In international trade, agreements are made regarding transport, costs, and risks. These are usually laid down using Incoterms. Less visible, but at least as important, is the influence of these arrangements on the customs value, the basis for the calculation of import duties.
Although Incoterms and the customs value are legally separate, in practice they are closely connected. The chosen Incoterm determines which costs are included in the price and thereby indirectly which costs form part of the customs value. For businesses, it is therefore essential to understand this relationship and to use it strategically.
The customs value forms the basis for import duties and is usually determined on the basis of the transaction value of the imported goods. This is the price actually paid or payable for the goods when sold for export to the EU, as laid down in Article 70 of the Union Customs Code. Where this transaction value method cannot be applied, alternative methods are used on the basis of Article 74 UCC.
The transaction value is not adopted on a one-to-one basis. Pursuant to Articles 71 and 72 UCC, it must be adjusted by certain elements. Costs such as transport and insurance up to the EU frontier, packaging costs, and royalties are added. Costs incurred after importation within the EU may, conversely, be deducted, provided that they can be distinguished.
The objective is to establish the value of the goods at the time of entry into the EU. In practice, errors frequently arise here, for example because costs are not clearly itemised or because there is insufficient insight into the price structure.
Incoterms are international standard rules developed by the International Chamber of Commerce. They determine who arranges transport, who bears the risk, and who pays the costs.
Incoterms exclusively govern the relationship between the buyer and the seller and do not form part of customs legislation. Nevertheless, they have a significant impact on the customs value, as they determine which costs are already included in the invoice price.
The Incoterms 2020 comprise various groups. Under EXW, the buyer bears almost all costs and risks. Under the F-terms, the seller delivers the goods to a carrier and the buyer arranges the main carriage. Under the C-terms, the seller pays for the transport, but the risk transfers at an earlier stage. Under the D-terms, the seller bears almost all costs and risks up to the place of destination.
In practice, Incoterms and the customs value are often treated separately. Procurement departments select an Incoterm based on commercial or logistical considerations, while the customs department only assesses the valuation at a later stage.
This may result in an incorrect customs value, import duties that are too high or too low, and discussions with the customs authorities. In addition, relevant information is often spread across different documents and systems, which complicates a consistent valuation.
A Dutch importer receives an invoice without any reference to an Incoterm. Due to a lack of internal clarity, the customs broker assumes EXW and adds transport and insurance costs to the customs value.
It later appears that the actual Incoterm was DDP place of destination. The costs were therefore already included, and part of the costs should even have been deducted from the invoice price.
The result is that the customs value is established too high, too much import duty is paid, and a time-consuming repayment procedure is required. This example shows that the absence of an Incoterm can have direct financial consequences.
Incoterms do not determine all elements relevant to the customs value. Certain components fall outside their scope, such as royalties, licence fees, assists, and commissions. These elements must be assessed separately and may still form part of the customs value.
The relationship between Incoterms and the customs value offers opportunities for deliberate steering. By selecting an Incoterm under which costs remain transparent, greater control over the valuation can be achieved.
In addition, a clear breakdown of costs helps to prevent unnecessary elements from being included. This requires effective cooperation between procurement, logistics, and customs. Organisations that structure this effectively can mitigate risks while optimising costs.
Incoterms also play an important role in export. In particular, under deliveries on DDP terms, the seller is responsible for costs and import duties in the country of destination.
When import duties increase, this can have a direct impact on margins and may even lead to losses. In a dynamic trading environment, this is a realistic risk. It is therefore important to also choose Incoterms strategically for export and to lay them down clearly in contracts.
The customs value is not a static concept, but the result of choices made within the supply chain. Incoterms play an important role in this, as they determine the price structure.
At the same time, they constitute only part of the overall framework. For a correct valuation, other elements must also be assessed separately.
By approaching Incoterms and the customs value in an integrated manner and taking them into account already at the stage of contract formation, businesses can mitigate risks, improve compliance, and steer on costs and margins.
Those who do this effectively turn the customs value from a retrospective obligation into a strategic instrument applied in advance. Want to know more? Please contact one of our experts.
While every care has been taken in the preparation of this publication, Customs Knowledge accepts no liability for any errors or omissions, nor for their consequences. This article is not intended as specific advice. Please also refer to the General Terms and Conditions of Customs Knowledge BV.
