Your questions answered
Client Question:
Why would import customs ask to see my supplier’s freight invoice?
Answer:
Broadly, the customs’ valuation system allows for two possibilities – a transactional value including freight, and one excluding freight.
The name used for goods valued before excluding the freight cost is free on-board, commonly expressed f.o.b.
The name and symbol for values inclusive of the freight may be either cost and freight / c&f if insurance is not incorporated in the statistics/values, or cost, insurance and freight / c.i.f. Whether marine insurance is allowed in the seller’s price is a matter for local legislation.
For example: South Africa is an f.o.b. country whereas our immediate neighbour Mozambique of a c.i.f. country.
What this means for South Africa is that import statistics, duties (if applicable) and taxes, like VAT, are calculated from a base which uses the arm’s-length market-related transactional value at the immediate point prior to the international carriage – that is to say, a price excluding the freight component.
Conversely, Mozambique uses the value immediately prior to landfall in Mozambique i.e., the transactional value inclusive of freight and insurance, bringing the value to the c.i.f. moment.
As always, these are broad strokes, and the devil is in the detail.
Consider two identical exports from country X – one shipment is routed to South Africa and the other to Mozambique. For this example, the ‘freight’ costs are identical too.
In both cases then, the commercial invoice looks as follows;
Customs ex-works value 10,000.00
Origin inland charges to the f.o.b. point 500.00
Freight and insurance to the c.i.f. point 1,250.00
Total price 11,750.00
The c.i.f. value for duty purposes in Mozambique is 11,750.00 (the value including freight and insurance) and the corresponding f.o.b. value for duty purposes in South Africa is 10,500.00 (the value immediately prior to the freight.)
Consider the invoice again if the values were manipulated as follows;
Customs ex-works value 9,000.00
Origin inland charges to the f.o.b. point 500.00
Freight and insurance to the c.i.f. point 2,250.00
Total price 11,750.00
The bottom line remains the same.
But, while the value for duty purposes in Mozambique remains 11,750.00 the corresponding f.o.b. value for South Africa is reduced to 9,500.00.
All the supplier has done is reduce the value which attracts duty (the origin landside) and inflated the value that does not attract duty (the freight cost).
The only way this practice can be defeated is if the actual freight disbursed by the supplier is established.
Traditionally, transport documents would be ‘freighted’ meaning that freight charges would be disclosed on the transport document.
However, a shipper who negotiates a preferential freight rate might not wish to disclose this rate on the transport document, and so expressions such as “freight as agreed” or “freight as arranged” (or ominously blank spaces) often appear on the transport document instead of verifiable figures.
The knock-on effect is that a customs officer in an ‘f.o.b. country’ cannot necessarily call for a transport document to verify the apparent freight charges which must be discounted from any c.i.f. commercial invoice value, to obtain the f.o.b. value for customs purposes.
And the commercial invoice, as in the example above, can be readily manipulated.
In response, therefore, when cargo is imported inclusive of freight, customs call for the actual freight invoice issued by the carrier.
Source: Freight Training
