The Most Misunderstood Document in International Trade?
John Vogt, former Halliburton vice president of global logistics, presents the latest in a series of informative articles on Incoterms. New instalments are published each month in BreakbulkONE.
The Commercial Invoice (CI) is strangely named as it is not a commercial transaction record; rather, a document informing customs authorities of goods entering or leaving a country, allowing them to calculate duties on entry. It has nothing to do with a commercial billing per se, but facilitates the interaction with customs authorities and the legal transfer of goods where special permissions are required.
The CI is one of the most misunderstood documents in international trade. As with the Bill of Lading (BOL), many companies put irrelevant information on the CI as a convenient place to record information of use to the company, but not necessarily to help the customs authority. The purpose of the CI is in fact relatively simple, giving the customs authority the information required to:
• Record the participants in the transaction (buyer and seller) and the end destination of the goods, with a record of the voyage, date and a reference to show the document was recorded by the customs authority. These pertain to all the products listed on the CI.
• Provide the correct information for each type of good exported to allow the authorities to calculate the duties.
• Record the right to export or import goods by licenses or approvals that are particular to the participant(s) and the end destination.
This defines the layout of the document. The first section, often called the header, records the seller, the buyer and the end destination for all the goods reflected in the CI.
The second section is the product-by-product information to determine the customs duties and the rights to export or import for each product. Each line must be a unique combination of Harmonized Schedule or Harmonized Tariff Schedule (HS / HTS) number and Certificate of Origin (COO). Every HS number with its COO must be shown, and if there are goods with the same HS number but with a different COO, these must be shown on different lines as the duties may be different.
Let us summarize this in a simple format:
Header:
• Seller (Full name, address, registration number)
• Buyer (Full name, address, registration number)
• End Destination (Specific physical location)
• Date
• Voyage reference
• Shipping Line
• Customs Authority reference
In the header section, if goods are delivered to another end destination, or the buyer is different, this means a new CI must be created. Full details are required so any restrictions on the buyer, the seller or even the rights to deliver the goods to the end destination can be determined.
The end destination is exactly what it says. It is the final or sometimes called the ultimate destination as known to the seller where the goods will be used or at least stored for resale to third parties within that country. It is not an intermediate location to enable the receiving company to create new CI and COO documents and delivery to any country with which trade is restricted or sanctioned by the source country.
Obviously, no deviations ‘en route’ are allowed without refiling with the export country’s customs authorities, otherwise the CI filed with the export customs authority is not correct and this is a fraud.
Beware of this, as some parties try to take goods and redirect them to other destinations without advising the export customs authority to save costs and speed up delivery. If this happens, the essence of the CI with its specific End Destination has been usurped and the seller might have some awkward questions from the customs authority. This does not preclude the sale of goods as described in the BOL as a new CI can be created with the new owner and the amended document refiled with the customs authority of the sending country.
Let us also quickly define how a customs authority calculates the duties.
The duties are published in a document which is called either the Harmonized Schedule (HS) or Harmonized Tariff Schedule (HTS). This is a document which is published by the World Customs Organization (part of the UN) where all the potential products are laid out in a defined sequence with a formalized numbering system.
The HS / HTS has multiple sections with chapters which are broken into subsections, and groups of products using 6 digits. Each country can then add 2 more digits to identify specific products, with the last 2 digits used for statistical purposes. The total number to identify a specific product in a country’s tariff schedule is therefore 10 digits laid out in the format of XXXX.XX.XXXX for all countries. The heading and sub-heading are the first 4 digits and categorize the product type, the next two digits give a specific group of products.
The next two digits being the 7th and 8th, allow a country to break a group of products into specific products if they so desire. By implication, the 7th and 8th digits are specific to a country. Now many countries probably do use the same two digits for a specific product, but there are unfortunately variations. For this reason, a CI given to an importing country is often 6 digits, allowing the Customs Broker in the importing country to add the correct last 4 digits.
The second portion of the CI product line detail is to record the type of license or approval, if required, that has been utilized to achieve the export. The categorization of the product for licensing is done separately from the customs classification via an ECCN number or Export Control Classification Number.
The ECCN is used by the appropriate part of the government of the country to define the type of license required for either export or import. The ECCN number is a 5-digit Alpha-Numeric code which defines what license the product requires. The ECCN number provides a structured categorization of the type of license which is required for the goods and will be the subject of a future article as will Country of Origin determinations.
One other issue must be addressed for the CI. The description of the product must describe the product for an external viewer. This is for the customs authority to read and be able to understand. If you have a specialized assembly of goods, do not use your proprietary number which makes sense only to your company employees, and expect the customs authority to accept it.
A customs officer reading a description of Assembly XT58AA for example with a cost of $50,000 will raise their ire and you can expect to have the goods delayed and have to field queries. Give it a reasonable description in common English.
The CI has one purpose which is to give the Customs Authority the correct information to enable them to pass your goods for export or import, calculate and pay the duties and have the goods available for free circulation in the country of import as quickly as possible. Add extraneous information at your peril and leave information out if you want your goods delayed.
And with this detailed view of the CI, you will realize that most of what you can Google about CI is erroneous, so be informed and knowledgeable!!
Missed Jon Vogt’s previous articles? Find them here:
Why Everyone Needs a Better Understanding of Incoterms (January 11, 2022)
For Incoterms, Devil is in the Details (February 8, 2022)
Why Use Ex Works Incoterm Rule? (March 3, 2022)
When FCA Can Be a Four-letter Word (March 31, 2022)
Exploring the 'C' Rules for Cost and Carriage (June 10, 2022)
CPT, CIP Add to Complexity of Incoterm Rules (July 7, 2022)
Trade Game Often Needs a Good ‘D’ (August 4, 2022)
Ramification of Choosing an Incoterms Rule (August 31, 2022)
About the author:
John Vogt has his own consulting company and, at the end of his 42 years in industry around the world, was the Vice President of Global Logistics for Halliburton. Thereafter he spent five years as a Professor of Record for the University of Houston-Downtown MBA for International and Supply Chain courses. He has experience as a Board Director and has traveled the world to improve trade.
In his career, he has driven the correct use of Incoterms as part of the trade improvements he has implemented to drive efficiency and effectiveness. In his role as a professor of record, he taught multiple courses on the use of Incoterms and trade-related agreements. He has published with colleague Dr. Jonathan Davis (Associate Professor, Supply Chain Management Chair GMSC Department, Marilyn Davies College of Business, University of Houston-Downtown), three formal research papers on Incoterms with two more in consideration, making him the most published Incoterms researcher. He has also published numerous articles, presented papers at multiple international conferences around the world on logistics, trade and compliance including Incoterms. He has served as track chair for multiple conferences as well.
Vogt has a Ph.D. (Logistics), an MBA, and a B.Sc. (Engineering), holds the title of European Engineer (Eur. Ing), is a Chartered Engineer (UK) and has been elected as a Fellow of the Institute of Engineering and Technology (UK). You can reach him at [email protected].
Photo Credit: DAKO Worldwide
