Customs Procedures and Incoterms in International Trade

Posted on Feb 21, 2025 in Commercial and Financial Management

Customs Procedures in International Trade

Customs play a crucial role in exercising control over international commercial exchanges. It is a government office responsible for collecting customs duties and taxes, and enforcing rules and regulations regarding what can enter a country. They also fight against smuggling activity.

European Union (EU): No customs duties are applied to goods traveling within the EU territory (Customs Union). A common external tariff is applied on goods entering the EU. The EU Customs Union (EUCU) includes all member states except Andorra and Turkey.

Customs Procedures

The customs procedure starts when an importer files an entry. This is the required documented permission for goods to enter or leave a country. Customs clearance is often handled by a shipping agent (forwarder) who proves that customs duties have been paid and that all necessary documents are ready (e.g., invoice, certificate of origin, certificate of inspection, certificate of insurance). Goods are not released until all taxes are paid and the shipment has been approved.

The task of interacting with Customs can also be done through a Customs broker, a representative of the importer with the knowledge and experience needed to deal with Customs.

Import Customs Procedures

This procedure is dictated by Customs. All imported goods must pass through customs. Customs will issue the SAD (Single Administrative Document), which helps customs authorities to charge the proper tax and also check the goods against illegal imports.

Export Customs Procedures

Similar to import procedures, often requiring a SAD. Before the SAD, the exporter must submit an application including the Commercial Invoice and Packing List.

Customs Clearance (Imports)

  1. Duty/Tariff: Tax the importer must pay to bring goods into their country.
  2. Harmonized System Codes: Used to classify imports and exports.
  3. Dumping: Customs can determine if goods are being sold at a price below their commercial value.
  4. Non-tariff barriers.
  5. Foreign trade zones.

Incoterms in International Trade

Incoterms allow parties to designate a point at which the costs and risks of transport are precisely divided between the seller and the buyer. Incoterms also allocate responsibility for customs clearance and duties between the parties.

  • FOB (Free on Board): The seller must prepare the goods for export and load them onto the specified ship. The buyer and seller share the costs and risks once the goods are on board. This term is not used for goods transported in containers by more than one mode of transport.
  • FCA (Free Carrier): Usually used for goods transported in containers by more than one mode of transport. The seller delivers the goods, cleared for export, to the buyer’s carrier at a specified place. The buyer is then responsible for transportation to the specified place of final delivery.
  • EXW (Ex Works): The seller makes the goods available at their premises, and the buyer is responsible for all other risks, transportation costs, taxes, and duties from that point onwards (quote price).
  • CPT (Carriage Paid To): The seller pays to transport the goods to the specified destination. Responsibility for the goods transfers to the buyer when the seller passes them to the first carrier.
  • CIP (Carriage and Insurance Paid): Same as CPT, but the seller also pays for insurance. Used for goods being transported by container by more than one mode of transport.
  • CIF (Cost, Insurance, and Freight): Used if transporting only by sea. The seller must pay the costs of bringing the goods to the specified port. They also pay for insurance. The buyer is responsible for risks when the goods are loaded onto the ship.
  • CFR (Cost and Freight): The seller must pay the costs of bringing the goods to the specified port. The buyer is responsible for risks when the goods are loaded onto the ship.
  • FAS (Free Alongside Ship): The seller places the goods alongside the ship at the specified port. The seller must prepare the goods for export, but the buyer is responsible for the cost and risk involved in loading them.
  • DDP/DTP (Delivered Duty Paid): The seller is responsible for delivering the goods to the named destination in the buyer’s country, including all costs involved.
  • DAP (Delivered at Place): The seller pays for transport to the specified destination, but the buyer pays the cost of importing the goods. The seller takes responsibility for the goods until they’re ready to be unloaded by the buyer.
  • DAT (Delivered at Terminal): Same as DAP, but at a terminal.