Replacement Goods and the Commercial Invoice

          This is similar to (but not the same as) samples supplied free of charge discussed in a previous blog. The issues around commercial invoices versus pro-forma invoices also discussed in a previous blog apply here.

          Replacement goods are goods supplied free of charge to replace previously imported defective goods, or goods which did not meet quality standards. The goods are in essence identical. These goods are intended purely for commercial purposes and cannot be treated quite the same as samples supplied free of charge.

          As an importer you may argue that duty and Vat was previously paid on such goods and hence, a “zero” value should be acceptable. You may even argue that a nominal value may be produced. The answer quite simply is that SARS will not accept “zero” valued clearances even though duty and Vat was previously paid. If the commercial invoice contains a “zero” value, then it should be endorsed with… “Goods supplied free of charge as replacement stock for defective goods – value supplied for Customs purposes only”, followed by the value.

          The Customs legislation requires that a fresh clearance for goods is required on a shipment basis. Off-setting against previous shipments is not allowed. So, what do you do with regards to duties and Vat previously paid. You may claim these back via a Refunds process. There are some strict adherences required when claiming such Refunds from SARS.

          The same rules apply when importing short-shipped or short-landed goods.


Samples and the Commercial Invoice

          The aspect of samples has to do with valuation, i.e. the value of the goods for Customs purposes. Again, this affects the rate of duty and Vat. Should one rate samples as “free” or “zero” on the commercial invoice, or should there be a value even though they are being supplied “free of charge”?

          Also, should samples be specified on a pro-forma invoice rather than the commercial invoice? This really does not matter so long as samples are cleared correctly. Pro-forma invoicing was discussed in the blog titled… “Pro-forma Invoices for Customs Purposes”.

          Samples supplied free of charge must be specified on the invoice. The value of samples (if supplied free) must be realistic, i.e. as if one was going to import them as “paid for” goods. One may insert a “zero” value on a commercial invoice however, the invoice should include an endorsement stating… “Goods supplied free of charge – value for Customs purposes only”, followed by the value.

          There are a few occasions when samples may attract a nominal or negligible value. The one to note is when samples are mutilated, or destroyed. If for example, you import footwear with a whole drilled through the sole of the shoe (i.e. the size of a 50c coin at least) clearly marked as “Sample”, then a nominal value may be utilised. Another example is a motor vehicle component which contains un-intended holes or cuts in it, rendering the product useless, and marked as “Sample”.

          If the samples are not mutilated, this will in any event fall outside of the scope of the transaction value for duty purposes. SARS will want to use alternative methods of valuation (i.e. the value of identical or similar goods) in order to determine a realistic value.

Therefore, the best advice I have is to truly assign a realistic value to samples. Samples are most often a negligible issue, unless you import samples in very large quantities. Starting a valuation investigation with SARS as a matter of principle will merely attract unnecessary administrative costs.

Terms of Sale on a Commercial Invoice

          Terms of Sale, or Terms of Delivery are most commonly referred to as Incoterms (International Commercial Terms) these days.  Terms of Sale simply must be reflected on the commercial invoice for Customs purposes. 

          Customs treat Delivery Terms somewhat differently from the conventional intention. 

          In South Africa, SARS Customs have retained the FOB (Free On Board) point for Customs duty purposes. This point affects the transaction value, which is the Customs value. 

          Therefore, all costs, charges and expenses incurred in the international sales transaction up to the FOB point (the point when the goods are laden on board the vessel or aircraft) must be included in the Customs value.  These are referred to as dutiable charges. Conversely, all costs, charges and expenses which occur beyond the FOB point, may be excluded from the Customs value. These are referred to as non-dutiable charges.

          In other words, if you have an EXW (Ex Works) invoice, then you must add all “dutiable” charges up to the FOB point in order to get to the Customs value. Likewise, if you have a CIF (Cost Insurance and Freight) invoice, then you may deduct all “non-dutiable” charges such as freight and insurance, up to the FOB point.

          A general rule of thumb is to take whatever the Incoterm is on the commercial invoice, and simply to work your way toward the FOB point (by adding or deducting), unless the Incoterm happens to be FOB. Even so, always be sure to check that all charges on FOB invoices are accounted for. 

          This issue is also impacted by the controversial subject of freight statements, which will be the topic of one of my next blogs. 

Rand Invoicing

          This seemingly complex subject is rarely understood. Getting it wrong can lead to un-necessary risk which is easy to avoid.

          While risk is normally of a financial nature, the administrative burdens of getting it wrong can also be overwhelming to importers.

          Using a foreign suppliers Rand invoice is generally acceptable for Customs clearance purposes. However, there are certain conditions according to the SARS Valuations Policy SC-CR-A-03 dated 24 January 2014 for using Rand invoicing namely:

  1. The Rand price must be concluded in a Forward Exchange Contract
  2. The rate must be negotiated between un-related parties

According to the policy, Rand invoicing is not accepted when:

  1. The foreign currency was converted at a fixed rate of exchange
  2. The conversion rate was negotiated between related importers and suppliers

The latter circumstances may however be accepted by Customs provided it is accepted in a VDN (Value Determination) issued by SARS. A VDN issued but where the Rand values were not accepted, will contain an alternative course of action which must be followed when clearing goods, i.e. a mark-up on the Customs value or set criteria for converting the currency.

          When applicable, the Forward Exchange Contract number, date and rate concluded must be specified on the commercial invoice.

          Now, here is the seemingly complex part.  Where no Forward Exchange contract or number exists but where the rate was fixed, the invoice must contain the concluded rate. Here are the steps which must be followed by the Customs Clearing Agent when fixed rates are used:

Step 1:  Convert the Rand amount back to the foreign currency using the fixed rate on the invoice;

Step 2:  Re-convert the foreign amount back to Rand using the official SARS rate of exchange, i.e. using the FOB (Free On Board) date.

          It is that simple, but evidence must always be available.  If the invoice contains both Rand and foreign amounts, then merely use the foreign amount.

Invoice Declarations

          Trade Agreements (to which Invoice Declarations relate) are a topic on their own. One agreement which may be specified on the commercial invoice (in lieu of using a Certificate as proof) for preferential duty purposes is the EU (European Union) Trade Agreement. This agreement was established between the EU and certain countries in the SADC (Southern African Development Community).

          The EU Trade Agreement was changed on 10 October 2016. It was previously known as the TDCA (Trade Development and Co-Operation Agreement). Today it known as the SADC-EPA (Economic Partnership Agreement). This agreement now includes not only South Africa but also Botswana, Lesotho, Namibia, Swaziland and Mozambique on the SADC side, as participants.   

          Invoice Declarations also apply to the agreement between the EFTA (European Free Trade Area) countries and South Africa. 

          The use of Invoice Declarations is allowed by exporters who are approved by the Customs authority in the export country; to insert an Invoice Declaration on the commercial invoice. This may be applied in lieu of the EUR1 (EU) or EFTA Certificates respectively. 

          Approved exporters are issued with an Authorisation Number by Customs. This number must be inserted into the Invoice Declaration when used. It applies to invoices where the total value of originating products in the consignment is EUR 6,000 or more. Consignments with originating products valued at less than EUR 6,000 do not require the Authorisation Number although the invoice declaration may still be used, i.e. by exporters who are not approved. 

          An invoice declaration may only be used on a commercial document such as an invoice, packing list or indent order. SARS does not accept invoice declarations to be used on blanket supplier’s declarations covering multiple shipments or on correspondence of any sort. 

Third Party Invoicing

          The golden rule when third party invoicing is involved in international trade consignments is to “use the last invoice”.  Third party invoicing refers to invoices issued by a third party, i.e. a buying or selling agent.

          But why is it important and what are the implications of not taking the most recent invoice into account?

          It has to do with commissions.  Commissions according to the SARS policy on Valuations (SC-CR-A-03 dated 24 January 2014) is when an intermediary acts on behalf of either the supplier of the goods (selling commission) or the importer of the goods (buying commission). Third party invoicing may also include other costs, charges and expenses as a condition of the sale.

Commissions and other expenses influence the Customs value of goods imported and hence, the amount of duty and Vat payable to SARS.

          The last invoice issued in the trade transaction would (or should), in addition to the original price paid or payable, include all commissions, costs, charges and expenses on the invoice. This does not mean that such commissions must always be included when calculating the Customs value for duty purposes. Buying Commissions are often accepted by Customs (and hence deductible) provided these are “bona fide” buying commissions. 

          Occasionally when multiple invoices are involved, confusion may exist over which invoice should be used for Customs clearance purposes.

A personal piece of advice is to obtain copies of all invoices involved in the transaction. Analyse the value of each and explore the invoice with the highest value. If Commissions or other expenses are reflected on a separate invoice altogether, then these too must be considered for inclusion. 

Invoice Part Payments

          This is a classical error I’ve seeing made in the past.

          Some suppliers have an uncanny way of making reference to advance payments on an invoice inconspicuous and hard to find. One would typically read that the total value on the invoice resembles a 30% advance payment found at the lower end of the invoice in very fine print.

          In such an example the balance of the payment would be followed up with a supplementary invoice for say 70% of the payment. If this is overlooked it will result into an under payment in Customs duties and taxes. Any Customs clearance must reflect the full transaction value of the goods, i.e. inclusive of all part payments per shipment.

          My advice is that payment terms which have being split into two or three lots must be clearly specified and defined on one invoice. If they are split over more than one invoice then this must be clearly indicated.

          I further advise that the sum of all part payments on the invoice must be reflected on the bottom line.

          At the other end of the spectrum I’ve seeing invoices which cover numerous shipments in one transaction. There is nothing wrong with this so long as the quantities and values on the invoice can be apportioned per shipment. Such instances must be backed up with a packing list per shipment.

          Staged Consignments, i.e. large plant or machinery shipped over several consignments should be invoiced appropriately. More about Staged Consignments will be covered in another blog.

Blank Invoices

          The penal provisions for importing or producing blank invoices going forward will be much different to the past.

          About 18 years ago I was participating in practical Customs training for passenger baggage searches. The training was based at JIA (Johannesburg International Airport), now ORTIA (OR Tambo International Airport).

          My training partner and I were being monitored by the instructor when opening passenger baggage one morning. My partner came across an original BOL (Bill of Lading) in one gentleman’s baggage. Because I was based at a coastal region I was familiar with reading BOL. As a result, we uncovered several containers of fake goods at a nearby premises. In addition, we found a booklet of blank invoices.

          It is illegal to import or to produce blank invoices which are capable of being completed. Blank or incomplete invoices are seeing to be utilised for fraudulent activities.

          At JIA that morning, we proceeded to issue a penalty of R 100 for every page of blank invoice found. There were 38 pages in total. The blank invoices were seized and later destroyed.

          There is a lot more to this story, but you get the point.

          The penal provisions for importing or producing blank invoices is a Category 1 offence in terms of the Customs Control Act.

          In particular, the new penal provisions are imprisonment or a fine not exceeding R 1 million. The new legislation also provides for an ‘additional’ penalty not exceeding three times the monetary benefit gained or to be gained from using them.

          Would you believe, the gentleman who we had penalised at JIA that morning attempted to bribe another Customs Officer to get the blank pages back. This all after being penalised R 3,800 and with several containers being seized. This was a lot of money 18 years ago.

          The penalties going forward appear to be more in line with the level of criminal activity, if engaged in. 

Amended Invoices for Customs Purposes

          This seemingly boring subject contains a few cautioning aspects worth noting.

          Customs requires any change to invoice particulars (especially a change in the transaction value) to be accompanied by an amended invoice. Reasons for amended invoices may include for example:

a.       Amounts debited or credited.

b.      Any amount refunded.

c.       Any additional amounts paid or payable whether in money or in kind.

d.      Any information to be corrected.

e.       If SARS Customs request the invoice to be amended.

f.       If the invoice needs to be split for any reason.

An invoice replacing a previous invoice may only replace one invoice, not multiple invoices. Supplementary invoices may also be produced.

          Amended invoices must contain a statement setting out the reasons for the amendment. It should, where applicable, also be accompanied by documentary evidence of such amendment.

          Customs may refuse to accept an amended invoice if they believe that the amendment is not a true reflection of the change.

          You should be cautioned about Customs requesting an invoice to be amended (point e). Any such request should be based on an investigation of sorts. The outcome of such an investigation must be in writing. It may even be in the form of a Determination issued. If you are not satisfied with a decision made by Customs you should follow the dispute resolution process discussed in previous blogs.

          An amended invoice must be communicated to Customs by means of passing a VOC (Voucher of Correction). This is relevant if the amendment results into any change on the Customs clearance declaration.

          Another area of caution is that any VOC passed for an amended invoice must be done within one month of “receipt” of the amended invoice. While the emphasis is placed on the time of “receipt”, the date when the amended invoice was issued is important.

          One should realistically have received the amended invoice soon after its issue. Taking longer than one month may result in interest being demanded from SARS, i.e. for additional duties and taxes on debit notes.

Pro-forma Invoices for Customs Purposes

          Pro-forma invoices… the subject of much debate and contention. May you use them? Will Customs accept them? Under what circumstances may they be used for clearance purposes?

          It is not true that pro-forma invoices are always not acceptable for clearance purposes. One just cannot use them willy-nilly.

          I am sure that on occasion you have received samples free of charge, replacement stock for defective goods, or goods supplied for testing purposes. You will likely not be paying the supplier for these goods. Why then is it so important to produce a realistic value for them, if at all.

          This question was covered in the Blog “Customs Minimum Requirements on a Commercial Invoices”. In particular, we discussed the concepts of “true reflection” and “transaction value”. We concluded that a realistic value for such goods must be produced as if the goods were subject to a normal commercial transaction.

          While such goods may be cleared using a commercial invoice, a pro-forma invoice may also be used for this purpose.

          But how will Customs react when a pro-forma invoice is present? Customs does not condone the use of a pro-forma however; it is their reaction to its use which must be noted.

          The new Customs legislation defines a pro-forma invoice [Rule 1.1(1) of the Control Act] as… “an abridged, estimated or preliminary invoice issued by a supplier to a buyer in advance of a delivery of goods otherwise than for purposes of payment…”.

          The Customs operating procedures guide Customs Officials to stop consignments where pro-forma invoices are present. Such consignments become subject to inspection where-after the nature and value of the goods will be assessed. SARS Customs will look to see whether realistic values were supplied on the invoice, amongst other things.

          There is certain information (other than standard information) that must be supplied on the pro-forma invoice. This also applies when goods are supplied free of charge on a commercial invoice.

          If produced, this information will help to minimise negative consequences of a lack of understanding during an assessment by Customs Officials. On the invoice you should include:

  1. A realistic value for the goods.
  2. The reason for goods supplied at no charge.
  3. An endorsement that the goods are being supplied at no charge.

When using endorsements indicating no charge items (point c), it should typically read as… “Goods supplied free of charge – value for Customs purposes only”.

A discussion around ‘samples’ in particular will be made in a separate blog later on. Samples, the value, markings, reasons for their use and quantities too can be a bone of contention. These must be understood.

In the new Customs legislation, pro-forma invoices will also be allowed for incomplete or provisional clearances.