BY Maxime Mekki-Kaddache and Wanissa Nemsi, University of Montpellier, Centre du Droit de l'Entreprise, Program of Master 2 "Droit du Commerce International"
Overview
This QuickCounsel examines the diversity and the efficiency of provisions that drafters of international contracts may dedicate to customs costs and formalities.
Diversity of Customs Provisions
A. Standard provisions: the Incoterms 2010
The Incoterms are standard provisions developed by the International Chamber of Commerce, the last version being from 2010. With respect to customs, Incoterms allocate some obligations as well as costs and formalities to one or both parties. Those terms are divided into two types:
- The ones which allocate all the obligations to one party: For example, "EX: Ex Works" Incoterm allocates to the buyer not only all the export customs duties and declarations but also the destination import customs clearance and duties. On the contrary, "DDP: Delivery Duty Paid" Incoterm allocates these obligations to the seller.
- The ones which divide the obligations between the parties: For example, "FCA: freecarrier" and "CPT: Carriage Paid To" Incoterms allocate the customs declaration and duties due in the country of origin of the goods to the party located in this country, and the customs clearance and duties due in the country of destination to the other one.
B. Adjusted provisions
- Provisions adjusting Incoterms:
The parties may adjust Incoterms to their specific needs. For example, they may specify that in any proceedings with customs authorities of the place of exportation or importation, the party receiving the goods will control the proceedings. It allows parties to keep control on issues, for which the knowledge of specific usages of a country may be important or for which the rapidity may be crucial (such as perishable goods).
- Provisions allocating customs duties:
Provisions may just allocate the payment of customs duties to one party. More precisely, one party will have to bear the cost of duties due to the importation or the exportation of the product. "Customs duties" is actually a narrow term, which only covers a part of customs costs. This term does not include additional costs linked to customs formalities such as the price of health or security checks.
- Provisions allocating import charges:
Various costs other than customs duties will be involved. They can be referred to as "import charges" and are linked with customs obligations. They include value added taxes, duties, tariffs, excise taxes (for certain categories of goods), any other cost assessed by a government authority in connection with the importation of goods, third party brokerage fees, penalties, classification charges (under the Harmonized System classification code), charges for export compliance screening and verification and the assignment of Export Control Classification Number (for the U.S), charges related to the management of variances between the quoted import charges and actual costs. They can even include other costs that may arise after delivery of the goods, and which could be borne by the contractual origin, such as surcharges, fines, penalties or other charges that may be imposed by customs or tax officials after delivery of the goods. The provision should clearly indicate which party will bear these import charges.
- Provisions relating to intermediaries:
Provisions may provide for the intervention of intermediaries. Thus, provisions of General Conditions of Sale or User Agreements may designate persons to perform the customs process. For example, delivering goods from a contractual origin could automatically force the party receiving the goods to contract with a carrier. This carrier could be empowered to enter into other contracts with third parties in order to perform customs services.
Those intermediaries are usually customs brokers and/or freight forwarders. An example of such a clause can be found in Ebay's User agreement: "By purchasing a Global Shipping Program Item, you will be entering into a binding contract with the Seller for the purchase of the GSP Item, as well as an agreement with XXXX for the provision of the Services, including parcel processing, international shipping and tracking, and customs clearance. You acknowledge and agree that XXXX may use third party logistics providers, shipping carriers, customs brokers, freight forwarders, and/or other subcontractors under contract with XXXX to assist it in performing the Services."
- Provisions relating to subcontractors:
A contract of sale of goods can lead to one or more subcontracts, for which the party receiving the goods could be responsible before customs authorities. Provisions could state that one party will grant the carrier (and, to the extent necessary, some service providers) a "power of attorney" authorizing the carrier and/or the service providers to act as its agent(s).
Moreover, provisions could specify that the liability for the importation/exportation of goods will remain with the party receiving the goods, even though a third party will take care of the customs formalities. Consequently, the party receiving the goods will have to make sure that the importation of the product is legal in the country of destination.
- Provisions allocating intellectual property charges:
Some costs related to intellectual property can also be involved when importing or exporting goods. Indeed, some provisions may specify that one party will have to comply with all the laws and regulations related to the importation of goods, including intellectual property rights for the importation of specified goods. For example, when importing CDs or DVDs, the party may have to pay rights related to copyrights (such as payment for private audio-visual copies).
Efficiency of Customs Provisions
A. Efficiency of Incoterms 2010
- Practical difficulties:
Practical difficulties may appear with the use of certain Incoterms 2010. A party should not only choose the term appearing as the most advantageous in order to minimize its obligations but also the one permitting this party to perform its obligations properly.
For example, if the parties opt for an "Ex Works" sale, the party receiving the goods will have to carry out not only customs duties in the country of destination of the goods but also all customs duties relating to the export in the country of origin of the goods. This obligation raises issues as this party may not have employees or an entitled freight forwarder to act on his behalf in that country. Conversely, the same kind of logistical problems may occur in a "DDP" sale.
In case of disagreement or litigation with customs authority (for example an error of classification under the Harmonized System), only one party will be involved in the proceedings (the one liable under the contract). Consequently, if all customs duties are allocated to the party sending the goods, the party receiving the goods would be unable to intervene if customs difficulty occurs in his own country. It may be dangerous as the party sending the goods may not know the law, usages or practices of this country necessary to unlock the situation. If the goods are blocked, the party who does not bear the customs formalities will be bound and unable to solve the issue, even though the latter is in a better situation to do so. In order to avoid these situations, it is recommended to choose Incoterms allocating the customs obligations to the appropriate parties.
- Contradiction with usages:
Incoterms may also raise issues if their content differs from local usages concerning customs costs and duties. A provision could indicate whether Incoterms or usages should prevail in case of such contradiction. Moreover, previous practices existing between the parties can also differ from Incoterms' content and raise similar issues.
- Origin of the goods:
Another question to take into consideration is the origin of the goods, which is determined by the law of the country of destination. Therefore, if the party sending the goods has to clear the goods, a provision should oblige him to describe the origin under the rules applicable to the country of destination. It is an important detail because failure to comply with the rules of origin may lead to important fines, for example under anti-dumping duties. A provision may also specify who will be liable for such a fine. Indeed, under the law of the country of destination the party clearing the goods is not necessarily the one liable for a failure to comply with the rules of origin.
B. Efficiency of adjusted provisions
Adjusted provisions raise the same risks as standard Incoterms: loss of control on customs processes and proceedings with customs authorities, problem of determination of the origin of the goods.
Specific issues can also arise from those particular clauses. Thus, in the case of representation, a party could be held liable by its agent. In this respect, it is recommended to specify which type of freight forwarder will be appointed. The liability of the party engaged will depend on this qualification. If the intermediary is a commissioner, he will be liable before customs authorities. If the intermediary is an agent, he will only represent the party sending the goods and the latter could be liable for the agent's doings.
Conclusion
Provisions related to customs formalities are often neglected by individuals and businesses. For instance, the value of the imported or exported goods are often underestimated on customs declarations. Nowadays, customs duties encompass other issues such as security, health or safety procedures. Those new issues increase the impact of customs formalities and call for enriched provisions.
Additional Resources
- "Tax clauses in international contracts", Professor Pierre Mousseron, International business law journal n°6, 2007, p. 751. Ebay.com's buyer terms and conditions: http://pages.ebay.com/shipping/globalshipping/buyer-tnc.html; http://pages.ebay.com/help/buy/shipping-globally.html Incoterms 2010 International Chamber of Commerce of Paris: http://www.entreprises.cci-paris-idf.fr/web/international/publications-internationales/incoterms-2010 ICC Guide to Incoterms 2010, Professor Jan Ramberg, ICC publication n°720E, 2011. http://store.iccwbo.org/icc-guide-to-incoterms-2010