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Revealed: Four practical examples of Incoterms and the potential Vat treatment of these transactions

by , 17 March 2014
If you sell and export goods, you must apply Incoterms to determine the nature of your export. This will help ensure you apply Vat at the zero-rate to the transactions correctly. Continue reading for four practical examples of the potential Vat treatment of Incoterms.

What are the Vat consequences of Incoterm Transactions?

In this article, we told about the Incoterms (International Commercial Terms).

We explained that Incoterm is a term of the contract of sale that indicates the parties' agreement with respect to:

  • Carriage of the goods from the seller to the buyer; and
  • Export and import clearance.

We also highlighted that Incoterms are useful if you want to find out about the nature, terms and consequences of an export. Now, we're going to give you examples of Incoterms and the Vat implications.

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Here are the practical examples of the Incoterms and Vat consequences of these transactions

The Practical Vat Loose Leaf Service outlines four Incoterms and the Vat implications:

#1: EXW (Ex Works)

What does it mean? It means you're responsible for the manufacture or assembly of the goods, but aren't responsible for loading the goods on any collecting vehicle or for clearing them for customs purposes.

For example, Extruded Polyethylene (EPE) in Rosslyn receives an order for 500m of 50mm irrigation pipe from Zamcopper. The agreement is EXW. Accordingly, EPE manufactures the pipe and on due date, Zamcopper comes and collects it from EPE's premises in Rosslyn.

What are the Vat implications?

Goods sold 'ex works' generally indicate an indirect export. Some vendors quote EXW in their contracts, but make an additional charge for the transport cost.

In that case, provided the supplier takes full responsibility for delivering the goods to the recipient at an address in an export country or to a designated harbour or airport in South Africa. This means the export is regarded as a direct export.

#2: FOB (Free on Board)

What does it mean? It means you're responsible for ensuring the goods are transported from the plant to the vessel. Risk transfers to the customer when the goods pass the ship's rail.

What are the Vat implications? This term could indicate an indirect export. If so, you'll have to comply with the Export Incentive Scheme rules.

#3: CIF (Cost, Insurance and Freight)

What does it mean? Here you're responsible for the transport costs and assume the risks relating to the delivery of the goods to the nominated port of destination or delivery.

What are the Vat implications? This will generally indicate a direct export.

#4: CFR (Cost and Freight)

What does it mean? It means you're responsible for the transport costs of delivering the goods to the nominated port of destination or delivery.

What are the Vat implications? This could indicate a direct export.

There you have it. Now that you know about Incoterms, make sure you apply Vat at the zero-rate correctly when it comes to exports.

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