How does Incoterms play an important role for a UAE business
What is an incoterm?
Expansion of incoterm is International Commercial Terms; it is a collection of commercial terms which is issued by the International Chamber of Commerce (ICC) and is used while making any international transactions or importing or exporting of goods or services. These are the terms that are globally accepted by all the trade councils, governments and authorities. These terms are used to interpret the commonly used terms and to facilitate uniformity during international trade where different countries may have different laws. It is a very vital term for all those firms and individuals which carry out international trade. E.g. DDP, EXW, DAT, etc. Incoterms facilitate smooth international trade by setting universal rules. It is the language medium through which the traders can communicate the rules and conditions of the trade with others.
Need of Incoterms
Incoterms are considered the most useful way of communication. The main objective of incoterms is to minimize the possibilities of confusion and uncertainties while making international trade. These terms are used to highlight and specify the obligations and responsibilities of a buyer and the seller who indulge in international trade. It is also used to clarify the risks which may be passed onto the buyer from a seller under the rules specified. It also specifies the cost that the buyer or the seller must bear as a result of the transaction. Normally the incoterms can be used while drafting a purchase order, documentation of Free Carrier Arrangement, shipment transport labeling, etc.
Advantages of Incoterms
One of the biggest advantages of Incoterms is that it facilitates uniformity and it standardizes all the trade aspects which are complex in nature. It avoids ambiguity among the traders by providing them with a common medium to communicate the terms and conditions of international trade. It is also continuously updated and modified by the ICC as the incoterms are the registered trademark of ICC.
Importance of Incoterms for the businesses in UAE
After the introduction of VAT in the UAE Incoterms became a term that is commonly used in the trade. The traders may not have a complete idea of how the VAT is charged on the import and export of goods and services in UAE, especially the reverse charge mechanism concept which the traders of other countries may not be well aware of. So, in such situations, the Incoterms may help to communicate and simplify the confusion. The business firms in UAE need to be aware of various Incoterms as the duty costs and the tax is computed of various supplies against these Incoterms in UAE. It would be very appreciable if the business firms in UAE may specify their Incoterms to other firms before they enter into international trade.
Some of the common Incoterms that are used in UAE are listed below:
Delivered Duty Paid, it is an Incoterm where the seller is entitled to bear the maximum liability of the supplies made and he is also obliged to deliver the supplies to the buyer at the place as per the choice of the respective buyer, also the unloading charges is to be met by the supplier which is the responsibility of the seller under the Incoterm DDP. This incoterm is frequently used nowadays due to the transfer of responsibility from a seller to the buyer.
Ex Works, in this type of Incoterm the buyer has the minimum liability as the responsibility is transferred to the foreign buyer before the transit of the supplies. In this type of contract, the seller makes available the supplies at their respective storehouses or the factory from where the buyer must take over the supplies, and the buyer is entitled to meet all the expenses related to the transit of such supplies thereof.
Delivered at Place, it is one of the latest Incoterms added by the ICC. It is a contract where the entire responsibilities of the supplies lie with the seller while making the delivery to the buyer at the place of his choice. The complete risk of the transit of the supplies must be under the responsibility of the seller.
Cost, Insurance, and Freight, this type of Incoterm mean that the supplier of the goods or services is in the position where he will undertake the liability of the supplies until it is delivered to the port of the buyer, in simple words he will undertake the liability of the transportation of the supplies including the expenses of insurance and the freight charges.
In this type of contract, the seller's liability is extended up to the point of loading of the supplies to the ship including the export clearance from the port of the origin. After the loading of the supplies onto the ship and handing over the export documents to the buyer, the ownership will be transferred to the buyer including the responsibility of the supplies and further costs must be incurred by him.
These are some of the common Incoterms that are used by the business firms in UAE with the motive of simplifying international trade and reducing the conflicts of understanding and the language between the international traders. All these Incoterms may have their different usages, an importer in UAE must always analyze the Incoterms used while entering into a contract and it must also duly identify the point of taxation as per the UAE VAT law.
Read More: Understanding UAE VAT Reverse Charge Mechanism
How can CDA assist you?
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Read More: Tax Consultant in UAE for Business Growth