Client Question:
Buyers ask me to raise two commercial invoices – one for the goods and one for the freight. Why would they ask, and is there any risk to me in doing this?
Answer:
It is a criminal offence to include anything on, or omit anything from, a commercial invoice that results in a false statement to customs.
For example, if you did not incur the international carriage (commonly called the “freight”) then you cannot include it on your commercial invoice. Conversely, if you did incur it you can’t exclude it.
But there is no restriction which directs that you must submit the freight on the same invoice as the supply of the goods. As such, a file with two (or more) commercial invoices covering a single supply is possible.
In some models, the freight is legitimately only known after the event and so two commercial invoices may arise in the ordinary course of business, but if this is not your model then you are right to ask yourself ‘why’ your client has requested this of you.
In second-guessing their motive I will assume the worst, but there may be nothing sinister happening at all, despite the fact that I cannot think of a rational explanation for their request.
As part of the laws and processes around import control, a country decides at what valuation point in the supply chain duties and taxes will be calculated.
For example, South Africa uses the customs free on board valuation point, which is also referred to as the first export price and which is loosely the value of the supply before the international freight leg is added.
This valuation point is informally often expressed “fob” or “f.o.b.”
Some developing countries use the c&f (cost and freight) price, which is the f.o.b. value with the freight portion added, and still others use the c.i.f. value which is the c&f value with the marine insurance premium added.
As a general statement, as there are exceptions, and notwithstanding South Africa’s use of the f.o.b. value, many African States use the c.i.f. customs value.
There are other valuation points, additonal to these common points, but I am excluding these for ease of explanation.
As you can imagine, the higher the customs value then the greater the revenue to the State from an applicable duty or tax, and you tend to find developing states using the higher c.i.f. value, whereas developed states use the lower f.o.b. value. But it is a local decision and, as I say, I have made a very broad generalisation.
If you are familiar with Incoterms you will know that in section A1 of each definition, the seller is obliged to create a “commercial invoice in conformance with the contract of sale”.
Given that there are local variations on layout and content it is anticipated in the Incoterms text that the buyer will direct the seller on the format of the commercial invoice, in order to ensure that the destination customs authority statistically and financially assesses import cargo at the correct (legally lowest) value.
Directed by the buyer or not, the seller is always best advised to create a commercial invoice that at least shows the commonest moments of valuation that comprises their transaction price.
This is broadly referred to by customs as a breakdown of “all ancillary charges” and it starts with the top-line selling price of the product.
This is the selling price on a vehicle, outside the factory gates or point of supply, customs cleared and fit for export. This value is termed ex-works.
Obviously, if the seller is supplying on this basis then this would be the only line to the invoice. However, if the price further included (say) the pre-carriage and loading onto a vessel or aircraft, then these additional charges would be listed and marked f.o.b.
(In roadfreight, if the goods are loaded at the seller’s premises directly onto the vehicle which will thereafter cross the border, the ex-works and f.o.b. prices become identical.)
A typical c.i.f. commercial invoice might break values down as follows;
Product description…………..ex works……………. 5 000.00
Transport to ship………………f.o.b.……………………. 1 500.00
Freight………………………………c&f.…………………….. 1 000.00
Insurance…………………………..c.i.f.………………………..150.00
Local delivery…………………………………………………… 350.00
TOTAL……………………………….……………………………8 000.00