A211: For historical reasons, this model is referred to (by SARS, at least) as being “A Sale on the High Seas”, although technically it could be applied to an air or road or rail import model too, and need not involve “The High Seas” at all, this term referring only to areas of the seas and oceans that are not under the jurisdiction of any country, and open to all nations.
In this model, the buyer places an order on the seller, but after shipment – and, crucially, before the import customs event – the buyer on-sells the order to a second South African buyer.
It is the second buyer who acts as importer of record and who incurs the applicable import duty and VAT.
The model (when successfully executed) allows the first buyer (who is often an agent of the original supplier) to sell goods in transit in the same currency as the purchase price, but at an uplifted value.
The first buyer thus avoids exchange rate fluctuation as well as the disbursement of import duties and taxes, making B’s costing simpler, and their profit stable and clear, all while allowing B to avoid the vagaries of importing.
But first note that the model assumes the first SA buyer, who will act as a Middleman, and the second SA buyer (who will act as importer) are both South African registered importers, and that the cargo’s destination is South Africa.
If the second buyer is registered in the Common Monetary Area of Namibia, Lesotho, or Eswatini, or if one of these countries is the intended import country, the model becomes more complex and should be referred to your Authorised Dealer (your banker) first, for their approval and direction.
If the second buyer is outside of the CMA as is the final destination of the cargo, the model becomes a ‘merchanting’ transaction and must be referred to your Authorised Dealer first.
Benefits
In the ordinary course of business, costing an import can prove difficult as the buying price will be in a foreign currency, the converted value of which may fluctuate erratically, and to which must be added the ZAR landing and clearing charges. In addition, the applicable import duty and VAT disbursements can be high, perhaps causing B to have cash flow concerns.
However, in a Sale At Sea transaction, the Middleman will avoid exchange fluctuation and any import disbursement by uplifting their buying price (to create a profit), and on-selling the supply in the same currency to a second local entity, after shipment but prior to import arrival. The new buyer will act as importer of record (and incur the associated costs directly).
Understanding the Model
For example: Supplier A (in China) sells to SA Middleman B for USD1,000. Middleman B on-sells to Importer C (also in SA) in the uplifted value of USD1,100.
In seafreight, it is expedient if supplier A arranges a transferable bill of lading (i.e. one consigned ‘to order’, that, once endorsed by A, will allow Middleman B to transfer the document to C, so that C may obtain release from the carrier.)
B generates a commercial invoice addressed to Importer C that is in all respects identical to Supplier A’s invoice, other than with regard to the supplier and consignee name changes, the date of issue and the upliftment of values. It must be clearly endorsed with the expression “Sale on the High Seas”.
Note that while the commercial invoice raised by A on B may pre- or post-date the shipment date, the commercial invoice raised by B on C may only be dated after A’s commercial invoice date and after the shipment date – i.e., the transaction between the two South African entities must happen while the goods are ‘at sea’ (that is to say, in international transit).
Commercial invoices between Middleman B and Importer C dated prior to the shipment date are not allowed in this model as they are deemed “premeditated sales”.
Exchange Control
SA Exchange Control laws and regulations allow the Customs’ importer of record the automatic facility to make a foreign payment for the supply of imported merchandise.
However, in a Sale At Sea model the party with the obligation to pay Supplier A is Middleman B, and they will not act as the importer of record on the customs’ paperwork.
Therefore, B must seek prior approval from their bank for permission to “pay against third-party documents” (using this phrase). This request is for B to make an import payment without Customs documents in their name, but against presentation of documents in the name of a third-party i.e. Importer C.
If granted, the permission allows B to pay Supplier A the original price of USD1,000 against Importer C’s entry. Note that the Customs’ value of the entry will be USD1,100 (B’s selling price to C), but only USD1,000 will be paid to the supplier. The bank will also need to sight Supplier A’s original commercial invoice on B.
To make the model work efficiently, Middleman B and Importer C must each have ‘tradable’ CFC (Customer Foreign Currency) accounts. These facilities allow for the inflow and outflow of currency to that account without conversion to or from ZAR (a bank’s “customer” having authority to hold “foreign currency” in that account).
In an Exchange Control reform articulated in Exchange Control Circular 2/2024, Authorised Dealers may allow resident entities purchasing goods via a local subsidiary of an off-shore supplier and/or agents, to settle the cost of the imports by transacting between their respective CFC accounts, without needing prior SARB permission.
Thus, in an ideal model, Importer C with pay USD1,100 to Middleman B, who in turn will pay USD1,000 to Supplier A, creating a fixed and predictable differential for B of USD100.
VAT
As well as a commercial invoice for Customs’ purposes, Vendor B must supply Vendor C with a tax invoice for VAT purposes. This invoice is at the zero-rate of VAT as the transaction between the parties is seen to have occurred “off-shore”.
Vendor B must retain the documents required to support the zero-rated supply, and the model is considered in Interpretation Note 30(3) at 8.3.2 “Sale of movable goods situated outside the Republic” as follows –
In instances where a vendor sells movable goods situated outside the Republic, for example, a sale on the high seas, and the vendor consigns or delivers those movable goods to the recipient at an address in an export country, the supply of the movable goods is subject to VAT at the zero rate under section 11(1)(a)(i), read with paragraph (a) of the definition of “exported” in section 1(1). In this instance, “at an address in an export country” includes consignment or delivery of the movable goods to the recipient on board a ship while on the high seas.
The required copy documents Vendor B must retain to support their file copy of the zero-rated tax invoice includes the ultimate import customs entry (which B already has for banking purposes); the original commercial invoice B received from A, and a copy of B’s commercial invoice on Importer C. In addition, B must retain a copy of the transport document, and proof of payment (by C to B).
Commercial Terms
There is no set commercial term for a sale in transit, although the model was first developed in the 1800’s for (pre-Incoterms) fob and c.i.f. transactions, using transferable bills of lading.
However, the guidance to B is to sell to C on the same commercial term applicable in the sales agreement B has with A, the original supplier. For example, if B buys FOB then they should sell FOB (however, see the note on insurance, below).
Marine Insurance
Note that if Supplier A sells to Middleman B inclusive of insurance (e.g. on c.i.f. or CIF terms), the ‘basis of valuation’ will be too low to cover C’s loss (in the event of a loss).
This is true as B has bought for USD1,000 and so A’s basis of insurance will only be USD 1,000, against C’s potential loss of USD1,100, the uplifted value.
It is important then that B ‘uplifts’ the value of the marine insurance cover too, before on-selling this cover to C. This is perhaps best achieved by directing A to insure at the higher value, so that A and B may still sell CIF.
This presupposes a transparency of pricing between B and A, as A will now be aware of B’s selling price.
Alternatively, if less elegantly, Middleman B may arrange insurance for C, but this requires a change of terms e.g. for B to buy CFR yet to sell CIF.
Of course, C might arrange their own insurance, but Supplier A (as Shipper) may see this version of the model as a risk and not allow the variation.
Advance Payment
As a consequence of the recently-introduced APN (Advance Payment Number) system, a Sale on the High Seas model is further complicated if Middleman B is required to prepay Supplier A, and the foregoing model assumed that B will pay against third party documents that are available – i.e., payment will be after importation using BoP code 103.
If a prepayment was required by Supplier A (and allowed by the bank) and given that an APN cannot be amended or cancelled after payment has been made, it is uncertain if Importer C (whose payment terms with B might involve extended credit) may acquit B’s APN on the subsequent import entry.
There is currently no mention of the model in SARB or SARS APN
literature or any general information available that might otherwise provide conclusive guidance and Middleman B, if in this position, is best advised to seek guidance from their tax consultants or directly from SARS before proceeding.
Conclusion
A successful “Sale On The High Seas” model requires the correct alignment of Exchange Control, Customs and VAT regulations, and an understanding of documentation and documentation flow.
It is a fruitful model when correctly applied, but, like anything in trade, it should not be undertaken without a full understanding of the process and consequent risks involved.
The next Public Course addresses Commercial Terms on the 13th & 14th of May. Mail me – [email protected]