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Best Incoterms for Sellers and Exporters
Whenever an international trade transaction takes place, there are two parties involved, the buyer and the seller. While both enter in a mutually-benefitting contract, there are certain rules and regulations which have to be followed and a contract is made where the roles and responsibilities of both the parties are defined. These predefined sets of rules are referred to as incoterms. They are published by the International Chamber of Commerce which regulates the contractual clauses used in the sales transaction. There are as many as 11 incoterms that one can choose from when making a transaction. For a seller, however, there are a few terms that are more beneficial as they give them greater control over the entire transaction. Let us delve deeper into some incoterms that work best for sellers:
1. Cost and Freight (CFR)
When a seller chooses the cost and freight option, he pays for the transport of the goods, but only up to the port of destination mentioned. After that, the risk gets transferred to the buyer when the goods are loaded in the country of export. It is important to understand the CFR shipping term meaning and the conditions that come with it when opting for it. Here the shipper’s responsibility includes export clearance and freight costs but is not responsible for the delivery to the destination from the port. CFR is considered to be the best option for non-containerized sea freight and inland waterway transport.
2. Cost, Insurance, and Freight (CIF)
Here the arrangement is much similar to that in the CFR, but the only difference is that the seller ensures the merchandise/goods instead of the buyer doing it. Here it is the seller who chooses the forwarder and the delivery is accomplished when the goods arrive at the port of the destination. One must clearly understand the CIF incoterm meaning and know that it applies only for inland waterway transport and is used frequently in both B2C and B2B transactions. It gives the seller the flexibility to opt for the best rates, routes, and transit times.
3. Freight on Board (FOB)
This is among the most commonly used incoterms in international sales. When choosing this arrangement, the seller is responsible till the time the goods are loaded at the port of origin. It turns out to be a very cost-effective option and works well for all suppliers who do not wish to negotiate the freight rates with their freight forwarders. It is important to note that FOB refers to inland waterway transport of goods. Here the responsibility of the buyer for transportation and insurance begins the moment the seller releases the goods.
4. Delivered Duty Paid (DDP)
Under this incoterm, it is the seller who is responsible for delivering the goods to the destination/buyer’s door. This means that the seller has to deal with all the tasks involved in transferring the goods throughout the shipping process. As he will be responsible for all the costs, including the payment of fees and duty, he must be well aware of all the shipping rules and regulations of the importing country.
5. Delivered at Place (DAP)
This incoterm requires the seller to carry out the necessary packing at his own cost to ensure that they reach the destination safely. While all the legal formalities in the exporting country are done by the seller, once the goods arrive in the destination country, the customs clearance (import permit, customs duties, and taxes) is to be done by the buyer.
So if you are a seller who does international transactions often, make sure you have good knowledge of all the above incoterms so that you can choose one that is mutually beneficial to you as well as the buyer. It is also advised to select a safe and reliable payment platform like Tazapay for cross-border transactions to ensure that you are paid by your buyers on time. Tazapay equally protects sellers and buyers, ensuring that sellers are paid in full as soon as your goods have cleared inspection.
Import-Export Procedures in Malaysia: Best Practices
Malaysia is a rapidly developing economy and a key member of the Association of Southeast Asian Nations (ASEAN). The government of Malaysia has been continuing to liberalize its economy, thus making imports and exports less cumbersome and more lucrative. As of 2019, Malaysia’s exports were pegged at RM 986.4 billion while total imports were estimated to be about RM 849 billion. The FTAs signed by Malaysia as a participating member of the ASEAN and as part of bilateral agreements with countries such as India, Australia, China, and Japan, continue to open doors for importers in the country and exporters across the world.
Basics of Import and Export
All companies practicing international trade
in Malaysia require to be registered with the Companies Commission of Malaysia.
The Ministry of International Trade and Industry (MITI) also issues appropriate
licenses for the import and export of the following goods –
- Agricultural products and food
- Animals and animal products
- Vehicles and automobiles
- Plants
- Iron and iron equipment
- Heavy equipment and machinery
Documentation Needed for Export/Import
While a trader in Malaysia importing goods may require vendor due diligence and clearances, an exporter of goods to Malaysia will additionally need to furnish the following documents –
- Commercial invoice
- Packing list
- Delivery letter
- Insurance certificate
- Bill of lading
- Licenses (if necessary)
- Customs forms (as specified by the Royal Malaysian Customs Department)
- Proof of payment of customs duties, import tax, and sales tax
Exporters from Malaysia may require the appropriate licenses apart from documents required by the destination country. The exporter may also need to furnish –
- Customs bond/declaration
- Legal undertaking (LUT)
- Letter of credit
- Commercial invoice
- Packing list
- Certificate of origin
- Insurance certificate
Understanding Taxes and Tariffs
All goods imported into Malaysia are subject to a GST of 6 percent. Apart from this, a tariff is imposed which may vary depending on the product which is imported. Most industrial goods are subject to a 6.1 percent tariff. An additional sin tax may be imposed on products such as pork and alcohol. Exported products too are subject to a tariff varying between 0 and 10 percent.
Trade Agreements
Importers in Malaysia and vendors exporting to Malaysia may take advantage of the numerous bilateral and multilateral trade agreements that Malaysia has in place with other countries. Malaysia has signed free trade agreements with Australia, Chile, India, Japan, New Zealand, Pakistan, and Turkey. These and other ASEAN countries are preferential trade partners and imports from and exports to these countries qualify for a reduction in tariffs and taxes.
Escrow Platforms – Increasingly Popular Choice
Online escrow platforms such as Tazapay are now becoming an increasingly popular choice for importers and exporters in Malaysia. A third-party escrow service provider is a reliable enterprise chosen by both the seller and the buyer. Buyers from Malaysia can fund the Tazapay escrow service with their local bank account using the local currency (Malaysian Ringgit). When the vendor has despatched or shipped the goods, the escrow account will transfer the amount to the vendor’s account (upon furnishing proof of shipping and verification). Escrow service is specifically designed for international trade. It offers protection and risk mitigation to both buyer and seller. The escrow fee is transparently charged at 1.8% of the transaction amount (capped at USD 250) making it very cost-efficient. Online escrow platforms such as Tazapay are very safe and secure and are powered by global payment networks and regulated under Singapore rigorous laws.
The use of Tazapay escrow service providers is also beneficial as they provide several additional services such as providing supplier due diligence checklists and dispute resolution.
Vietnam Import Regulations: All You Need to Know
The average annual GDP growth of Vietnam in the year 2019 was 7.02%. After the drop in GDP during the pandemic, it has recovered, and currently, the average annual GDP growth is 6.7%. There is no doubt about the fact that Vietnam is one of the fastest-growing economies in the world. Quite surprisingly, Vietnam’s import laws are strict and highly regulated by the government. Whether it is EXW incoterms (EXW shipping means EX works) or some other type, the regulations have to be followed strictly. Mentioned below are a few things you need to know about Vietnam’s import policies:
Import License
For importing to Vietnam, the importer has to obtain two main documents: a Department of Planning and Investment’s (DPI) business registration certificate and an investment license. The process is a little time-consuming and the approval can take up to 3 months. If the purpose is to just import and export goods from and to Vietnam, the investment license is sufficient. No distinct import license is required for it. With the investment license, you can also wholesale the goods to businesses. For businesses looking for an easy-access market, this provides them a great opportunity. However, a trading license is required if the aim is to sell the goods to the end-consumers in Vietnam. Once the incorporation is done and the capital contribution has been paid in full, it may take anywhere between 6 to 12 weeks to obtain it.
Before applying for the investment license, ensure that you list the products and check the Vietnam import regulations for any related information. For importing other goods in the future, the current investment license will not work and will have to be changed.
The Procedure for Import Licensing
All foreign investors have to register with Vietnam’s Department of Planning and Investment (DPI) for an import license so that they become eligible to operate import businesses in Vietnam. An Investment Certificate is also required by the investors. In case the firm has been involved in business for some time and wants to get involved in import activities, experts suggest that adjusting the Investment Certificate is the best option.
- It may take up to 3 weeks to obtain the Investment Registration Certificate (IRC).
- Business Registration Certificate (BRC) takes approximately 10-15 days.
- In case retail sales are involved, a trading license is required that may take up to 12 weeks.
In some cases, foreign firms are allowed to import goods in Vietnam as per Circular 34/2013/TT-BCT.
Impor-Related Taxation in Vietnam
It is important to have some basic knowledge about the import taxes in Vietnam before getting started with the business. The Import and Export Tax Law in Vietnam states that there are two types of taxation: Object of Taxation and Non-Object of Taxation
Object of taxation: Goods in these specific cases are an object of taxation.
- Goods and cargos imported and exported through the Vietnam border.
- Domestic goods that are considered non-tariff barriers and non-tariff goods that are brought into the domestic market.
Non-Object of taxation: Goods that fall in these specific cases are not considered an object of taxation.
- Goods that are being transported across the borders or border gates of Vietnam.
- When goods provided for by the Government are transferred through the border-gates.
- Non-refundable and humanitarian aid.
- When goods, imported from other countries, are brought into non-tariff zones and only used in non-tariff zones. Also, when goods are transported from a non-tariff zone to another non-tariff zone.
- Goods whose portions have already been paid to the government in the form of natural resource tax during export.
According to the import policies, the maximum number of goods imported to Vietnam is subject to duty. Depending on the type of the good, the tax rates vary. All luxury consumer goods like alcohol, cars, and cigarettes are subject to higher import duties as compared to other goods such as industrial equipment, materials, and machinery that are necessary for manufacturing.
Import Tax Exemption in Vietnam
Most goods exported from Vietnam are exempted from tax. Export duties (somewhere between 0% to 45% and calculated on FOB price) are only charged on a few items. FOB incoterms mean free-on-board. Similarly, many products are on the tax exemption list during import as well according to the Export and Import duty Article 16 of the Law No. 107/2016/QH13:
- All manufacturing materials, components, and supplies.
- Goods that will be re-exported and imported only for a temporary time.
- Raw materials and goods that are only available outside Vietnam’s territory.
- An entity’s fixed assets such as equipment and machinery that are eligible for incentives
Prohibited Products
According to the Ministry of Industry and Trade’s Circular No. 34/2013/TT-BCT, certain goods are prohibited from import into Vietnam. The list includes:
- Cigars
- Petroleum oils and any bituminous mineral oils
- Journals, periodicals, and even, newspapers
- Types of recorded media like discs and tapes
- Any second-hand good like electronics or automotive
Getting yourself familiarised with the Vietnam import regulations is very crucial if you actively do business in the country. Since it can be very difficult to obtain a license for your business on your own, you can opt to get in touch with local distributors for assistance. That said, one must be aware that this may take some time.
Now that you are familiar with all the regulations, it’s time to make sure that you choose a safe platform like Tazapay to ensure that your import payment to Vietnam is well protected via escrow. You can also make use of Tazapay’s free business verification tool to vet your trade partners’ background to ensure that you are dealing with a legit business
Letter of Credit vs. Bank Guarantee: Clearing the Confusion
Both a letter of credit and a bank guarantee are promises from a financial institution that a borrower can repay a debt to another party, irrespective of what the debtor’s financial circumstances are. Although there are some differences, both of these assure the third party that in case the borrowing party cannot repay what it owes, the financial institution will invariably step in on behalf of the borrower.
Simply by providing financial backing for the borrowing party, these promises serve to reduce risk factors, thereby, encouraging the transaction to proceed further. However, they tend to work in slightly different ways in different types of situations.
Letters of credit are particularly significant in international trade, owing to the distance involved, the remarkably differing laws in the countries of the businesses involved, as well as the difficulty of the parties meeting in person. While letters of credit are primarily used in global transactions, bank guarantees are, more often than not, used in real estate contracts as well as infrastructure projects.
Bank Guarantee
Bank guarantees usually showcase a more important and professional contractual obligation when it comes to banks than letters of credit usually do. To be precise, a bank guarantee guarantees a sum of money to a beneficiary. The bank only pays that amount if the opposing party fails to fulfil the obligations by the contract. Additionally, the bank guarantee can also be used to effectively insure a buyer or seller from either loss or damage due to non-performance by the other party in a particular contract.
In addition to this, bank guarantees to protect both parties in a contractual agreement from credit risk. Let’s say, for instance, a construction company and its cement supplier may sign a contract to build a mall. Both of these parties may have to issue bank guarantees to prove their financial capability and credibility. Therefore, in a situation where the supplier fails to provide cement within a specified time, it is upon the construction company to notify the bank, which then pays the company the specified amount in the bank guarantee. While letters of credit are issued for importing as well as exporting companies, bank guarantees are most typically used by many contractors.
Letter of Credit
Also known as a documentary letter of credit, it assures that a buyer’s payment to a seller or a borrower’s payment to a lender will be received right on time and for the entire amount as a whole, thus acting as a promissory note.
In addition to this, it also states that if the buyer fails to make the full payment while purchasing, the bank will cover the whole or remaining amount owed. However, before making any purchase, it is also important to ensure that your trade partner is legitimate. To do so, the best way is to use the services such as business vetting to ensure a more transparent trade. From company status and registration details to shareholder information and much more, you can rely on Tazapay to download specialized reports on any company right away, to grow your business with utmost confidence.
A letter of credit process involves an obligation that is taken on by a bank to make a payment, considering certain criteria are met. Once these terms are completed and confirmed, the bank will make it a point to transfer the funds. The letter of credit also ensures that the payment will be made as long as the services are performed properly. The letter of credit, all in all, substitutes the bank’s credit for that of its client, thus, making it a point to ensure correct, proper, and timely payment.
Summary of Key Differences between Letter of Credit and Bank Guarantee
Listed below are the key points of
differences:
● Use & Application – A letter of credit is used in International markets to
guarantee import as well as export. On the other hand, a bank guarantee is used
in the domestic market and guarantees infrastructure projects.
● Liability – When it comes to a letter of credit, the bank bears the primary liability.
However, in bank guarantee, it is secondary.
● Risks Involved – The letter of credit brings lesser risks to the merchant and a lot
more to the bank. However, bank guarantees have more risks for the merchant and
less for banks.
● Parties Involved – There are about five or more parties involved in a letter of credit.
These are the confirming bank, advising bank, issuing bank, negotiating bank,
beneficiary, and applicant while a bank guarantee only has three – the bankers,
beneficiary, and the applicant.
● Default – A letter of credit does not wait for the buyer’s default. However, a bank
guarantee becomes all the more effective when the applicant defaults.
● Recipient – When it comes to a letter of credit, it is the seller’s bank that receives
the instrument. However, in bank guarantees, it is the beneficiary.
The purchasing company has to apply for a letter of credit at a bank where it already has some funds or a line of credit, also referred to as LOC. The bank that is issuing the letter of credit can hold payment on behalf of the buyer until it receives confirmation that the goods in the transaction have been shipped. Once the goods are shipped, the bank pays the wholesaler its due amount only if the terms of the sales contract are met. Tazapay’s Escrow Services is an alternative that is cheaper and much simpler than LOC. It reduces risk for both the parties involved in a transaction and releases amount only upon the completion of the set milestones.
Blockchain: Disrupting Cross-Border Trade in Southeast Asian Countries
International traders engaging in cross-border trade are leveraging the blockchain to disrupt operations for better output. While the technology has its pros and cons, it has started to be adopted by numerous Southeast Asian traders aiming to streamline operations.
At the moment, blockchain is primarily being used to increase visibility and enhance goods tracking, through the trade lifespan. Whereas for payments, critical trust-building solutions such as overseas business verification and escrow continue to be highly considered by traders in the region as they offer convenience and value for money in cross-border transactions .
The Pros of Using Blockchain in International Trade
1. Adding Value in Key Trading Operations
Blockchain is assisting in cross-border trade areas, such as authentication, documentation management, ownership management, etc. It is allowing international parties to be connected through the blockchain medium, for mapping bills of lading, policies of insurance, invoices, etc.
It is helping in reducing the reliance on middlemen, and secondary parties, to facilitate the successful trade of goods across borders. While most traders still prefer traditionally adopted technologies, they are reviewing the role of Blockchain long-term for streamlined adoption.
2. Aiding In Paperless Transition and Documentation
Technologies, such as blockchain, are set to contribute to the growth of international trade by 31-34% over the next 15 years. They enable the digitization of the B2B trading process by creating a digital record that can be analyzed by decision makers.
Technologically mature countries, such as those in Southeast Asia, adopt solutions that reduce bottlenecks in key areas such as paperless international trading. Traders are cautiously adopting blockchain to help reduce the manual management of documentation and trading assets through increased digitization.
Blockchain is being used to streamline the KYC and regulatory compliance process, to gather complete information about buyers and sellers through the digital medium. Traders are digitizing information gathering to reduce manual intervention through blockchain and other mediums.
3. Enhancing Transparency through DLTs
The Distributed ledger technology (DLT) is being used across Southeast Asian countries, to help enhance tracking and tracing of goods across different supply chains. It is also being leveraged to ensure a digital map of the entire trade processes, for transparency within cross-border trade.
DLTs are being used to protect companies against counterfeit goods while providing insights on potential trading hazards that may arise during the transaction. Key Southeast Asian projects within the DLT space are enhancing trade visibility into cross-border operations for some B2B traders.
Key Challenges with Blockchain Currencies
Traders are experimenting with crypto within the Southeast Asian region as a means of payment but may not be completely satisfied with the payment structure. The increased volatility, lack of transparency, and issues with cybersecurity tracing, are driving traders to focus on other payment models.
While businesses are leveraging Blockchain for logistics mapping or digitizing documentation, they are still focusing on other innovative models such as escrow when executing an overseas payment.
The Preferred Strategy for Secure Cross-Border Transactions
Businesses that are regularly engaging in cross-border trade will find a lot of value in using an escrow service to secure their transactions. An escrow agreement introduces greater trust and transparency into trade by ensuring that payments are only released after both buyers and sellers fulfill the terms and conditions that they have agreed on.
Another critical aspect of cross-border trade is business verification and vetting. Performing a complete background analysis on the entity at the other end of the trade is vital to business success in the Southeast Asian region.
Tazapay – a member of the Singapore FinTech Association eliminates uncertainty risks in cross-border trade, by conducting background checks on parties as well as protecting international payments via our easy-to-use escrow product.
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Incoterm
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General
Best Incoterms for Sellers and Exporters
Whenever an international trade transaction takes place, there are two parties involved, the buyer and the seller. While both enter in a mutually-benefitting contract, there are certain
Import-Export Procedures in Malaysia: Best Practices
Malaysia is a rapidly developing economy and a key member of the Association of Southeast Asian Nations (ASEAN). The government of Malaysia has been continuing to liberalize
Vietnam Import Regulations: All You Need to Know
The average annual GDP growth of Vietnam in the year 2019 was 7.02%. After the drop in GDP during the pandemic, it has recovered, and currently, the
Letter of Credit vs. Bank Guarantee: Clearing the Confusion
Both a letter of credit and a bank guarantee are promises from a financial institution that a borrower can repay a debt to another party, irrespective of
Blockchain: Disrupting Cross-Border Trade in Southeast Asian Countries
International traders engaging in cross-border trade are leveraging the blockchain to disrupt operations for better output. While the technology has its pros and cons, it has started
Verifying the Business Registration of a Vietnamese Company: 3 Best Practices
Running a successful enterprise and engaging in international trade is a task that requires a lot of supervision and vigilance. It is always subjected to risks and
Export Customs Procedures
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Import Customs Procedures
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