Incoterms 2010: Most Prominent New Features

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The new Incoterms 2010 replace and update a number of various features of Incoterms 2000. The new rules took effect on January 1, 2011. The following is a very brief description of some of the most prominent changes.

1. Reduced Number of Incoterms

The number of Incoterms rules has been reduced from 13 to 11.  This reduction resulted from replacing four Incoterms 2000 rules with just two (see below).

2. New Incoterm Rules: DAT and DAP

Two new Incoterms rules – DAT and DAP – have replaced the Incoterms 2000 rules DAF, DES, DEQ and DDU

Under both new rules, DAT (Delivered at Terminal) and DAP (Delivered at Place), delivery occurs at a named destination.  In DAT,  at the buyer’s disposal unloaded from the arriving vehicle (as under the former DEQ rule); in DAP, also at the buyer’s disposal, but ready for unloading (as under the former DAF, DES and DDU rules).

The new rules makes DES and DEQ superfluous.  First, the named terminal in DAT may be a port, and, hence, DAT can be used in cases were DEQ once was.  Second, the arriving “vehicle” under DAP may be a ship and the named place of designation may be a port.  Therefore, DAP can be used in place where DES once was.

These new rules, like their predecessors, are “delivered”, with the seller bearing all the costs (with the exception of import clearance, where applicable) and risks involved in bringing the goods to the named place of destination.

3.    New Classification of the Incoterms 2010 rules

The eleven Incoterms 2010 rules are divided into two distinct classes.

a).  Rules of Any Mode(s) of Transport

The first class contains rules for any mode or modes of transport.  These are:

EXW – EX WORKS

FCA – FREE CARRIER

CPT – CARRIAGE PAID TO

CIP – CARRIAGE AND INSURANCE PAID TO

DAT – DELIVERED AT TERMINAL

DAP – DELIVERED AT PLACE

DDP – DELIVERED DUTY PAID

The first class rules can be used irrespective of the mode of transport selected and irrespective of whether one or more than one mode of transport is employed.  They can be used even when there is no maritime transport at all. It is important to remember, however, that these rules can be used in cases where a ship is used for part of the carriage.

b).  Rules for Sea and Inland Waterway transport

The second class contains only rules for sea and inland waterway transport.  These are:

FAS – FREE ALONGSIDE SHIP

FOB – FREE ON BOARD

CFR – COST AND FREIGHT

CIF – COST INSURANCE AND FREIGHT

In the second class of Incoterms 2010 rules, the point of delivery and the place to which the goods are carried to the buyer are both ports (hence the label “sea and inland waterway” rules). Under the FOB, CFR, and CIF, all mention of the ship’s rail as the point of delivery has been omitted in preference for the goods being delivered when they are “on board” the vessel. This more closely reflects modern commercial reality and avoids the rather dated image of the risk swinging to and fro across an imaginary perpendicular line.

3     Rules for domestic and international trade

Incoterms rules have traditionally been used in international sale contracts where goods pass across national borders. In various areas of the world, however, trade blocs, like the European Union, have made border formalities between different countries less significant. Consequently, the subtitle of the Incoterms 2010 rules formally recognizes that they are available for application to both international and domestic sale contracts. Therefore, the Incoterms 2010 rules clearly state in a number of places that the obligation to comply with export/import formalities exists only where applicable.

4     Guidance Notes

A “Guidance Note”has now been attached to each Incoterms 2010 rule. The Guidance Notes explain the fundamentals of each Incoterms rule, such as when it should be used, when risk passes, and how costs are allocated between seller and buyer. Remember – the Guidance Notes are not part of the actual Incoterms 2010 rules, but are intended to help the user accurately and efficiently steer towards the appropriate Incoterms rule for a particular transaction.

5    Electronic communication

Incoterms 2010 seeks to stand in line with the developments in the international commercial reality.  Articles A1/B1 of the Incoterms 2010 rules now give electronic means of communication the same effect as paper communication, as long as the parties so agree or where customary. This formulation facilitates the evolution of new electronic procedures throughout the lifetime of the Incoterms 2010 rules.

6      Insurance

The new Incoterms emphasizes the importance of the insurance coverage by moving the relevant provisions of carriage and insurance from more generic articles A10/B10 (Incoterms 2000) to articles A3/B3 (which deal directly with contracts of carriage and insurance). Furthermore, the language in articles A3/B3 relating to insurance has been altered with a view to clarifying the parties’ obligations in this regard.

7     Security-Related Clearances

In the modern world, the security concerns are ubiquitous.  Therefore, Incoterms 2010 rules have allocated obligations between the buyer and seller to obtain or to render assistance in obtaining security-related clearances, such as chain-of-custody information, in articles A2/B2 and A10/B10 of various Incoterm rules.

8     Terminal Handling Charges

Under Incoterms rules CPT, CIP, CFR, CIF, DAT, DAP, and DDP, the seller must make arrangements for the carriage of the goods to the agreed destination. Usually, while the freight is nominally paid by the seller, it is actually paid for by the buyer as freight costs are normally included by the seller in the total selling price.

Sometimes, the carriage costs will include the costs of handling and moving the goods within port or container terminal facilities and the carrier or terminal operator may well charge these costs to the buyer who receives the goods. In such cases, the buyer will want to avoid paying for the same service twice: once to the seller as part of the total selling price and once independently to the carrier or the terminal operator. The Incoterms 2010 rules seek to avoid this happening by clearly allocating such costs in articles A6/B6 of the relevant Incoterms rules.

9     String sales

String sales may arise in situation where there is a sale of commodities (as opposed to the sale of manufactured goods).  In these cases, the cargo sold several times during transit “down a string”. When this happens, a seller in the middle of the string does not “ship” the goods because these have already been shipped by the first seller in the string. Rather, the seller in the middle of the string performs its obligations towards its buyer by “procuring” goods that have been shipped. Incoterms 2010 rules clarify this situation and specifically state the obligation of the seller to “procure goods shipped” as an alternative to the obligation to ship goods in the relevant Incoterms rules.

Contact Sherayzen Law Office for Legal Help with International Contracts

If you are selling and/or buying goods overseas, you should contact Sherayzen Law Office immediately to get legal help in negotiating and drafting your international contacts.  Our experienced international contract firm will guide you every step of the way in the complex process of international trade, including tax consequences of your international business transactions.

Minnesota Department of Revenue Launches New e-Services System

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On October 3, 2011, the Minnesota Department of Revenue announced the launch of its new e-Services online system. This new system is replacing e-File Minnesota and will offer a wider variety of services to 400,000 business taxpayers. The new system was the product of at least four years of diligent work by the Department.

The new E-Services not only provides the ability for business taxpayers to file and pay their taxes, it also allows taxpayers to update their contact information, register new accounts, and send the department secured messages. In addition, business taxpayers will have the ability to view all account information in one location. They can now view their payment history, returns they have filed and all correspondence sent to them by the Department of Revenue.

The functionality being added provides more security flexibility to the business taxpayer. Businesses can create unique user ID’s and passwords which grant online access to tax practitioners and accounts they partner with.

Finally, e-Services will also allow self-service activities 24 hours a day, seven days a week. Business taxpayers now have the ability to handle their tax needs online when it is convenient for them.

The transition to the new system will begin on October 17, 2011 and is currently projected to finish by mid-January of 2012. During the transition, groups of taxpayers will be added each Monday, until all 400,000 business taxpayers have access to e-Services.

IRS Proposed Regulations Require Tax Preparers to File Form 8867 with 2012 EITC Claims

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On October 6, 2011, The Internal Revenue Service announced that it is issuing proposed regulations that would require paid tax return preparers, beginning in 2012, to file a due diligence checklist, Form 8867, with any federal return claiming the Earned Income Tax Credit (EITC). It is the same form that is currently required to be completed and retained in a preparer’s records.

The due diligence requirement, enacted by Congress over a decade ago, was designed to reduce errors on returns claiming the EITC, most of which are prepared by tax professionals.

The EITC benefits low-and moderate-income workers and working families and the tax benefit varies by income, family size and filing status. The EITC is a refundable tax credit – taxpayers can get it even if they owe no tax. For 2011 tax returns, the maximum credit will be $5,751.

Tax Return Extension Deadline for Most Filers: October 17, 2011 and Some Exceptions

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October 17, 2011 is the deadline for most of those individual taxpayers who filed Form 4868 to request a six-month extension on filing of their tax returns. Traditionally, October 15 would have been the deadline, but it falls on Saturday this year. Therefore, the IRS extended the deadline until October 17, 2011.

Note that this deadline of October 17, 2011, includes U.S. taxpayers living abroad, even though their tax filing deadline is automatically extended to June 15. It is also important to emphasize that the extension to file your federal tax return does not in any way affect the obligation to file the FBARs by June 30, 2011.

Some taxpayers, however, are not subject to October 17, 2011 deadline this year. The two most prominent exceptions are qualified military personnel and victims of Hurricane Irene. Victims of Hurricane Irene will have until October 31, 2011 to file their tax returns. The new deadline primarily concerns residents of certain counties in Connecticut, Massachusetts, North Carolina, New Hampshire, New Jersey, New York, Pennsylvania, Puerto Rico, Texas, and Vermont.

It is important to emphasize that an extension of time to file is not equivalent to an extension of time to pay. It is generally true that, under the relevant Treasury regulations and IRS Notice 93-22, individual taxpayers still can file a valid Form 4868 and obtain an automatic extension without paying the properly estimated tax in full – this means, of course, that no late filing penalty is likely to be assessed. However, the taxpayers will still owe interest on any past due tax amount and may be subject to a late payment penalty if payment is not made by the regular due date of the return.

IRS Form 5471 and US Persons Who Own Shares in Foreign Corporations

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Do you own 10% or more of the shares in a foreign corporation?  Then you may be required to file IRS Form 5471 (“Information Return of U.S. Persons With Respect to Certain Foreign Corporations”).

IRS Form 5471

Form 5471 is a required informational return for certain categories of filers (there are four different categories of U.S. persons who are required to file this form), and is utilized to satisfy the reporting requirements of IRC Sections 6038 and 6046, and applicable regulations. Form 5471 applies to specified US citizens and residents who are shareholders, officers, or directors in certain foreign corporations.  In general, US taxpayers who own 10% or more of the total value or voting percentage of foreign corporations are required to file the form.

The form itself is very complex and requires reporting of significant amounts of corporate information in the accompanying schedules.  Moreover, this reporting usually must meet GAAP requirements.

Contact Sherayzen Law Office NOW for Legal and Accounting Help with Form 5471

This article is intended to give a brief look at some of the important issues surrounding Form 5471, and it should not be construed as legal or tax advice.  If you have further questions regarding the filing of Form 5471 as it pertains to your own tax and accounting circumstance, Sherayzen Law Office offers professional advice in all of your tax and international tax needs.  Call (952) 500-8159 to discuss your tax situation with an experienced international business tax lawyer.