A179: As I have previously stated, Incoterms are ready-made suits: they may not always fit and, in this case, there is no exact match between the Incoterms rules options and an Indirect Export from South Africa. But perhaps we can get close enough to make a modified or ‘tailored’ term fit.
An Indirect Export is one where the SA seller (the vendor for VAT purposes) delivers control of the cargo to the buyer (the Qualifying Purchaser) at any address in South Africa. Thereafter, the non-resident will arrange to export the goods. In this, note that a port or airport in the Republic qualifies as an address in South Africa.
The cornerstone in all of this is to understand what “to export” means for SA Revenue Services, the body which administers both the Customs Act and the VAT Act. For SARS, being in control of an export has two components (that is to say, two primary components – remember, the devil is in the detail. There’s more to all of this.)
Firstly, the party exporting must control the supply chain event from a place in the Republic to a place in the foreign country – which ‘place’ in both instances could be a port or an airport as much as an inland address. The supply chain therefore could be as inclusive as door-to-door, or ‘merely’ the port-to-port or airport-to-airport fragment, or any combination thereof.
In layman’s terms, the party exporting appoints the carrier and pays the freight, the international carriage (although in roadfreight, they may operate their own vehicle to achieve the same end).
Crucially, the second aspect of controlling an export is to act as the exporter of record and to obtain Customs’ release.
In an export, one party acts as both the shipper and the exporter. These responsibilities cannot be divided.
Accordingly, exporting, for SARS purposes, falls into two models. Firstly, there is a supply where the SA seller acting as the supplying vendor pays the international carriage directly to the carrier (thus acting as the shipper) and acts as the exporter of record. Note here how this aligns the seller with the vendor; with the shipper; with the exporter. One party takes all four roles. This is a Direct Export. With the narrowest of exceptions, this is a zero-rated supply.
The second model involves the buyer (a non-resident, non-vendor Qualifying Purchaser) paying the international carriage directly to the carrier, acting as both the shipper and the exporter. This is an Indirect Export.
As the buyer pays the “freight”, the C- and D-prefixed Incoterms would not apply, and as the buyer acts as exporter (or, at least, as the seller does not act as exporter) the F-prefixed Incoterms could not apply.
So, by elimination, the only remaining Incoterms rule is EXW. Note that this is regardless of the rate of tax applied. Whether the vendor applies the standard-rate or elects to zero-rate in terms of Export Regulation R.316 Part Two and Three, EXW is the only Incoterms rule allowed for Indirect Exports.
But the raw term does not fit the common model.
The first challenge is collection, in that an EXW term excludes from the seller’s obligations the risk and cost of loading the collecting vehicle. It is, however, common practice in South Africa for the seller to load the buyer’s vehicle, and so EXW unmodified would not describe the physical model.
If the parties agree to modify the term to allow for loading, the seller is encouraged to contemplate if they wish to take the risk and the cost of this responsibility or only the cost.
Of course, there are examples where the seller would not undertake the loading of the buyer’s vehicle, in which case (however rare) EXW would fit in this aspect without modification.
A second challenge is that EXW obligates the seller to issue a “commercial” invoice, which would be incorrect in the intended model. As a local sale to a non-resident, the seller would be cautioned to only issue a tax invoice, as they would for any local sale, and to avoid the commercial invoice entirely.
If, after collection, the Qualifying Purchaser wishes to export, their local Registered Agent will facilitate the commercial invoice. Again, EXW must be modified to reflect this new arrangement.
One further note of caution. EXW requires the buyer to issue the seller with evidence of delivery. The seller should ensure that securing such evidence a) does not prejudice the seller should the buyer fail to collect and b) that they avoid signing any documentation offered to them by the buyer’s collecting carrier.
The ideal condition would be that EXW is modified further, to establish that the ‘evidence of delivery’ is the seller’s document endorsed by the collecting carrier.
In short, if Incoterms rules are applied, all Indirect Exports are sold under some modified version of the Incoterms rule EXW. The slightest modification excludes the commercial invoice, the greater modification also includes the risk and cost (or perhaps just the cost) of loading the collecting vehicle, but in both cases defining an alternative delivery document must also be considered.
Of course, the seller may be requested to drop the cargo off at the buyer’s carrier or at the port or airport. In such a case, the caution regarding avoiding signing the carrier’s documents remains, as does the caution that the seller must not issue a commercial invoice and cannot be the exporter of record. However, unlike a collection from the seller’s premises, there are no Incoterms rules to describe these additional Indirect models except under the most extreme modification and in these instances Incoterms are better avoided than destroyed.
All modifications must be expressed as part of the contract between the parties in order to have any binding meaning.
Remember, all of this is regardless of the rate of tax applied by the vendor.
There is considerably more to understanding this model, export VAT and Incoterms rules and these are purely the broad strokes: bear this in mind.
If you are uncertain about the execution of a Direct or Indirect Export, the next course dealing with this, and the related Exchange Control reporting, is on the 6th of October. It will be the last such public course for 2022.
course schedule link here: Freight Training