Customs Valuation System Handout PDF

**SOUTHWESTERN INSTITUTE OF BUSINESS AND TECHNOLOGY, INC.       ** [DISCIPLINE...ACCOUNTABILITY...PROFESSIONALISM...HUMILITY]{.smallcaps} NAUTICAL HIGHWAY, PANGGULAYAN, PINAMALAYAN, ORIENTAL MINDORO   *Contact Nos.: +63917-127-8500 \| +63912-448-6518* **CUSTOMS VALUATION SYSTEM** **HANDOUT NO....

**SOUTHWESTERN INSTITUTE OF BUSINESS AND TECHNOLOGY, INC.       ** [DISCIPLINE...ACCOUNTABILITY...PROFESSIONALISM...HUMILITY]{.smallcaps} NAUTICAL HIGHWAY, PANGGULAYAN, PINAMALAYAN, ORIENTAL MINDORO   *Contact Nos.: +63917-127-8500 \| +63912-448-6518* **CUSTOMS VALUATION SYSTEM** **HANDOUT NO. 1**  **NAME: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_** **YEAR & SECTION: \_\_\_\_\_\_\_\_\_\_\_\_\_** **INTRODUCTION** This handout introduces you to the International Commercial Terms (Incoterms) 2020 as developed and published by the International Chamber of Commerce (ICC) as well as the modes of payment used by both parties being the buyer and the seller that is widely used internationally. **OBJECTIVES:** At the end of this handout, you shall be able to: - Identify each incoterm - Differentiate the different modes of payment - Explain the obligation of the buyer and seller in each incoterm **INTERNATIONAL COMMERCIAL TERMS (INCOTERMS) 2020** First published by the International Chamber of Commerce (ICC) in 1936, Incoterms provide internationally accepted definitions and rules of interpretation for most common commercial terms used in contracts for sale of the goods. The Incoterms are a set of 11 individual rules issued by the International Chamber of Commerce (ICC) which define the responsibilities of sellers and buyers for the sale of goods in international transactions. Of primary importance is that each Incoterms rule clarifies the tasks, costs, and risks to be borne by buyers and sellers in these transactions. **PURPOSE:** The purpose of Incoterms is to provide a set of international rules for the interpretation of the most commonly used trade terms in international sale contracts. Devised and published by the ICC. **The seven Incoterms 2020 rules for any mode(s) of transport are: **    ** EXW** - Ex Works (insert place of delivery)     **FCA ** - Free Carrier (Insert named place of delivery)     ** CPT**  - Carriage Paid to (insert place of destination)      **CIP** -  Carriage and Insurance Paid To (insert place of destination)      ** DAP** - Delivered at Place (insert named place of destination)       **DPU** - Delivered at Place Unloaded (insert of place of destination)       **DDP** - Delivered Duty Paid (Insert place of destination).   ### ### The four Incoterms 2020 rules for Sea and Inland Waterway Transport are:      **FAS** - Free Alongside Ship (insert name of port of loading)       **FOB** - Free on Board (insert named port of loading)       **CFR** - Cost and Freight (insert named port of destination)       **CIF -  **Cost Insurance and Freight (insert named port of destination)  **ICC INCOTERMS TERMINOLOGIES** **MAIN CARRIAGE** - refers to freight cost, by air or sea, charged by the carrier (airlines/shipping lines) or amount paid by the shipper to carrier for the transport of goods from country of origin to country of destination. **PRE-CARRIAGE** - refers to the cost of transport for hauling goods from seller's premises to a designated point at country of origin. Also known as "Origin Inland Freight". **ON-CARRIAGE** - refers to the cost of transport for hauling goods from the port of discharge to buyer's warehouse or designated place at destination. Also known as "Destination Inland freight". **FREIGHT PRE-PAID** - means the main carriage for the exported goods was paid by seller prior to departure from country of origin and therefore included in seller's invoice price. **FREIGHT COLLECT** - means the main carriage was paid by the buyer upon arrival of imported goods at country of destination and not included in seller's invoice price. **MULTIMODAL TRANSPORT** - refers to inter-continental transit of goods involving main carriage that can be carried out both by air or by sea. **PORT TO PORT INSURANCE** - generic name for cargo insurance. It refers to the insurance premium paid in the international transport of goods by air/sea. This is procured by the buyer or seller to cover risks against loss or damage to the cargo during pendency of the voyage from country of origin to destination. **INTERNAL INSURANCE** - Insurance coverage taken up by seller to cover risks against loss or damage to the goods while in transit from his premises to a delivery point at origin. **ORIGIN/DESTINATION LCL CHARGES** - refers to cost of handling and moving loose or breakbulk cargoes within a seaport at country of origin or destination. **ORIGIN/DESTINATION TERMINAL HANDLING CHARGES (THC)** - refers to cost of handling and moving containerized cargoes within the terminal facilities of a seaport at country of origin or destination. **OTHER CHARGES (O/C)** refers to incidental expenses (except main carriage & port to port ins.) incurred by the seller/exporter in relation to fulfilling his contractual obligation to deliver the goods for each of the 11 incoterms. (e. g. pre-carriage/on-carriage, export documentation/clearance fees, forwarder's fees, THC/LCL charges, export/import duties & taxes, etc.) **CARRIER** *refers to airlines, shipping lines* or their agents (NVOCC/IFF) **DELIVERY** refers to bringing of goods to a specific place or to a carrier/forwarder at country of origin or destination and used as reference point when liability against risk for loss of or damage to the goods passes on from seller to buyer The **ICC INCOTERMS RULES** specifically defines the respective contractual obligations and allocation of costs that exist between buyer and seller in relation to the following: a\) Where and when will the seller make the goods available to the buyer (Delivery Obligation) b\) Who must pay for the intercontinental transport of goods (freight prepaid or freight collect) c\) Who will be liable for loss/damage to the goods while in transit (transfer of risk from seller to buyer) d\) Who must pay for the packaging, inland freight, loading/unloading costs & port to port insurance e\) Who is responsible for undertaking customs formalities and payment of duties upon export (origin) and import (destination) **EXW: EX WORKS** **(insert named place of delivery)** "Ex Works" means that the seller's delivers when it places the goods at the disposal of the buyer at the seller's premises or at another named place (i.e. works, factory, warehouse, etc.) Seller does not need to load the goods on any collecting vehicle (if he does so, it will be at the buyer's risk & expenses). Seller is not bound to organize the export clearance **EXW = COST OF GOODS/COST** **FCA: FREE CARRIER (insert named place of delivery)** "Free Carrier" means that the seller delivers the goods to the carrier or another person nominated by the buyer at the seller's premises or another named place. The risks passes on to the buyer at the delivery point. FCA requires the seller to clear the goods for export but has no obligation to contract for carriage nor to clear the goods for import, pay any import duty or carry out any import customs formalities. The seller has no obligation to the buyer to make contract of insurance. **FORMULA: FCA = EXW + O/C** **CPT: CARRIAGE PAID TO (insert named place of destination)** "Carriage Paid To" means that the seller deliver the goods to the carrier or another person nominated by the seller at an agreed place and that the seller must contract for and pay the costs of main carriage necessary to bring the goods to the named place of destination. Under CPT, the seller fulfills his obligation to deliver when it hands the goods over to the carrier and not when the goods reach the place of destination. CPT requires the seller to clear the goods for export but has no obligation to clear the goods for import, pay any import duty or carry out any import customs formalities. The seller has no obligation to the buyer to make a contract of insurance. **FORMULA: CPT = FCA + FRT** **CIP: CARRIAGE AND INSURANCE PAID TO (insert named place of destination)** "Carriage Insurance Paid To" means that the seller delivers the goods to the carrier or another person nominated by the seller at an agreed place & that the seller must contract for & pay the costs for carriage necessary to bring the goods to the named place of destination. Seller also contracts for insurance cover against the buyer's risk of loss or damage to the goods during the carriage. Seller is required to obtain insurance only on minimum cover. Under CIP, seller fulfills its obligation to deliver when it hands the goods over to the carrier and not when the goods reach the place of destination. CIP requires the seller to clear the goods for export but has no obligation to clear the goods for import, pay any import duty or carry out any import customs formalities. **FORMULA: CIP = CPT + INS** **FAS: FREE ALONGSIDE SHIP (insert named port of shipment)** "Free Alongside Ship" means that the seller delivers when the goods are placed alongside the vessel (e. g., on a quay/dock or a barge/lighter) nominated by the buyer at the named port of shipment. The risk of loss or damage to the goods passes to the buyer when the goods are alongside the ship and he bears all costs from that moment onwards. FAS requires the seller to clear the goods for export but has no obligation to contract for carriage nor to clear goods for import, pay any import duty, carry out any customs formalities and to make a contract of insurance. **FORMULA: FAS = EXW + OC** **FOB: FREE ON BOARD** **(insert named port of shipment)** "Free on Board" means that the seller delivers the goods on board the vessel nominated by the buyer at the named port of shipment. The risk of loss or damage to the goods passes on to the buyer when goods are on board the vessel, and the buyer bears all costs from that moment onwards. FOB is not appropriate for containerized cargoes since they are first handed over to the carrier and delivered at a container terminal before they are placed on board the vessel. In such situations, FCA should be used. FOB is not appropriate for containerized cargoes since they are first handed over to the carrier and delivered at a container terminal before they are placed on board the vessel. In such situations, FCA should be used. FOB requires the seller to clear the goods for export but has no obligation to contract for carriage nor to clear goods for import, pay duty, carry out any import customs formalities and to make a contract of insurance. **FORMULA: FAS = EXW + O/C** **CFR: COST AND FREIGHT** **(insert named port of destination)** "Cost and Freight" means that the seller delivers the goods on board the vessel nominated by him. The risk of loss of or damage to the goods passes on to the buyer when the goods are on board the vessel. The seller must contract for and pay the costs of freight necessary to bring the goods to the named port of destination. Under CFR, the seller fulfill his obligation to deliver when it hands the goods over to the carrier and not when the goods reach the place of destination. CFR may not be appropriate for containerized cargoes where they are first handed over to the carrier and delivered at a terminal before being loaded on board the vessel. In such circumstances, the CPT term should be used. CFR is not appropriate for containerized cargoes since they are first handed over to the carrier and delivered at a container terminal before they are placed on board the vessel. In such situations, CPT should be used. CFR requires the seller to clear the goods for export but has no obligation to clear the goods for import, pay any import duty, carry out any import customs formalities and to procure any contract of insurance. **FORMULA: CFR = FOB + FRT** **CIF: COST, INSURANCE AND FREIGHT** **(insert named port of destination)** "Cost, Insurance and Freight" means that the seller delivers the goods on board the vessel. The risk of loss or damage to the goods passes on to the buyer when goods are on board the vessel. The seller must contract and pay the costs of freight necessary to bring the goods to the named port of destination. The seller also contracts for insurance cover against the buyer's risk of loss of or damage to the goods during the carriage. Seller is required to obtain insurance only on minimum cover. Under CIF, the seller fulfills his obligation to deliver when it hands the goods over to the carrier and not when the goods reach the place of destination. CIF may not be appropriate for containerized cargoes where they are first handed over to the carrier and delivered to a terminal before they are placed on board the vessel. In such circumstances, the CIP term should be used. CIF is not appropriate for containerized cargoes since they are first handed over to the carrier and delivered at a container terminal before they are placed on board the vessel. In such situations, CIP should be used. CIF requires the seller to clear the goods for export and has no obligation to clear the goods for import, pay any import duty or carry out any import customs formalities. **DAP: DELIVERED AT PLACE** **(insert named place of destination)** "Delivered at Place" means that the seller delivers when the goods are placed at the disposal of the buyer on the arriving means of transport ready for unloading at the named place of destination (beyond the terminal). The seller bear all risks involved in bringing the goods to the named place. DAP requires the seller to clear the goods for export and to procure a contract of carriage but has no obligation to clear the goods for import, pay any import duty or carry out any import customs formalities. The seller has no obligation to the buyer to make a contract of insurance. **FORMULA: DAP = FOB/FCA + FRT + Dest. O/C** **DPU: DELIVERED AT PLACE UNLOADED (insert named place of destination)** "Delivered at Place Unloaded" means that the seller delivers when the goods, are unloaded from the arriving means of transport at buyer's warehouse or designated place, and placed at the disposal of the buyer. The seller bears all risks involved in bringing the goods to and unloading them at the named place of destination. DPU requires the seller to clear the goods for export and procure a contract of carriage but has no obligation to clear the goods for import, pay any import duty or carry out any import customs formalities. The seller has no obligation to the buyer to make a contract of insurance. **FORMULA: DPU = FOB/FCA + FRT + Dest.O/C** **DDP: DELIVERED DUTY PAID** **(insert named place of destination)** "Delivered Duty Paid" means that the seller delivers the goods when the goods are placed at the disposal of the buyer, cleared not only for export but also for import on arriving means of transport ready for unloading at the named place of destination. Seller has to pay any duty for both export and import and to carry out all customs formalities at origin and at destination. Any VAT or any taxes payable upon import are for the seller's account unless expressly agreed otherwise in the sales contract. DDP represent the maximum obligation for the seller but he has no obligation to the buyer to make a contract of insurance. **FORMULA: DDP = FOB/FCA + FRT + Dest. O/C** **INTERNATIONAL MODES OF PAYMENT** Subject to existing laws and rules on foreign currency exchange, the internationally accepted standards and practices on the mode of payment or remittance covering import and export transactions, including standards developed by international trading bodies such as the ICC on trading terms (incoterms) and on international letters of credit such as the UCP, shall be recognized. a. Letter of Credit (L/C); b. Documents Against Payment (D/P)}; c. Documents Against Acceptance (D/A); d. Direct Remittance (DR); e. Advance Payment; and f. Open Account (0/A) including intercompany netting arrangement among non-bank related parties. A. **LETTER OF CREDIT (LC),** - also known as a **documentary credit** or **bankers commercial credit**, or **letter of undertaking** (**LoU**). - Letters of Credit are one of the most secure instruments available to international traders. An L/C is a commitment by a bank on behalf of the buyer that payment will be made to the exporter, provided that the terms and conditions stated in the L/C have been met, as verified through the presentation of all required documents. The buyer establishes credit and pays his or her bank to render this service. **COMMON TERMS IN L/C TRANSACTION:** **[Uniform Customs & Practice for Documentary Credits (UCP 600)]** **Advising bank (Bank in PH)** - the bank that advises the credit at the request of the issuing bank. a. **Applicant (importer)** - the party on whose request the credits issued. b. **Beneficiary (exporter)** - the party in whose favour a credit is issued. c. **Complying presentation** - a presentation that is in accordance with the terms and conditions of the L/C d. **Confirmation** - definite undertaking of the confirming bank, in addition to that of the issuing bank, to honor or negotiate a complying presentation. Confirming bank means the bank that adds its confirmation to a credit upon the issuing bank\'s authorization or request. e. **Honor** - to pay at sight if the credit is available by sight payment; - to inçur a deferred payment undertaking and pay at maturity if the credit is available by deferred payment; - to accept a bill of exchange (\'draft\") drawn by the beneficiary and pay at maturity if the credit is available by acceptance. f. **Issuing Bank** - the bank that issues a credit.at the request of an applicant g. **Negotiation** - the act of advancing or agreeing to advance funds to the beneficiary h. **Nominated Bank** - the bank with which the credit is available or any bank in the-case of a credit available with any bank. i. **Presentation** - either the delivery of documents under a credit to the issuing bank or nominated bank. **BSP L/C REGULATION** 1. All L/Cs must be opened on or before the date of shipment and only one L/C should be opened for each import transaction. 2. For purposes of opening an L/C, importers shall submit to the AAB the documents required for regulated imports. 3. Amendments of L/Cs need not be referred to the BSP for prior approval. L/Cs shall be negotiated in accordance with the terms and conditions set forth in the L/C and shall be governed by the Uniform Customs and Practices on Documentary Credits. (BSP Circular No. 742 dated 21 November 2011UCP 600 BASIC RULES IN L/COPERATIONS) B. **DOCUMENTS AGAINST PAYMENT (D/P)** - AAB\'s shall advise the importer of the receipt of complete original documents and effect the release of said documents to the importer upon receipt of payment. C. **DOCUMENTS AGAINST ACCEPTANCE (D/A)** - The original shipping documents are released to the importer by the AAB at the instance of the seller\'s bank upon the importer\'s acceptance of the seller\'s bill of exchange obligating the importer pay for the shipment at some future date. D. **ADVANCE PAYMENT** - Upfront cash to seller before shipment. This could be a full or part payment in advance. Advance payment is the least attractive option for the buyer, because it creates unfavorable cash flow. Foreign buyers are also concerned that the goods may not be sent if the payment is made in advance. It should be avoided unless buyer and seller know each other for a long time. E. **OPEN ACCOUNT (0/A)** - Shipping documents are sent directly to the buyer upon the importers promise to pay at some future date. D/A or O/A must be payable at least 30 days after B/L date F. **DIRECT REMITTANCE (DR)** - Banks may service within 29 calendar days after B/L date applications for direct remittance of import payments upon presentation of the complete original shipping documents and import clearance in case of regulated goods. **SOUTHWESTERN INSTITUTE OF BUSINESS AND TECHNOLOGY, INC.       ** [DISCIPLINE...ACCOUNTABILITY...PROFESSIONALISM...HUMILITY]{.smallcaps} NAUTICAL HIGHWAY, PANGGULAYAN, PINAMALAYAN, ORIENTAL MINDORO   *Contact Nos.: +63917-127-8500 \| +63912-448-6518* **TM 3 HANDOUT 1 POST ASSESSMENT** **NAME:\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_** **YEAR AND SECTION:\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_** Direction: Answer the following questions and write your answer on the space provided. \_\_\_\_\_1. Which of the following INCOTERM does not cover freight charges from port of origin to port of destination? A. CPT B. DAP C. FAS D. DPU \_\_\_\_\_2. Which of the following INCOTERMS is not considered as multimodal as far as transport from port of exportation to port of destination is concerned? A. CPT B. CIP C. FAS D. FCA \_\_\_\_\_3. This INCOTERM requires seller to include in his quotation the marine insurance premium and Ocean freight charges A. DAP B. DPU C. DDP D. CIP \_\_\_\_\_4. This INCOTERM requires seller to pay for export clearing charges and ocean freight charges at port of origin. A. FOB B. FCA C. FAS D. DAP \_\_\_\_\_5. This INCOTERM requires the importer to pay ocean freight charges upon arrival of goods at port of destination. A. DAT B. DAP C. FOB D. DDP \_\_\_\_\_6. This INCOTERM requires seller to deliver the goods to carrier's warehouse not unloaded from delivery truck, air freight charges and port to port insurance were prepaid by seller. A. FCA B. CIF C. DDP D. CIP \_\_\_\_\_7. This INCOTERM includes loading of goods to carrying vessel, internal insurance, inland freight and export clearing charges at port of origin. Which is not included? A. FOB B. CFR C. CIF D. CPT \_\_\_\_\_8. This INCOTERM is exclusively used for sea transport only. Ocean Freight Charges was prepaid at country of origin by seller but excluded marine insurance. A. FCA B. CFR C. CIP D. CIF \_\_\_\_\_9. The seller included in his quotation to the buyer loading of goods to vessel as well as expenses to cover risk against loss/damage to the goods during pendency of voyage by sea. Bill of Lading shows freight as "Pre-paid" from port of Shanghai, China up to the Port of Manila. A. CIF B. CPT C. DAP D. CFR \_\_\_\_\_10. What INCOTERM is referred when goods are made available by the seller at carrier's warehouse not unloaded from the delivery truck, cleared for export but airfreight charges will be paid by the importer upon arrival of goods? A. FCA B FOB C. CPT D. CIP **IDENTIFICATION. Identify the incoterms used in each situation.** \_\_\_\_\_\_1. The seller bears all costs and risks until the goods' arrival at the named place of destination including all taxes and customs formalities. \_\_\_\_\_\_2. The buyer's obligation in this incoterm commences when the seller delivers the goods to the first carrier. \_\_\_\_\_\_3. What INCOTERM requires the buyer to only pay the duties & taxes due on the importation? \_\_\_\_\_\_4. This INCOTERM requires the seller to include in his quotation the insurance premium and air freight charges. \_\_\_\_\_\_5. This INCOTERM obliges the seller to deliver the goods at the quay in the port of origin. \_\_\_\_\_\_6. This INCOTERM includes internal insurance, inland freight, export clearing charges and loading of goods to carrying vessel at port of origin. \_\_\_\_\_\_7. What incoterm allows the buyer to pick up the goods at the seller's premises? \_\_\_\_\_\_8. The buyer bears all the costs when the goods have been passed the ships rail, bill of lading shows freight as "collect". \_\_\_\_\_\_9. The seller's obligation is being terminated once he delivered the goods at the disposal of the buyer--unloaded from the delivery truck. \_\_\_\_\_\_10. This incoterm only allows the seller to make the goods ready for pick up. **ESSAY**. Explain each mode of payment in your own words. (5 points each) 1. Letter of Credit (L/C) 2. Document Against Acceptance