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October 2, 2019 International Chamber of Commerce launches Incoterms® 2020: Global Trade, Indirect Tax, Legal, OME and IT consequences Executive summaryIncoterms® (International Commercial Terms) rules (the Incoterms®) are internationally accepted standards which define the responsibilities of sellers and buyers for the delivery of goods under sales contracts. The Incoterms® are defined by the International Chamber of Commerce (ICC) and facilitate trillions of euros in global trade each year. On 10 September 2019, the ICC published the latest edition of the Incoterms® which will enter into force on 1 January 2020. The Incoterms® 2020 updates the Incoterms® 2010 and intends to clearly and accurately reflect present-day trade practices. The commercial terms set by the Incoterms® are interpretive sources for properly and fairly sharing the costs and the risks arising from the delivery of the goods. The manner in which the costs and risks are being divided between trade partners, are leads and in some cases decisive criteria to determine the customs and indirect trade treatment of the delivery of goods. This Global Tax Alert summarizes the modification to the Incoterms® and provides an overview of the Global Trade & Customs, Indirect Tax, Legal, Operational Model and Effectiveness (OME) and Information Technology (IT) consequences which arise from the launch of the Incoterms® 2020. Detailed discussionLaunch of the Incoterms® 2020 – What’s new?The Incoterms® 2020 introduces new terms and removes and modifies existing terms.1 The main changes to the Incoterms® are (for more detail see the legal section of this Alert):
The main distinction introduced in the Incoterms® 2010, that between Rules for any Mode or Modes of Transport (comprising EXW, FCA, CPT, CIP, DAP, the newly named DPU—the old DAT—and DDP), and Rules for Sea and Inland Waterway Transport, (comprising FAS, FOB, CFR and CIF) has been retained under the Incoterms® 2020. Global Trade & CustomsFrom a customs perspective, the commercial terms set by the Incoterms® applied in a cross-border transaction, are used to determine whether the seller or the buyer is responsible for the export and import formalities. It also depends on the applied Incoterm® as to who will borne the import duties and cost of transport, insurance and related charges. Therefore, the applied Incoterm® in a cross-border transaction may also play a role in determining the customs value of imported goods. Depending on whether CIF or FOB arrangements are in place in the country of importation, respectively the cost of transport, insurance and related charges up to the place of importation should or should not be part of the customs value. Costs incurred after importation (e.g., import duties and transport, insurance and related charges) are never part of the customs value. Except for the EXW and DDP Incoterms® 2020, the seller is responsible for the export formalities whereas the buyer should take care of the import formalities. Typically, companies using EXW and DDP Incoterms® experience challenges with respect to fulfilling customs formalities as follows:
Especially in these times of trade tensions, the introduction of the Incoterms® 2020 provides for the opportunity to carefully assess the Incoterms® being applied in a company’s supply chain and evaluate who is responsible and liable to fulfil customs formalities and at the same time prevent over or undervaluation of the imported goods. Indirect TaxFrom a Value Added Tax (VAT) perspective, Incoterms® are very commonly used in cross-border commercial transactions and set out the responsibilities of buyers and sellers for the supply of goods under a contract. The revised Incoterms aim to provide further clarity on the tasks and costs involved in the delivery of the goods from the sellers to the buyers in a cross-border scenario. At this point, the following actions play a significant role in streamlining transactional flows and costs from a VAT perspective:
Incoterms® 2020 are aimed at bringing stability and consistency for companies dealing in cross-border trade, both within and outside the EU. That said, this would be a suitable time to assess whether the revised Incoterms® 2020 triggers additional VAT (de) registrations and compliance costs for the business. LegalIncoterms® 2020 shall apply as from 1 January 2020. Users can still use Incoterms® 2010 (or earlier versions), however the new Incoterms® 2020 rules are more tailored to current market practice and can therefore be more useful to the business. However, it is necessary to be unambiguous in which version of the Incoterms® is being used (i.e., include the year of the version used after ”Incoterms®”). The most important changes to the Incoterms® are:
Operational Model and Effectiveness (OME)Operating models of global businesses include transactions between multiple parties. Incoterms® plays a critical role in identifying and allocating the obligations, risk and costs in such transactions. This could ultimately support the justification behind operating margin and tax liabilities of the parties. Some of the key elements of operating model design and interplay with Incoterms® are:
The Incoterms® 2020 provides an opportunity to review, validate and update the Incoterms® currently used across the business. ITERP-supported processes are key for smooth execution of the transactional flows. Often Incoterms® are not aligned with the functional reality of the transactional flows. Interplay of tax, supply chain and the functional profile of the stakeholders should be correctly reflected and captured by the IT set-up. Some points of consideration are:
Endnote 1. List of Incoterms® 2020 (alpha order):
For additional information with respect to this Alert, please contact the following: EY Indirect Tax, Global Trade and Global Law contacts
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