Q195: When should I invoice a sale in a CIF contract?

A195: This question comes up frequently, often in this simple form, but there isn’t a simple answer.

There are many variables at play and the ultimate answer is influenced by factors such as whether payment has been made and how; which version of CIF is being referred to; and crucially, by the type of documents called for in terms of the sale contract, and where these documents are.

Some basics first, the most important of which is that raising an invoice and accounting for a sale are not necessarily synonymous or simultaneous events, and while Customs apply a necessary fiction of treating the commercial invoice as a demand for payment, it isn’t really, at least not in the context of exports.

The invoice in the question is therefore a tax invoice not a commercial invoice.

A vendor’s tax invoice is triggered by ‘supply’, and one of the definitions of supply is (any) payment. Accordingly, if the vendor was prepaid they are obligated (with the narrowest of exceptions) to raise their tax invoice to account for this payment, regardless of the underlying commercial term, and whether they have made a sale in a contractual sense or not.

The main precondition to get a clear answer to the question is that the supply must really be a CIF contract and not merely a c.i.f. customs value. The two are very different and yet (sounding similar) they are often confused; the one for the other.

Further, even when it is a CIF contract the seller still needs to qualify under which ‘system’ that term is to be defined. What is meant by CIF?

Reframing the question to allow for the foregoing, we might come up with: “If I am not prepaid, when do I raise my tax invoice if making a CIF sale under the current Incoterms Rules.”

This is clearer because we have an absolute understanding of the meaning of the Incoterms Rule CIF, and the conditions required for the seller to contractually demand payment, which we can align with the vendor’s legal obligation to do so.

However, because the ICC emphasizes “delivery” as the crucial moment in the contract’s execution, the common misconception of the Incoterms Rule CIF is that the sale takes place when the goods are loaded onboard the vessel at the port of departure.

This is misleading, but as a consequence many CIF sellers treat the onboard date as the trigger for their tax invoices, deeming ‘supply’ to be equal to the physical onboard event.

Accepting that a commercial term tells us nothing about payment this approach cannot be said to be ‘wrong’, but if we broaden our view we can see that it is nevertheless inappropriate.

A CIF contract is the sale of documents and not the sale of goods, and so a physical event cannot be the conclusion of the seller’s obligations in the contract.

Rather, the seller must understand what documents are being sold and, importantly, determine when these documents can be said to have been tendered to the buyer.

To tender is to offer for acceptance.

Some opinions allow that a Seller’s record of sending the documents meets this definition, and their dispatch concludes the Seller’s obligations.

But, for example, consider if the buyer’s payment obligation was arranged under a Documentary Credit (letter of credit or L/C). As CIF contracts are the sale of documents, payment is frequently arranged this way.

Yet in terms of a credit, merely sending the paperwork may be insufficient.

If a beneficiary tenders compliant documents to their local bank, and the credit is unconfirmed (that is to say only the issuing bank guarantees payment), the issuing bank first needs to receive the papers, and vet them, before payment is triggered.

In this combination of conditions, merely tendering the documents locally might give the seller the right to be paid in the sale contract, but it would not be enough in the payment contract (as the documents would still need to be received by the issuing bank, and thereafter accepted, before the beneficiary is paid).

The question, therefore, might narrow even further: “If I am paid on an unconfirmed letter of credit, when do I raise my tax invoice if I am making a CIF sale, using Incoterms Rules.”

From this you can perhaps see why the original question is difficult to answer: there are so many variables that need to be factored in, any combination of which frames a subtly different question.

But the broad answer to the generic question is that in a CIF contract on credit, supply (or delivery) takes place when the agreed documentation is tendered to the buyer, at the agreed time and in the agreed manner.

That moment is the moment of sale, or supply, when the tax invoice is legitimately raised as a demand for payment.

In an ‘average’ unconfirmed letter of credit, the beneficiary would know that they had tendered compliant documents to the issuing bank perhaps 8 to 10-days after sailing. In that model, it is then that the sale can be said to have taken place.

Certainly, the arrival (or existence) of the cargo, or any activity exclusively linked to the physical goods (such as its loading onboard) cannot be the trigger for the tax invoice.

Still, many people do not know that they do not know and they account for the sale when the onboard bill of lading is issued, regardless of the detail. And there are some sellers who account for the sale even earlier in the supply chain because “that’s what the system” requires.

If you don’t know what you are doing, budget to find out more, or budget for the inevitable consequence of ignorance.

It’s your call.

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