ANCILLARY FREIGHT CHARGES, DEMURRAGE, ETC.: $ Shippers of cargoes internationally learn quickly the array of additional

surcharges that can apply on an ancillary basis that sometimes go way above and beyond what costs were originally anticipated.

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Many experienced freight personnel budget from 1% to 3% additionally when calculating freight costs in anticipation of unexpected variables. If they don’t happen, they’re ahead. If they do, they have them covered.

Some of these costs are

• Bunker Fuel Surcharges

• Security Fees

• Container Service Charges

• Terminal Handling Charges

• Demurrage

• Currency Adjustment Factors

Example

An exporter from Germany sells electronic components on a CIF Wellington basis to an importer in Taranga, New Zealand. The goods are shipped by ocean freight through the port of Hamburg.

When the goods arrive and the importer begins the clearance process in New Zealand, they discover that the documents do not meet the documen-tary guidelines for import in New Zealand.

In Wellington, importers are given 5 days to clear the goods and pick them up from the inbound ocean carrier’s facility before penalties (demurrage) are accounted for.

The error in the shipper’s export documentation becomes an issue and 9 days expire before the correct documents are provided by the exporter and handed over to New Zealand Customs.

When the importer arranges for pick up from the carrier, they are advised that demurrage penalties will be an additional $850 NZD. In the CIF Incoterms the importer is responsible for clearance, import formali-ties, and costs. But the exporter is required to provide documentation to the importer enabling them to make the import clearance in their country.

So this case “opens up Pandora’s box” and places the situation into a

“gray area” of Incoterms global trade management.

Demurrage can be the cost which makes the most unanticipated impact. This cost results from carriers charging fees that grow incre-mentally when freight is not picked up in the allotted time frame local to the “ordinary and customary” guidelines in that port or country. Demurrage is always a cost which when occurs may not be clear as to who the responsible party is and also how Incoterms might apply.

Common sense dictates that if the exporter created the problem by send-ing incorrect documents, they would be responsible for any resultsend-ing excess costs. But technically, this is not clear.

A number of issues arise:

• Did the importer in the purchase order advise what documents are required and how they should be constructed?

• Did the exporter ask those questions?

• What role did the export freight forwarder and the import custom-house broker play in the handling of the documentation?

• What role did New Zealand Customs play potentially in an

“interpretative” area of import documentary requirements?

DUTIES, TAXES, VAT, OR GST, ETC.: $$$$

Most countries customs authorities’ primary reason for existence is for the purpose of collecting duties, taxes, and related costs.

These costs impact the landed costs significantly on most products shipped around the world.

In many countries certain products move across the borders freely, such as, but not limited to, printed matter, personal effects, relief goods, and items sold to government agencies.

Having noted that 99% of goods move under some level of taxation to and from most origins and destinations globally.

It is in that 99% that the decision on the Incoterms will play a large role on what the costs are to each party—the seller and the buyer—and who assumes the risks of managing the customs clearance process in that arriving destination.

Landed Cost Modeling • 119 In some situations, duties and taxes can amount to as much as 40% of the value of the goods. In many developing nations this is the case as their governments impose stiff taxes in order to “stem” the tide of imports that impact their trade imbalances.

A company in Belgium ships certain machine parts to a customer in Sao Paulo, Brazil. The CIF value heading into Brazil is R$100,000.00 (real/ reais).

The duty and tax rate is almost 38%. This brings the landed cost to almost R$140,000; and when you add in import permits, product regis-trations, warehousing, the clearance process, and inland freight to desti-nation manufacturing point, the costs could increase another R$10,000, making the landed costs very high.

When companies are making choices about Incoterms … when they take the responsibility for paying duties and taxes they could be assuming a cost which may be half the value of the goods. Treading carefully here is a prudent decision.

Some countries such as Canada, the European Union, Argentina, Australia, and Egypt, among hundreds (complete list in the Appendix), impose a form of VAT or GST taxes on goods imported into that country.

In some countries there is a refund process which enables companies to get back all or part of that tax through a specialized application process.

The United States, along with a few countries like Hong Kong (though now part of China), Saudi Arabia, and Bermuda, do not have any of these forms of value-added taxes (VAT).

VAT is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the

“value added” to a product, material, or service, from an accounting point of view, by this stage of its manufacture or distribution. The manufacturer remits to the government the difference between these two amounts, and

retains the rest for themselves to offset the taxes they had previously paid on the inputs.

The “value added” to a product by a business is the sale price charged to its customer, minus the cost of materials and other taxable inputs. A VAT is like a sales tax in that ultimately only the end consumer is taxed.

It differs from the sales tax in that, with the latter, the tax is collected and remitted to the government only once, at the point of purchase by the end consumer. With the VAT, collections, remittances to the government, and credits for taxes already paid occur each time a business in the supply chain purchases products.

From a historical perspective, Maurice Lauré, joint director of the French Tax Authority, the Direction Générale des Impôts, was first to introduce VAT on April 10, 1954, although German industrialist Dr. Wilhelmvon Siemens proposed the concept in 1918. Initially directed at large busi-nesses, it was extended over time to include all business sectors. In France, it is the most important source of state finance, accounting for nearly 50%

of state revenues.

Each country rules this area of tax differently. In general, individual end- consumers of products and services typically cannot recover VAT on pur-chases, but businesses are able to recover VAT (input tax) on the products and services that they buy in order to produce further goods or services that will be sold to yet another business in the supply chain or directly to a final consumer. In this way, the total tax levied at each stage in the economic chain of supply is a constant fraction of the value added by a business to its products, and most of the cost of collecting the tax is borne by business, rather than by the state. Value-added taxes were introduced in part because they create stronger incentives to collect than a sales tax does. Both types of consumption tax create an incentive by end consum-ers to avoid or evade the tax, but the sales tax offconsum-ers the buyer a mechanism to avoid or evade the tax—persuade the seller that he or she (the buyer) is not really an end consumer, and therefore the seller is not legally required to collect it. The burden of determining whether the buyer’s motivation is to consume or resell is on the seller, but the seller has no direct economic incentive to collect it. The VAT approach gives sellers a direct financial stake in collecting the tax, and eliminates the problematic decision by the seller about whether the buyer is or is not an end consumer.

Landed Cost Modeling • 121

Example: Canada HOW GST/ HST WORKS

The GST (Goods and Services tax) is a tax that applies to the supply of most property and services in Canada. The provinces of Nova Scotia, New Brunswick, and Newfoundland, and Labrador, referred to as the participating provinces, harmonized their provincial sales tax with the GST to create the Harmonized Sales Tax (HST). Generally, the HST applies to the same base of property and services as the GST. In some participating provinces, there are point- of- sale rebates equivalent to the provincial part of the HST on designated items.

As of July 1, 2010, Ontario harmonized its retail sales tax with the GST to implement the HST at the rate of 13% and British Columbia harmonized its provincial sales tax with the GST to implement the HST at the rate of 12%.

Also, as of July 1, 2010, Nova Scotia increased its HST rate from 13% to 15%.

Almost everyone has to pay the GST/ HST on purchases of taxable sup-plies of property and services (other than zero- rated supsup-plies). A limited number of sales or supplies are exempt from GST/ HST.

Although the consumer pays the tax, businesses are generally respon-sible for collecting and remitting it to the government. Businesses that are required to have a GST/ HST registration number are called registrants.

Registrants collect the GST/ HST on most of their sales and pay the GST/ HST on most purchases they make to operate their business. They can claim an input tax credit, to recover the GST/ HST paid or payable on the purchases they use in their commercial activities.

GST/ HST registrants must meet certain responsibilities. Generally, they must file returns on a regular basis, collect the tax on taxable supplies they make in Canada, and remit any resulting net tax owing.

Canada is one of a few countries that allows a foreign entity to become a

“registrant” and act as “importer of record” and collect back GST charges.