller’s oods leaving the arehouse warehouse, the seller may face difficulties, as the transfer of risk date is later than the goods issue date.11 Fig. 15 – Place of Delivery – Risk Transfer – Vessel Port of Load
In our example, the contract between the seller with a warehouse in Zagreb and the re r este ort buyer in Wuhan states CPT Trieste Port, vessel–buyer’s premises Wuhan. The seller dispatches the goods on December 30, 20X1 (goods issue date) in Zagreb. On January 2, 20X2, the goods are loaded ransfer is at onto the vessel at the port of loading which is Trieste Port (transfer of risk date). lace of elivery vessel On January 27, 20X2 the goods arrive in Shanghai Port. On January 29, 20X2, the goods arrive at the buyer’s warehouse in IFRS has been transferred. Depending on the Wuhan (goods receipt date). Under IFRS, the transfer of risk according to Incoterms® rules used, it may be necessary Incoterms® rules is not a sufficient criterion to rely on the original shipping documents Corresponding accounting difficulty for recognizing revenue, because the as a means of proof of ownership of the for the seller: relevant Standard IFRS 15 Revenue from related goods. In these cases, control is not If the goods issue date is used to trigger Contracts with Customers is based on the transferred until the seller receives those revenue recognition in the seller’s ERP control concept. An entity shall recognize documents. This date might be a few days system, the revenue as of revenue when (or as) the entity satisfies a after the date on which the risk transfers, December 31, 20X1 (balance sheet date) performance obligation by transferring a (e.g., CPT – Port of Load Trieste (risk would be overstated and the assets would promised good or service (i.e. an asset) to transfer) – Port of Destination Shanghai be understated. Revenue was already a customer. An asset is transferred when (cost transfer), the transfer of control, recognized and inventory derecognized (or as) the customer obtains control of that however, would take place only once the on December 30, 20X1, even though the asset (IFRS 15.31). Control of an asset refers original documents reach the buyer via transfer of risk did not occur until to the ability to direct the use of, and obtain courier). January 2, 20X2. substantially all of the remaining benefits of that asset, including the ability to prevent others from doing so (IFRS 15.33). For performance obligations to be satisfied at a particular point in time, the entity has to determine at which point in time the customer obtains control of the promised goods. The transfer of significant risk and rewards of ownership of an asset – which equals the transfer of risk as defined in the Incoterms® rules– is only one indicator to consider in determining when control
11 Please note that these difficulties also apply to other Incoterms® rules: In such cases, the transfer of risk as per the chosen Incoterms® rule takes place later than the goods issue date. 25 Investing in Germany | A guide for Chinese businesses
3.6 Strategy: considerations for Sales Procurement procurement and sales of goods Sales teams need to have the right tools On the other hand, in terms of Coming back to the example of FCA to properly yet pragmatically reflect the procurement, it is important to properly seller’s premises and the effort to avoid impact a specific Incoterms® rule on reflect Incoterms® rules in sourcing unexpected costs from the perspective of pricing and profitability in a sales or pre- decisions – together with all other terms & financial restructuring, we have observed sales phase. Mature organizations have conditions – to ensure a comprehensive such behavior in our clients in different pricing schemes in place that factor the decision-making process and to properly industries and ranging from mid-sized Incoterms® rule in question along with factor in the total cost of ownership12 companies to large multinationals. The other terms and conditions, such as when evaluating tenders. It is essential, relevant causes for these observations payment terms and advance payment therefore, for the supporting tools may result from the misuse of the seller discounts, if they are applicable, into to properly reflect the impact of the as free warehousing or delays in the their pricing and profitability calculations. Incoterms® rules. As already discussed pick-up process, for example, due to an Sales teams also need adequate support for the Sales side, the combination of unreliable transport provider prone to to properly add Incoterms®-specific Incoterms® and payment terms are delay, in particular for customers collecting surcharges to the product price, e.g., for significant drivers for net working capital – from distant regions. This may occur, for packaging, transport, additional handling this time focusing on the payables side. example, when CIS region customers pick equipment or administrative effort, and up goods in Central Europe. calculate realistic margins to cover these It is also a significant lever to drive specific efforts. inbound logistics cost and complexity. These events often result in operational While “delivered” Incoterms® rules reduce troubleshooting and additional cost, e.g., This also strengthens the sales teams’ operational complexity for the procuring double-handling of already prepared arguments in a negotiation setting. Sales organization, these terms jeopardize shipments blocking space in the staging teams must consider this when they efforts to reduce inbound logistics cost, area of the seller’s warehouse. calculate the real payment terms, for e.g., by applying milk-runs or similar example, to assess internal profitability logistics concepts. In several industries it If such behavior is observed frequently, limits or to have the right answers on hand is already common to request prices for the company should conduct a root when buyers ask for prolonged payment pick-up (suitable E/F-) Incoterms® rules cause analysis to resolve potential terms. as well as for delivered (suitable C/D-) misunderstandings at the operational level Incoterms® rules to allow for informed or to adjust the current customer-care The company should also use the decision-making when it comes to selecting strategy and change the Incoterms® rules Incoterms® rule on offer to highlight the a logistics concept or potentially changing for specific customers or customer groups. company’s sales strategy. For example, the terms during a contract period without However, this would require a rigorous a seller that claims to have a “full service additional negotiations. analysis of real profitability and may even offer” but sells EXW would strike potential mean the end of the relationship with non- customers as very strange. While EXW or Some companies have implemented profitable customers. F-Incoterms® rules may be suitable for Incoterms® decision checklists for larger customers with dedicated logistics their procurement teams in order to After examining observed customer and customs processing capabilities, provide hands-on support. Based on behavior and its operational implications, smaller customers, e.g. technicians or a few questions regarding product our focus will now shift to pricing and repair shops, typically require the seller characteristics, the procuring legal entity negotiations. to arrange transport or even, at times, to as well as supplier information, the sell customs cleared, as these customers procurement team is clear on the options typically lack the skills and the time for and caveats for the respective Incoterms® customs clearance. We sometimes observe rules. There may even be certain B2C businesses, where customers typically Incoterms® rules that are excluded, for face the same limitations, referring to non- example several companies do not allow suitable Incoterms® rules in their deliveries. EXW from China for European procuring organizations to avoid overly complex and costly setups.
26 12Total cost of ownership reflects the direct and indirect cost. Incoterms® (2020) – The hidden champions of efficiency | Your guide to improving business performance across the entire value and supply chain
3.7 Process Reflection in Software Fig. 16 – Logic Chain Processes – Software The purpose of this chapter is to describe the impact opportunities and threats of Incoterms® Incoterms® rules in the area of software logic. To better understand why this is important, we will provide a brief overview: a) Incoterms ® rules determine processes, processes depend on Incoterms® rules. (largely described in the previous chapters)
depend on determine b) Processes are made more transparent by modeling them in software and software helps to automate processes.
There are various potential benefits rocesses to using software, from lower failure rates caused by typos, to standardized automated process steps. Software helps to make processes and their data more transparent, serving as a basis for more efficient decision-making.
ma e transparent automi e
o t re
How can software support Incoterms® usage (opportunities)? Data Extracts Process Automation •• whether EXW is used for non-domestic or •• an alert could be sent to the department non-intra-customs-union trade manager if EXW is chosen for cross- border transactions •• whether buyers regularly fail to pick up cargo in time under FCA •• based on FOB terms, the seller’s ERP/ TMS13 could automatically calculate the •• check on correct
13 TMS = Transportation Management Software, ERP = Enterprise Resource Planning System 27 Investing in Germany | A guide for Chinese businesses
Where are Incoterms® rules reflected The diagrams below reflect the fact that In the freight forwarder’s systems, seller in software? the final object on seller’s/buyer’s side shipments might be consolidated into When talking about software in the context could, for instance, be an LCL (less than further shipments/consolidations. The next of Incoterms® rules, the field is simply container load) or an FCL (full container level of carriers has been scoped out. too vast to give a complete overview. load) shipment, which is then handed over Incoterms® rules play a role in standalone to the freight forwarders and finally to the ERPs, CRMs, TMSs, WMSs, GTs, Tax carriers. Software, etc., so we will narrow our focus to the ERP and TMS environments only.
Fig. 17 – Software Objects at Seller and Freight Forwarder (very high level)
e er er re t or r er
o es et et et et et et
hipper hipper hipper hipper n o er rder elivery hipment onsol onsol
ess than ontainer oad rder rapage
o es et t cont ner t cont ner
n rder elivery hipment o er hipment ull ontainer oad rder
28 Incoterms® (2020) – The hidden champions of efficiency | Your guide to improving business performance across the entire value and supply chain
In fact, the order-level is not the initial Fig. 18 – Incoterms® on Customer Master (example SAP ERP, SAP S/4HANA) starting point for the system; it is basically the contract between the seller and the buyer, but the impact of the Incoterms® rules can be captured in the business partner’s master data, for instance.
If the data is maintained there, the agreed Fig. 19 – Incoterms® on Order Level (example SAP ERP, SAP S/4HANA) Incoterms® rule & Named Place(s) can be automatically pulled through into an order when it is created.
29 Investing in Germany | A guide for Chinese businesses
If needed, changes could be made at the Fig. 20 – Incoterms® on Delivery Level (example SAP S/4HANA) order or the delivery level. For example, when the agreed terms are CPT Port of Load Trieste – Port of Discharge Shanghai, the destination could be changed to Ningbo instead due to congestion in Shanghai.
The delivery contains the information based on a seller–buyer level. Here you can find the final destination of goods (Wuhan), which should not, as described in Fig. 7, be confused with the Incoterms®-Destination field (e.g., Shanghai Port, vessel).
At the shipment level, multiple deliveries can Fig. 21 – Incoterms® on Shipment Level be consolidated, including cargo for various consignees as well. Here it is the master terms – and not the Incoterms® rules – that play a role at the shipment (header) level.
When moving the information to the freight forwarder, Incoterms® rules play a vital role indeed. At the shipment level in the FCL scenario, for instance, the Incoterms® rules given by the seller to their freight forwarder help them to determine how many transport legs they have to organize.
It becomes clear when talking about Incoterms® rules and how they are reflected in the software, that the terms will greatly depend on the point of view of the party involved and on the type of software being used. By the same token, there can be substantial differences in how different entities use the same software product, when it comes to reflecting the most important supply chain places and dates. Please compare with Fig. 7.
30 Incoterms® (2020) – The hidden champions of efficiency | Your guide to improving business performance across the entire value and supply chain
4. Changes 2020: What are the Threats and Opportunities?
4.1 Overall Changes •• Adding clarification to the role and usage cargo into the buyer’s truck, which would The most important initiative behind the of Master On-Board Bills of Lading, espe- make the transaction FCA in Incoterms® Incoterms® 2020 update has been the cially in terms of the Letter of Credit (LoC) rules. attempt to help users better understand in FCA and the misuse of FOB the existing Incoterms® rules, in order EXW terms also require the buyer to to minimize their misuse. To achieve A less official, but very important indirect manage export clearance. Especially in this, the update cleans up the legalese, impact is the: cross-border trade, it is unlikely that the restructures the book chapters and adds importer is familiar with the exporting illustrations. These change initiatives are •• stronger encouragement to use Named country’s laws and regulations, making it in part thanks to three non-lawyers out of Place(s) Incoterms® rules a bigger effort to obtain the goods and the ten members of the Drafting Group. leading to a higher risk for delay and Newcomer Bob Ronai in particular, who An intense debate also took place within additional costs. owns and manages the Incoterms® Group the Incoterms® community about whether on LinkedIn14, has brought in various further to eliminate EXW and add VGM regulations As a consequence, EXW may be used for insights from operations. Along with his (see below for further details). In terms domestic, e.g., road transport only. operative expertise, the president of an of EXW, the update has basically added American consultancy firm and the Customs clarification to prevent its misuse. VGM has Adding VGM regulations Compliance Manager from a Chinese not yet been incorporated. An important change took place in July telecommunications firm15, have contributed 2016 after the release of the maritime further to making the Incoterms® rules Eliminating EXW – Ex Works treaty SOLAS, which is the International easier to understand from a non-lawyer The reasons people wanted to get rid of Convention for the Safety of Life at Sea. Its perspective. EXW are mainly related to warehouse purpose is to enable the shipping carrier/ operations and global trade, as illustrated shipping industry to conduct proper More substantive changes were made with in a commonly used example of EXW loading of containers on a vessel based regard to: Seller’s Premises. on having been given correct information about the cargo and the container weight. •• Enabling different levels of insurance EXW requires the buyer to arrange for the If a container’s weight is not correct, the cover in CIF and CIP cargo to be loaded onto their own means container will not be loaded onto the ship, of transport at the seller’s warehouse. That as it could be a risk to the staff during •• Including security-related requirements would mean the buyer’s trucker would have sailing, e.g., if the container load was not to bring a forklift, or at least have the right statically stable enough for rough weather •• Adding clarifications in case the seller/ equipment on hand (e.g., wearing security conditions. The Drafting Group decided buyer decides to use their own means of boots and complying with individual not to incorporate these regulations into transport in FCA, DAP, DPU and DDP warehousing regulations) to load the the Incoterms® 2020 update as they were pallets into the trailer themselves. Sellers found to be “too specific and complex to •• Renaming DAT to DPU would not appreciate strangers operating warrant explicit mention”.16 their forklifts, nor would they wish to bear the risk of any work accidents. As a In the following chapters each change is consequence, sellers will tend to load the described in further detail.
14 Source: Linkedin Incoterms® Group. 15 Source: Incoterms® 2020 by the International Chamber of Commerce, p. 391 following, Linkedin. 16 Source: Incoterms® 2020 by the International Chamber of Commerce, p.221. 31 Investing in Germany | A guide for Chinese businesses
4.2 Transport Document in FCA and its Fig. 22 – Carrier's, Freight Forwarder's Bill of Lading impacts At first sight, the changes to FCA appear ontract level about goods to be simply incorporating the common se er er practice “sellers may get hold of MBLs” into the rule set17. It may seem to only be about fostering efficient handling of Letters of Credit (LoC details below), but the change goods material has additional impacts that give it more significance. e er er money for goods First of all, let us explain the relationship between MBL and shipper in Fig. 22.
It becomes clear that the seller/buyer actually receives the House Bill of Lading from their respective freight forwarder18, and not the Master Bill of Lading. The Master Bill of Lading is a document ontract level about services organi ing transport between the freight forwarder(s) and their se er er respective carrier(s). e er er So, it is not unusual that the seller/buyer does not even know which carriers have been contracted. This may be because it is ervice ervice not important for them to know precisely organi ing organi ing how the cargo gets to the other party – transport transport they outsource the detailed route planning to dedicated freight forwarders. Or it may re t or r er re t or r er be because the freight forwarders rely (usually) on adding margins on top of the purchase price originally given to them by the carriers. ontract level about services conducting transport c rr er
re t or r er or n
depend on ncoterms rules to other factors
ervice ervice ervice conducting conducting conducting transport transport transport
rr er rr er
truc er truc er rr er
shipping line
17 MBL is an important transport document issued by the carrier (e.g. shipping line), which gives information such as type, quantity and destination of goods. It serves as a shipping receipt and partially as a negotiable document of title to goods 32 18 This is generally accepted practise across almost all the globe. There are exceptions such as the importance of the shipper’s BoL in the USA. Incoterms® (2020) – The hidden champions of efficiency | Your guide to improving business performance across the entire value and supply chain
There are some scenarios in which the Impact Change 1 It is not recommended to use FOB seller/buyer is more informed about the Support correct LoC (Letter of Credit) for containerized cargo, however. As chosen shipping line/cargo handling. handling described in chapter Clustering Criteria 2: One scenario uses “Named Account Rates”, In order to avoid delays in handing in Mode of Transport. FOB should be meaning that the seller/buyer negotiates the MBL for the purposes of an LoC (e.g., used only for
19 TEU stands for Twenty Foot Equivalent Unit, which represents a small 20 ft container. A bigger 40ft container thus is 2 TEU. 20 It is implied that the seller is mentioned on the transport document. This may lead to negative consequences: a) All addresses of parties who may not be direct customers of the shipping line must be registered in the latter’s system. b) The seller may have to bear additional costs in the case that the buyer does not collect the cargo at the port of unloading/destination terminal. 33 Investing in Germany | A guide for Chinese businesses
4.3 Urge to use Named Place(s) Initiative 2 cost tender with the set-up for freight cost Incoterms® Clearer structure of Named Place(s) in master data, but they all require a lot more There has been no official change to the ICC 2020 effort and clarification than the only
21 The safest and clearest way is for all parameters to be stated. Here the focus is on operational handling benefits. 22 Should the date on which the goods pass these Named Places be of extraordinary interest, for example from an accounting perspective when the balance sheet date is imminent, then the matter becomes significantly more complex. 34 23 Please note that this issue relates to Dates of the Named Place(s) as well. See 3.5 Accounting. Incoterms® (2020) – The hidden champions of efficiency | Your guide to improving business performance across the entire value and supply chain
4.5 Security Clearance damage during main-carriage (from Point In clauses (A) there are only a few risk Security clearance plays a vital role in of Delivery onwards, which is the Port of groups that are not covered addition to export/import clearance and it Load for
•• fire or explosion 4.6 Insurance The changes have an impact on insurance •• discharge of cargo at a port of distress for two Incoterms® rules: CIP (Carriage and •• collision or contact of vessel craft or con- Insurance Paid to) and CIF (Cost Insurance veyance with any external object other and Freight). As described earlier, CIF than water is recommended for only
24 Unless the import country does not accept insurance issued overseas, e.g. in Brazil. 25 This information has to be proved, however. 26 In the past it was common practise that cover A be used in the case of Letters of Credit. 35 Investing in Germany | A guide for Chinese businesses
5. How To Approach
As discussed in the previous sections, the Incoterms® 2020 update may require companies to make some adjustments, but there are also many opportunities arising from its implementation. Using the new update as an opportunity to perform an overall Incoterms® check-up makes sense and the guidelines below can be used in this process as a reference.
a) Incorporate 2020 Changes b) Use the momentum for your own b3) Check your software feasibility These adjustments include updating: value chain See if any adjustments are needed, e.g., As part of an overall Incoterms®-Check-Up, check the tax code determination setup •• Contracts (new, existing) it would be advisable to assess the if Incoterms® rules have been directly or •• Instructions for and monitoring of freight validation bases that have been introduced indirectly embedded in the logic of the forwarders across business functions within this Point system. Verify if the direction of transport of View. The following factors may have a is automatically connected to Incoterms® •• Transport insurance fees positive impact on your value chain: rules. And make sure that Place of Delivery •• Validation of of document/print creation and Place of Incoterms®-Destination are setups b1) Incoterms® rules in line with their visible and usable in the system, as well as intention their related date. •• System customization such as customer Make sure that EXW is not being used for master non-domestic/intra-customs-union trade, b4) Financial improvement options •• Process trainings for example, and that no FOB, FAS, CFR or In terms of Place of Delivery, make sure CIF is being used for containerized, multi- that that it makes sense for the purposes After the introduction of the new modal cargo. of accounting and invoicing, as well as the Incoterms® rule DPU, users must ensure it three-way match. is added to the configurations and, where b2) Incoterms® rules in line with one’s it is already contractually permissible, DAT own intended role in the export b5) Sales and Procurement Calculation should be deleted (in accordance with legal For EXW contracts, check who has been scheme contracts) and replaced with DPU to avoid assigned the role of exporter for the Review the calculation schemes or the using obsolete Incoterms® rules. purposes of customs and/or export templates used for sales and procurement controls and make sure that the exporter and adjust them where necessary. For In terms of Named Place(s) Incoterms® rules understands the responsibilities associated companies that still do not have such tools and preventing the misuse of EXW and only with these roles and raise awareness in place, the new Incoterms® 2020 update
36 Incoterms® (2020) – The hidden champions of efficiency | Your guide to improving business performance across the entire value and supply chain
6. Graphic: Incoterms® 2020
This chapter will provide a visualization of the new Incoterms® rules. Incoterms® in general is a highly complex topic that would be impossible to cover completely in one readable diagram. We have elected, therefore, to focus on specific key issues and to provide a guideline instead of an exhaustive explanation of Incoterms® rules overall. We would recommend that you always cross-reference the diagram with the rule book. We have made some changes to traditional presentation methods and these are explained in more detail below:
a) Solid vs gradient fill bars d) Added matrix of Loaded/Unloaded h) Customs Icon in EXW, DDP We have used gradient fill bars to status of goods Even with EXW, a seller can de facto be underscore that the named places may In order to more easily identify whether assigned the role of the exporter for vary in these Incoterms® rules. The bar the cargo is supposed to be delivered customs purposes. Accordingly, he would should only extend up to the maximum loaded or unloaded, we have added a have to assume the obligations and agreed Named Place(s). matrix to the right (relating to Cluster responsibility for customs and – as the case Method 4 in Chapter 1.3). may be – even export controls. For DDP, b) Separate port graphic for only
37 Investing in Germany | A guide for Chinese businesses
Fig. 23 – Incoterms® 2020 (Deloitte's graphical approach)
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38 Place of Incoterms®-Destination (risk transfer) Place of Incoterms®-Delivery (cost transfer) Additional Insurance Incoterms® (2020) – The hidden champions of efficiency | Your guide to improving business performance across the entire value and supply chain
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elivered at lace st o e o e n o e er rom se er s me ns o tr ns ort st te me ce elivered uty aid
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39 Investing in Germany | A guide for Chinese businesses
Conclusion
ICC has succeeded in making Incoterms® One approach to solve this problem could rules much more comprehensive by be to incorporate Incoterms® rules that updating the structure of the book enable users to more easily identify Named (Incoterms® 2020 – ICC Rules for the Use Place(s), such as Port of Load Terminal of Domestic and International Trade Entrance for FCL/FTL/ULD and Port of Load Terms), cleaning up the legalese and stuffing/stripping Warehouse for Loose/ adding visualizations. ICC has also tried to LCL/LTL. ensure that DAT is not understood as “only Terminals” and to avoid the misuse of FOB In addition to the challenges associated for the sake of Letter of Credit. with using Named Places in software (e.g. Place of Delivery for risk transfer), handling There are various other reasons why FOB, dates is also not always straightforward CFR, CIF (and FAS) are so popular – for in the main ERP and TMS systems on the containerized cargo as well. The main market. These systems rarely display all of advantage is that they easily help to identify the collective dates relating to Origin, Place the Named Place(s) and do not necessarily of Delivery, Place of Incoterms®-Destination require – from an operational perspective – and Destination in one place. Instead, filling out the Named Place(s) field they are often split up into different (Incoterms® Fields 2 and 3). In terms of FOB, objects, making it difficult to support more Free On Board, everyone is able to derive automated, qualitative workflows. what their tasks are from the three-letter code, while the software systems can use Companies therefore have to either invest them to automatically allocate tasks as well. in additional and complex IT change requests on their own, or make only One potential goal for the Incoterms® minor changes and come up with manual 2030 rules could be to invite IT experts workarounds. Or they simply continue to contribute, as companies are trying to to misuse
40 Incoterms® (2020) – The hidden champions of efficiency | Your guide to improving business performance across the entire value and supply chain
41 Investing in Germany | A guide for Chinese businesses
Authors & Contact For feedback and inquiries, please email: [email protected].
Your Incoterms® Team
Consulting Audit & Assurance Tax & Legal Sandra Irlbacher Kai Haussmann Michael Neumann Transportation, Hospitality & Services | IFRS Center of Excellence Global Trade Freight Forwarding and Logistics Software Anton Berizzi Stefan Runge Carl Michael Petry Audit & Advisory | Audit Industry VAT Strategy & Operations Financial Advisory Torsten Schmitz Hartmut Lierow Patrick Pfersich Legal Enterprise Application SAP Restructuring Services Jens Schaeperclaus Tax Management Consulting
Special Thanks to supporting Partners/Directors
Consulting Tillman Hentschel, Transportation, Hospitality & Services Andreas Flegel, Strategy & Operations Nicolas Roussel, Enterprise Application SAP
Audit & Assurance Felix Mantke, Audit & Advisory | Audit Industry
Financial Advisory Michael Neumann, Restructuring Services
Tax & Legal Bettina Mertgen, Global Trade Dr. Ulrich Grünwald, VAT Andreas Leclaire, Legal Dr. Astrid Bregenhorn-Kuhs, Tax Management Consulting
42 Incoterms® (2020) – The hidden champions of efficiency | Your guide to improving business performance across the entire value and supply chain
43 Investing in Germany | A guide for Chinese businesses
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Issue 02/2020