1. Ex Works – VAT issues
Under an Ex Works (“EXW”) delivery, the seller makes the goods available to the buyer at the seller’s premises or another named place, and the buyer is responsible for collecting the goods. The buyer even loads the goods themselves. If the seller loads the goods, this is at the buyer's risk! The buyer is responsible for export and import formalities. Despite EXW being unsuitable for international trade, it is still frequently used.
One reason EXW is not suitable for international trade involves VAT. When goods are exported from the EU, the VAT zero rate can generally be applied. The seller declares the goods for export for VAT purposes and applies the zero rate. The required proof that the goods have left the EU – the confirmation of exit – is held by the buyer, who is responsible for the export declaration. Consequently, the seller does not have conclusive documentation available for VAT purposes.
It is also common for the buyer to fail to export the goods and thus not make an export declaration. The seller, assuming the goods would be exported, incorrectly declares the goods as exported for VAT purposes. The seller then incorrectly provides the goods at the VAT zero rate.
2. Ex Works – Exporter issues
The exporter must be established in the EU and must have the authority to decide that the goods are sent to a destination outside the EU customs territory. This means that not all parties can act as exporters. If you sell goods to a party established outside the EU, the buyer cannot act as the exporter. There are two solutions possible in this case:
The first solution is to avoid agreeing to EXW. With another Incoterm – for example, Free Carrier (“FCA”) or Free On Board (“FOB”) – the seller is responsible for export formalities. The second option is to have a third party established in the EU act as the exporter. This party must have the authority to decide that the goods are sent to a destination outside the EU. This should be contractually documented. Model agreements provided by organizations such as FENEX and evofenedex can be used for this purpose.
Using EXW for international trade involves many complexities. The Incoterm FCA is often recommended as an alternative.
3. FCA – seller fails to make export declaration
With the INCO-term FCA applicable, there are two ways to deliver the goods. The first is that delivery occurs at the seller’s premises when the goods are loaded onto the buyer’s transport vehicle. The second is that delivery occurs at another agreed location when the goods have been loaded onto the seller’s transport vehicle, have reached the agreed place, are ready to be unloaded from the seller’s transport vehicle, and are made available to the person designated by the buyer (carrier).
Under FCA, the seller is responsible for export formalities, and the buyer is responsible for import formalities. In practice, it sometimes happens that the seller forgets to make an export declaration. In this case, the seller, lacking an export declaration, does not have proof of export for applying the VAT zero rate.
4. Customs Value – accuracy of calculation
Incoterms not only determine who is responsible for customs formalities, but also play a crucial role in the calculation of customs value. There are six methods for calculating customs value, with the transaction value method often being used. In short, in this case the transaction price serves as the basis for customs value, with additional and deductible elements that need to be considered. Examples of these additional and deductible elements include freight and insurance costs. The amounts of these costs depend on the Incoterm used.
Incorrect amounts may be attributed to the customs value, leading to a customs value that is either too high or too low. As a general rule, all freight and insurance costs up to the EU border should be added to the customs value if they are not included in the price. Freight and insurance costs from the EU border to the destination may generally be deducted if they are included in the price. However, these elements must be distinguishable. Therefore, it varies by Incoterm whether part of the freight and/or insurance costs should be added or which costs may be deducted. The differences are outlined with three different Incoterms:
- FOB [Free On Board] [port of departure]: freight and insurance costs up to the EU border are added.
- CFR [Cost and Freight] [port of arrival]: only insurance costs up to the EU border are added.
- DDP [Delivered Duty Paid] [place of arrival]: freight and insurance costs within the EU can be deducted.
To correctly add to or deduct from the transaction price, it is important to use the correct port or place of arrival as specified by the Incoterms. Additionally, insurance costs cannot always be deducted, as insurance costs are not included in Article 72 of the Union Customs Code (UCC). If insurance costs are listed separately on the invoice and a lower “invoice value excluding insurance costs” is known, then they can generally be deducted.
5. DDP delivery – Does it include VAT?
Under DDP delivery, the seller is responsible for paying import duties and applicable taxes. A common question is whether VAT is included with this Incoterm applicable. Often, buyers and sellers assume that VAT is included in the import duties. However, this can sometimes lead to disputes. To avoid unexpected surprises, clearly agree in advance whether the payment includes VAT upon import. The implications can be significant, as the VAT rate in the Netherlands is 9% or even 21%.
Conclusion
Proper application of Incoterms is crucial, especially for accurate handling of customs formalities! If you have any questions, feel free to contact one of our advisors.