by M. Sigmund Shapiro
June 4, 1999
Some time ago, I wrote about the advantages a sophisticated
exporter or importer would enjoy by taking note of the terms of sale
that should be employed in international transactions.
An axiom in international trade that probably harks back to the
ancient Phoenicians, states that you should buy FOB and sell CIF.
The reason is fairly obvious, all things being equal. An FOB
purchase "presumably" covers only the cost of the goods at the FOB
point (factory or port of exit, while CIF can include a myriad of
items either actual or built up, unknown to the purchaser. Why then,
do many importers accede to the seller’s CIF terms? Mostly its
because of convenience. The seller arranges and is responsible for
delivery to the discharge port. But at what cost? Especially since
there are ample opportunities at point of origin to arrange shipping
and other details subsequent to purchase. And at the same time, save
some duty.
Here’s how. Under current US Customs law and regulation, the
price of goods is usually the "transaction value" which is
essentially defined as the total payment for the goods, "exclusive
of any costs, charges or expenses incurred for transportation,
insurance and related services incident to the international
shipment of the merchandise…" These costs must be the actual
ones-not estimates, and evidence, apart from the invoice for the
goods, must be submitted to obtain a deduction from the invoice to
arrive at a dutiable value. So if you ship CIF, these elements must
be developed and evidence of payment submitted, in order to deduct
the charges. This isn’t a problem with an FOB purchase since the
charges aren’t in the selling price.
Of course, FOB can be a tricky term. To buy ex-works creates a
problem for the buyer not familiar with the inner transportation
techniques of, say, Korea. Easier, then to buy FOB Pusan and forgo a
deduction for the freight from the factory to seaboard. But, if the
supplier can furnish the importer with a copy of a trucking bill,
the deduction will probably be allowed. And of course, the ocean
freight is no longer a problem, since it is paid on this side.
Insurance is another problem. Most CIF shipments are insured
under the seller’s marine policy, the rate for which is not easily
identifiable. Customs has ruled that only independent evidence of
actual payment will allow a deduction. Furthermore, there is a dimly
understood IRS regulation that assesses an excise tax on insurance
premiums paid abroad. FOB shipping, with insurance underwritten in
the US avoids this complication, allows a deduction from Customs
value and, incidentally, allows for quicker, more efficient claims
payment.
The biggest deduction that can be allowed from a CIF price is, of
course, the ocean freight. In days past, if you were buying CIF, it
was an easy matter to contact the steamship agent and determine,
from the ocean manifest, the amount of freight charged. Customs
accepted this method, notwithstanding that the shipper may have paid
a lesser amount. As long as there was a confirming number on the
manifest, deduction could be made.
This is no longer true. The recent passage of the Ocean Shipping
Reform Act provides for confidential agreements between carriers and
shippers/consignees. Steamship lines don’t have to show the freight
amount on bills of lading or manifests. When Customs was approached
for a solution, they said, in effect, "too bad"; either produce
evidence of what was charged or forgo the deduction.
A Hobson’s choice? You bet. Another bit of evidence to show that
importing should be done on a FOB point of origin basis.
Ironically, however, the new law has little or no effect on the
rest of the trading world. Virtually every one of our trading
partners assess duties on a CIF price. (The U.S. has tried to
conform to the rest of the world in the past but it didn’t work.
Because of our size, the same goods would land at different prices
all over the country). So exporters are in the driver’s seat in
quoting CIF.
