Banking and Custom Clearing LSCM

Chapter One
1. Meaning of Import and Reasons of Importing Commodity

Learning Objectives

After studying this chapter you should able:

 Examine the reasons for importing materials.

 Explain the parties that facilitate importing materials.

 Explain import procedures in international practice.

 Understands the trade terms in import transaction.

Understand the responsibility and duty of sellers and buyers of each tradeterms.

 Explain compulsory documents in import transaction.

Introduction

In this stiff and intensive competition Companies go overseas to obtain lowermanufacturing costs and protect
themselves from lower-priced imports being sold in theirown country; importing enables them to be
competitive with other companies doingbusiness in their country. Free trade agreements help strengthen
business climates byeliminating or reducing tariff rates, improving intellectual property regulations,
openinggovernment procurement opportunities, and easing investment rules. In connection with the flow of
goods and services in the international market, boundariesare shrinking and disappearing, and what’s becoming
apparent is that global purchasingand domestic purchasing are flowing, blending, and converging in to one
stream. The interdependence of countries is increasingly growing, however, their advantages may not be
ofequal terms, and in fact with big gaps, particularly, between the developed and developing countries.

What is importing?

Importing is bringing goods into your country from another country in order to sell them.

1.1. Reasons for importing

Although strengthening domestic sources can be justified from its multi- effect on national socio- economic
aspects, it is difficult, and now a day’s seems even impossible to be aclosed economy, to become self-
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supporting in all requirements. Particularly the poorcountries like ours are highly dependent on international
sources. As the consequence of the only being poor, but also the globalization has furtherstrengthened the
inter-dependence of countries of the world where the issue of self-sufficiency became almost a far cry,
particularly in the poor countries.

Importing should not, however, understand from the pressures it creates on balance ofpayments only. It has to
be recognized as an essential economic function since many of thetechnological output and industrial products
required in the production systems are missingin many of the developing countries. Such imported materials
would be fundamental in the endeavors made for self- sufficiency including from the long – term perspective.
Infectthough the exchange may not be in a balanced manner where developing countries whodepend on only
very few export items of mostly raw nature, with less value added andmainly agricultural products are at a
disadvantaged position, the developed countries also are not self- sufficient. So the industrially advanced
countries also import items from othercountries.

As stated above, importing is an essential economic function which cannot be completelyeliminated. In

connection with this, Ricardo’s principle of comparative advantage statesthat it would be beneficial for an
economy to concentrate on the production of items inwhich it specializes, export these items and import its
requirement of other items. The principle, though not totally practical, cannot be dismissed. International trade
isundoubtedly governed by political motives and, as such, a country cannot totally rely onanother country for
its requirements of specific items. Accounting various parameters\ countries have their respective policies on
imports.

These days import policies are liberatedin many countries as possessed the import substitution policies that
were commonpractices and procedures are very important to industries which depend on import for
theirproduction. Policies consider, among others, the impact of imports on indigenousproduction and its
influences on foreign exchange resources. Generally, policies need to beneither liberalized nor restrictive, but
with a balance between the need for import and export production. In relation to the classification of the
purchasing process as to the possible source, thepoints highlighted above suffice to indicate that foreign
purchase is one important source.But the detail aspects of the importing are looked in to the following chapter.

Most businesses go overseas to obtain lower manufacturing costs and protect themselvesfrom lower-priced
imports being sold in their own country. It enables them to be competitive with other companies doing business
in their country.

Developing countries are highly dependent on technological and industrial product importsfor the progresses
they endeavor especially in the industrial sector. Not only they have toimport machineries but the spare parts
for their maintenances as well as other inputs fortheir continuous production.

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The reason for importing goods from abroad are many and actually vary with the specificcommodity needed,
however, the underlying principal and governing reason for usingforeign vendor is that better value is
perceived to be available from that source than from adomestic vendor.

Importing goods and services of foreign origin can be highly challenging.

Importingrequires additional efforts when compared with domestic sourcing, though may be withhigher
rewards. One of the complexities of buying goods and services of foreign origin isthe wide variability among
the production countries in characteristics such as quality,service, and dependability. With this perception in
mind, however, there are common reasons for importing/ purchasing goods and services from international
sources ashighlighted below.

A. Quality

Although the issue of quality is argumentative, for there can be practices when foreignitems are purchased
while their quality may not be better than domestic products, the keyreason forwarded by purchasing
managers for international sourcing is to obtain therequired level of quality. This is not to imply infect there are
no higher quality products inthe international market than in domestic markets. Especially in developing
countries likeEthiopia, there may not be domestic sources for many industrial products and hence thismay
eventually lead to developing lack of confidence one’s own products. Suchunderstanding impedes their
progresses and domestic industrial development potential.

B. Price

It may seem surprising to see a foreign vendor producing and transport an item severalmiles at the lower cost
than domestic supplier(producer). But, it actually is observed in theinternational trade through additional costs,
import duties, and transportation expenses arerequired on international sourcing. Several factors can influence
the issue and be reasonsfor the specific commodity, such as:

I. The labor costs in the producing country may be substantially lower thanthe costs incurred
domestically.

II. The exchange rate may favor buying foreign.

III. The equipment and processes used by the foreign vendor may be moreefficient than those used by domestic
vendors.

IV. The foreign vendor may be concentrating on certain products and pricingexport products at particularly
attractive levels to gain volume.

C. Product and Process Technologies

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International sources in some industrial products are more advanced technologically thantheir domestic counter
parts. So importing may be advisable than an attempt to produce anitem.

D. Unavailability of Items Domestically

Some items may only be available in foreign sources. In such situations there may not beoption than depending
on foreign purchase.

E. Faster delivery and continuity of supply

Because of limited capacity of the domestic sources, foreign vendor can deliver faster thanthe domestic
supplier. The foreign supplier may even maintain an inventory of products. Inrelated connection professional
buyers want to develop and maintain an adequate supplybase for required materials. It may be necessary to
develop international suppliers in orderto have a completive supply base.

F. Better Technical Service

If the foreign vendor has a well – organized distribution network in various areas; bettersupply of parts,
warranty service, and technical advice may be available than fromdomestic suppliers.

G. Counter Trade

The term “counter trade” refers to any transaction in which payment is made partially orfully with goods
instead of many. Counter trade links two normally unrelated transactions;the sale of a product in to a foreign
country and the sale of goods out of that country.Under such arrangement countries require their domestic
suppliers to purchase materials intheir country as part of the sales transactions, which commonly are called
barter, offsets, orcounter trade.

F. Tie – in with Foreign Subsidiaries

Firms can consciously be made to operate in foreign countries to support the local, foreigneconomy by
purchasing there and for export to own country.

1.2. Parties That Facilitate Import/Export Commodity

There are several participants in facilitation of international trade. An exporter or importercan draw on a
greater number of professional services-bankers, transporters, freightforwarders, and insurers-for advice and
assistance. The following diagram depicts theparties that are among the active participants of international
trade.

I. Freight forwarders

For the smooth flow of customs clearing activities in any country customsAuthority/House, freight forwarders
or Customs Clearing Agents (CCA) plays critical roles.

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Freight forwarding is the representation of a consignor or consignee locally orinternationally in fulfilling
customs, port and other formalities for import and export cargo.The freight forwarder is a person who is
licensed to carryout freight forwarding. In otherwords, freight forwarder refers to a service provider working
from his/her premises andtaking care of a range of operations relating to his/her clients’ goods:
transshipment,handling, storage and various commercial and administrative formalities. He/she isgenerally also
a customs broker. The exporter or importer must take appropriate policies in order to insure risks as per the
terms of sales contract such as CIF (cost insurance andfreight).

A freight forwarder is an independent company that acts as your agent in moving the cargofrom its point of
origin to its overseas destination. Freight forwarders provide a valuableservice to exporters. They coordinate
the shipment of the goods from the factory, arrangeto have the cargo loaded onto the vessel, and process the
documentation on the shipment.

Especially when you’re new to importing, having a freight forwarder you can trust helpsease the stress of
sending your first shipments overseas. Freight forwarders also assist exporters by advising them about freight
costs, port charges,consular fees, cost of special documentation, and handling fees. They do this as part oftheir
price quote process for their prospective customers. So you don’t have to worry aboutgetting slammed with a
charge you hadn’t expected. Every charge you pay should bespelled out ahead of time, allowing you to budget
and plan accordingly.

Freight forwarders can recommend proper packing so that the goods arrive in goodcondition, and they can also
arrange to have the cargo export packed at the point ofshipment or coordinates the packing of goods into a
container. When the order is ready forshipment, the freight forwarder coordinates the preparation of all
shipping documentsrequired by the foreign government, as well as those required as part of the
paymentprocess. Freight forwarders also arrange to have the goods delivered to the carrier in timefor loading,
prepare the bill of lading and any special required documentation, and forwardall documents directly to the
customer or to the paying bank, if applicable.

II. Custom Clearing Agent

Customs brokers act as agents for importers in the transaction of their Customs business.

Brokers are private individuals or firms licensed by the Customs Service to

 Prepare and file the necessary Customs entries

 Arrange for the payment of duties

 Take steps to effect the release of the goods in Customs custody

 Represent the importer in Customs matters

In addition to assisting in the entry process, Customs brokers can also:

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 Help you decide which shipping routes are best, to get your goods in theshortest possible time

 tell you which method of shipment is best for your goods and advise you onpacking requirements for those
goods

 Guide you on matters relating to international payments

 when you’re choosing a Customs broker, consider the following questions:

 Do you have a specialized product line or type of import? You may wantto find a broker who either
specializes or has a great deal of expertise in clearingyour type of products.

 How many ports will you be using for your imports? If you’re importingthrough a large number of ports,
you’ll want to hire a broker who has offices inthose ports.

 How connected is the broker? You want to identify a broker who is fullyautomated with full connectivity
with various Web portals and cargo tracking sites.Consider using a firm that participates in the Automated
Broker Interface (ABI),which is a system that permits transmission of data pertaining to merchandise
beingimported into the United States.

 What is the broker’s general reputation? The best source of informationabout a broker’s reputation comes
from the broker’s own customers. Ask forreferences — and be sure to contact them.

III. Commercial BanksOwing to commercial banks’ vital role in export-import business activity, the
exporteronce conclude the sales contract with his/her counterpart importer, arranges the delivery ofdocuments
to be given to exporting bank. The exporter’s bank, in turn, scrutinizes thedocuments and gets confirmation
from its correspondent importer’s bank. If there are nodiscrepancies in the content of documents, the exporter’s
bank will effect payments to theexporter outright.

IV. Transportation and shipping company

In importing goods from abroad transportation company play a prominent role by movinggoods from point of
origin or exporter country to the importers country.There are five modes of transport involved in the
international transportation of goods.These modes include Water/sea transport, Railroad transport, Motor
vehicle/Roadtransport, Air transport, and Pipelines transport.

V. Insurance and Insurers Company

Insurance is legal contract that protects people from the financial costs that result from lossof life, loss of
health, lawsuits, or property damage. Insurance provides a means forindividuals and societies to cope with
some of the risks faced in everyday life. Peoplepurchase contracts of insurance, called policies, from a variety
of insurance organizations. Insurances facilitate in import/export trade by protecting the goods against an
expected lossand damages and their purpose to redistribute the loss and thereby eliminate risk.

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Insurancecompany they issue a certificate of insurance to the insured goods to importer/exporter asan evidence
to claim against damage or loss of the goods and to get compensations.

Insurance certificate an insurance certificate is issued by an insurance company oragent and is proof that the
shipment is insured to the extent stated (and no more).aninsurance certificate gives evidence of risk coverage
for merchandise shipped. It is sent tothe bank with other collection documents, and normally is used only when
required.

There are many types of insurance policies available. t is compulsory to insure goods import from
abroad.There are several type of insurancesfor cargos to be transship from origin to a place or importers
premises and depends up on the nature costs ,and other environmental factor of the cargo and transportation
mode. Marine insurance, one of the oldest forms of insurance, covers damage to and losses of boats, ships,
marine workers, cargo, and passengers. Both businesses and individuals may purchase various forms of marine
insurance. Insurance for commercial ships or boats at sea, docked in a port or on some inland waterways as
well as their cargo or passengers—is known as ocean marine insurance.

There are four main types of ocean marine insurance: (1) hull insurance, (2) cargo insurance, (3) freight
insurance, and (4) marine liability. Hull insurance covers damage to a ship itself. Cargo insurance covers losses
to a ship’sphysical cargo. Freight insurance covers shippers against a loss of freight (payment for
thetransportation of cargo). Marine liability covers damages to people and property fromcollisions and other
incidents.

1.3. Import/export Procedure: International Practices

Before beginning to import, and on each importation, the importer/buyer should consider a number of
preliminary matters that will make a great deal of difference in smooth and efficient importing.

A. Products

Before actually importing, or whenever the importer is considering importing a new item, the characteristics of
that item should be reviewed. That is, is the product being imported as a raw material or component to be used
in the manufacturing process? Is it a finished product that is going to be resold in the form imported or with
some slight or significant modification? Is it a replacement or spare part? Is the item sold singly or as a part of
a set or system? Does the product need to be modified, such as in size, weight, or color, to be suitable for the
domestic market? Often the appropriate methods of manufacturing and marketing, the appropriate purchase
and import documentation, the appropriate procedures for importation, and the treatment under law of a given
country , including ,Customs law, will depend upon these considerations (for example, whether or not the
product may be imported duty-free or what the correct classification and duty will be).

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In addition to the general procedures and documents, some products are subject to special import restrictions,
permits, licenses, standards, and/or procedures. Therefore before actually engaged in to import of a given
product, you have to check the legal fulfillment and custom laws of given the country.

B. Volume

What is the expected volume of imports of the product? Will this be an isolated purchase of a small quantity or
an ongoing series of transactions amounting to substantial quantities? Small quantities may be imported under
purchase orders and purchase order acceptance documentation. Large quantities may require more formal
international purchase agreements; more formal methods of payment; special shipping, packing, and
handlingprocedures; an appointment as the U.S. sales agent and/or distributor from the foreign exporter; or
commitments to perform after-sales service.

C. Country Sourcing

One of the principal preliminary considerations will be to identify those countries that havethe products that the
importer is seeking to purchase. If the importer seeks to import a raw material or natural resource, the importer
may be limited to purchasing from those countries where such products are grown or mined. If the importer is
looking for a manufactured product, it is likely that the number of countries where such products are available
for sale will be much greater; however, identifying the low-cost countries based upon proximity to raw
materials, labor costs of manufacturing, current exchange rates with the United States, or transportation costs
may require considerable study and analysis.

In identifying the potential country, the importer should ascertain whether the products of that country are
eligible for duty-free or reduced duty treatment under the different nation’s trade agreement. Sourcing or
importing products from hostile or internationally sanctioned country is restricted.

D. Identification of Suppliers

Once the countries with the products available for supply have been identified, of course, the importer still
needs to identify a specific supplier. This will be just as important as identifying which countries can provide
the products at the lowest cost.

An unreliable supplier or one that has poor product quality control will certainly result in disaster for the
importer. The importer should spend a significant amount of time in evaluating the potential supplier if there
are going to be ongoing purchase transactions. The importer should ascertain the business reputation and
performance of the potential supplier. If possible, the importer should inspect the plant and manufacturing
facilities of the supplier. The importer should determine whether there are other customers within its own
country who might be able to confirm the quality and supply reliability of the potential supplier.

E. Compliance with Foreign Law

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Prior to importing from a foreign country or even agreeing to purchase from a supplier in aforeign country, an
importer should be aware of any foreign laws that might affect thepurchase. Information about foreign law can
often be obtained from the supplier fromwhom the importer intends to purchase. However, if the supplier is
incorrect in theinformation that it gives to the importer, the importer may have to pay dearly for havingrelied
solely upon the advice of the supplier. Incorrect information about foreign law mayresult in the prohibition of
importation of the supplier’s product, or it may mean that theimporter cannot resell the product as profitably as
expected. Unfortunately, suppliers oftenoverlook those things that may be of the greatest concern to the
importer. As a result, itmay be necessary for theimporter to confirm its supplier’s advice with third
parties,including attorneys, banks, or government agencies, to feel confident that it properlyunderstands the
foreign law.

F. Import Packing and Labeling

Prior to the exportation of the purchased products, the importer should ascertain the type of packaging and
labeling that the exporter will use. Different packaging is often required to withstand the rigors of international
transportation and to ensure that the importer is going to receive the products in an undamaged condition.

Generally, container transportation will protect best against damage and pilferage. Certain types of containers
may be needed, such as ventilated, refrigerated, flat, open top, or high-cube. If the merchandise is a hazardous
material, it cannot be transported unless it complies with the International Maritime Dangerous Goods Code or
the International Air Transportation Association Dangerous Goods regulations depending on the mode of
transport.

The packing, labeling, and invoicing requirements for such hazardous materials must be communicated to the
seller before shipment. Where the supplier sells FOB factory or on any term or condition of sale other than
delivered to the buyer, the buyer/importer will be taking the risk of loss during the transportation.

G. Commercial Considerations

There are several commercial considerations that the importer must take into account.

1. Prevailing Market Price

In planning its import purchases, the importer must pay attention to the prevailing market price. Obviously, if
raw materials or components can be purchased in the domestic at a lower price than they can be purchased
abroad, depending upon the source country, importation will not be economically feasible. In purchasing for
resale, if the purchase price is not sufficiently low to permit an adequate markup when the product is resold at
the prevailing domestic market price, the importation will not be economic.

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2. Industry Standards

Merchandise manufactured abroad should comply with quality standards of given country. Prior to agreeing to
purchase foreign products, the importer should check any applicableindustry standards to make sure that the
products will comply. The importer may need toadvise the manufacturer of the appropriate specifications so
that the products can be manufactured to meet an importer country industry standard.

H. Terms of Purchase

Although there are ordinarily many terms and conditions that the buyer will include in its import purchase
agreements, the terms of purchase upon which seller and buyer must agree is that relating to passage of title,
risk of loss, price, and payment. Although a buyer can purchase on different terms of sale from different
sellers in accordance with whatever terms are expressed in each seller’s quotation or purchase order
acceptance, it is ordinarily much better for the buyer to think about and formulate policies relating to its terms
of purchase in advance of placing its order. There are a number of considerations, the first of which relates to
the use of abbreviations. The international commercial (13 in number we will discuss later in this chapter)
developed by international chamber of commerce shows clearly the responsibility and duties of buyer and
seller to be used as contract terms of statement in international trade.

I. Method of Transportation; Booking Transportation

Transportation may be made by air or by ship. Transportation can be arranged directly with air carriers or
steamship companies or through freight forwarders. Air transportation is obviously much quicker, but is more
expensive. Large shipments cannot be shipped by air. In obtaining quotations from various carriers, it is
important to record and confirm any such quotations to avoid future increases and discrepancies. When
checking with transportation carriers, the name of the person making the quotation, the date, the rate, and the
appropriate tariff classification number used by the carrier should be recorded.

J. Import Financing

Some foreign governments offer financing assistance to for importers who are purchasingmerchandise from
exporters in their countries. Some state government agencies even offerfinancing to purchase imported
components if the finished products will be exported. If theimporter intends to utilize any import financing
program, the program should beinvestigated sufficiently in advance of commencing imports.The necessary
applications and documentation must be filed and approvals obtained priorto importation of the merchandise.

k. Payment

An importer may be required to pay for merchandise it purchases by cash in advance or a letter of credit, unless
the exchange control regulations of the government of the buyer do not require it or the buyer hassufficient
bargaining leverage to purchase on more liberalterms. The buyer’s methods of payment are discussed in

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Chapter 2. If a letter of credit is required, the seller will often provide instructions to the importer), and the
importer will have to make an application in the nature of a credit application to a bank that offers letter of
credit services.

For payment by documentary collection, a sample of the seller’s instructions to the bank is. Sample sight or
time drafts that the seller will present to the correspondent bank under a letter of credit to obtain payment when
the goods are shipped. A buyer using a letter of credit should realize that the bank does not verify the quantity,
the quality, or even the existence of the goods. The bank will make payment as long as the seller
presentsdocuments that appear on their face to be in compliance with the terms of the letter of credit. For this
reason, a buyer may wish to arrange for a pre-shipment inspection by an inspection service.

1.4. Contract consideration for importers Or on Formation

Purchase /sales agreement

The purchase agreement is a formal contract governed by law. In general, a purchase agreement is formed by
agreement between the seller and the buyer and is the passing of title and ownership to goods for a price. An
agreement is a mutual manifestation of assent to the same terms. Agreements are ordinarily reached by a
process of offer and acceptance.

This process of offer and acceptance can proceed by the seller and the buyer preparing a purchase agreement
contained in a single document that is signed by both parties, by the exchange of documents such as purchase
orders and purchase order acceptances, or by conduct, such as when the buyer offers to purchase and the seller
ships the goods. From the view of clarity and reducing risks, preparation of a purchase agreement contained in
a single document is best. Both parties negotiate the agreement by exchanges of letters, emails, or faxes or in
person. Before proceeding with the performance of any part of the transaction, both parties reach agreement
and sign the same purchase agreement. This gives both the seller and the buyer the best opportunity to
understand the terms and conditions under which the other intends to transact business, and to negotiate and
resolve any differences or conflicts. This type of purchase agreement is often used if the size of the transaction
is large, if the seller is concerned about payment or the buyer is concerned about manufacture and shipment, or
if there are particular risks involved, such as government regulations or exchange controls, or differences in
culture, language, or business customs that might create misunderstandings.

Common Forms for the Formation of Purchase Agreements

There are a number of forms that are customarily used in the formation of purchaseagreements. In order to save
time (and discourage changes by the other party), both buyers and sellers often purchase preprinted forms from
commercial stationers or develop and preprint their own forms. however, it is important to be familiar with the
various forms.

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A. price lists

Sometimes a seller will send a price list to a prospective buyer as its first communication. Ordinarily, a buyer
should not consider such lists as offers to sell that entitle the buyer to accept. The buyer should ordinarily
communicate with the seller (specifying that he is not making an order), asking for a quotation and confirming
that the terms of the price list are still current.

B. Requests for Quotations and Offers to Purchase

Sometimes the first document involved in the formation of a purchase agreement is a request from the buyer to
the seller for a quotation (RFQ). Ordinarily, such a request— whether it be informal, in an email, facsimile, or
letter, or formal, in a printed form—will ask for a price quotation from the seller for a specific quantity and
often a shipping date. When requesting a quotation, the buyer should be particularly careful to specify that its
request is not an offer to purchase and that such an offer will be made only by the buyer’s subsequent purchase
order. Another method is to expressly state that the buyer’s request is subject to or incorporates all of the
buyer’s standard terms and conditions of purchase.

C. Quotations

In response to a request for a quotation, the seller ordinarily prepares and forwards a quotation or a pro forma
invoice. In making quotations, the seller may use a printed form that may contain all of its terms and conditions
of sale on the front or back thereof. If this is the first communication from the seller to the buyer, the buyer
should be careful to ascertain whether the quotation contains other terms and conditions of sale in addition
tothe price, quantity, and shipment date.

The quotation on the pro forma invoice form should include the following:

 Names and addresses of the exporter (seller) and importer (buyer)

 Any reference numbers.

Listings and description of products.

 Itemized list of prices for each individual item being sold

 Net and gross shipping weights (using metric units when appropriate)

 Dimensions for all packages (total cubic volume, again using metric unit when appropriate)

 Any potential discounts

 Destination delivery point

 Terms of sale

 Terms of payment
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 Shipping and insurance costs (if required)

 Expiration date for the quotation

 Total to be paid by the importer

 Estimated shipping date

 Currency of sale

 Statement certifying that the information found on this pro forma invoice istrue and correct

 Statement that provides the country of origin of the goods

D. Purchase Orders

The next document that may occur in a purchase transaction is a purchase order (PO) issued by the buyer.
Again, the purchase order may be informal, such as in an email, facsimile, or letter or it may be on a printed
form. This is the most important document for the buyer because it should contain all of the additional terms
and conditions that the buyer wants to be a part of the purchase agreement when the purchase order is accepted
by the seller. Before issuing a purchase order in response to a quotation, the buyer should carefully calculate
its costs.

The buyer should determine whether the quotation is ex-factory, FOB port, CIF, or delivered, since all
expenses of transportation from the point quoted will be expenses of the buyer, including customs duties. If
the buyer intends toresell the product in its imported form, it should determine whether the quoted price plus
additional expenses of importation will still permit the buyer to sell at the prevailing market price with a
reasonable profit or, if the product will be used as a raw material or component, that its delivered cost will be
lower than that from the domestic supplier If the price is unacceptable, the buyer should make a counteroffer at
a lower price before sending a purchase order. Even though the buyer may expect that no purchase agreement
will be formed until she has sent a purchase order, if the seller has previously sent a quotation tothe buyer, the
terms and conditions stated in the seller’s quotation may govern the purchase agreement.

E. Purchase Order Acknowledgments and Acceptances and Sales Confirmations

When a purchase order is received, some sellers prepare a purchase order acknowledgment, purchase order
acceptance, or sales confirmation form.

A purchase order acknowledgment may state that the seller has received the purchase order from the buyer and
is in the process of evaluating it, such as checking on the credit of the buyer or determining the availability of
raw materials for manufacture, but that the seller has not yet accepted the purchase order and will issue a
purchase order acceptance at a later date.

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F. Commercial Invoices

Later, when manufacture is complete and the product is ready for shipment, ordinarily the seller will prepare a
commercial invoice, which is the formal statement for payment to be sent directly to the buyer or submitted
through banking channels for payment by the buyer.

Such invoices may also contain the detailed terms or conditions of sale on the front or back of the form

In additions to the above mentioned contract consideration; There are numerous terms and conditions in an
international purchase agreement that require special consideration different from the usual terms and
conditions in a domestic purchase agreement.

A. Quantity

To reach on the purchase agreement the buyer and the seller has clearly state the amount of the items or goods
and their measurements. The quantity term is even more important than the price. One reason for forming a
formal purchase agreement is for the buyer to obtain a lower price by committing to purchase a large quantity,
usually over a year or more. The seller may be willing to grant a lower price in return for the ability to plan
ahead, schedule production and inventory, develop economies of scale, and reduce shipping and administrative
costs.

B. Pricing

There are a number of considerations in formulating the buyer’s pricing policy for international purchase
agreements. A delivered price calculation sheet will identify all additional costs of importing to make sure that
the price of resale results in a net profit that is acceptable to the buyer. Some of the constraints are laws
regarding dumping, antitrustlaws of a given country.

Another very important pricing area relates to rebates, discounts, allowances, and price escalation clauses.
Sometimes the buyer will ask for and the seller will be willing to grant some form of rebate, discount, or
allowance under certain circumstances, such as the purchase of large quantities of merchandise.

Pricing should consider the currency fluctuations that occur between the countries of the seller and the buyer.
Currency fluctuation risk has to be taken in to account. Sometimes, when the term of the agreement is long, or
when major currency fluctuations are anticipated, neither the seller nor the buyer is comfortable in entirely
assuming such risk. Consequently, they may agree to some sharing of the risk, such as a 50/50 price adjustment
due to any exchange fluctuations that occur during the life of the agreement, or some other formula that
attempts to protect both sides against such fluctuations

C. Terms of purchase or sales

In any sales agreement, you need to provide not only the price but also a corresponding term of sale. Terms of
sale are the conditions of sale that clarify who is responsible for what expenses, as the goods move from the

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seller to the buyer. Terms of Sales used in import/export called INCOTERMS (will discuss in detail in chapter
two). These INCO terms are 13 in number and a universal trade terminology developed by the
InternationalChamber of Commerce (ICC). These terms were created to describe the responsibilities of the
exporter and importer in international trade and to resolve disputes among parties engaged in international
trade. Understanding and using these terms correctly are important, because any misunderstanding may prevent
you from living up to your contractual obligations and make you accountable for shipping expenses that you
had initially intended to avoid.

D. Methods of payment

In a domestic sales transaction, the buyer may be used to purchasing on open account, receiving credit, or
paying cash on delivery. In international purchases, it is more customary to utilize certain methods of payment
that are designed to give the overseas seller a greater level of protection. The idea is that if the buyer fails to
pay, it is much more difficult for a seller to institute a lawsuit, attempt to attach the buyer’s assets, or otherwise
obtain payment.

Any international transaction involves risk. You need to understand what those risks areand what actions you
can take to minimize them. The primary payments used in international transactions are (we will discuss in
detail in chapter two).

Cash in advance: This means that the exporter will receive his money in advance of making the shipment.

Letter of credit drawn at sight: This is a document issued by the importer’s bank guaranteeing that the exporter
will get paid, just as long as he presents required documents to the bank before an expiration date.

Time letter of credit: This is the same as the letter of credit drawn at sight except that the exporter will get the
money a certain number of days after the documents have been presented and accepted.

Bill of exchange (documentary collections): This is like buying something using cash on delivery (COD)
except the importer makes the payment when the required documents are presented, instead of when the goods
are received. There are two types of bills of exchange:

• Sight draft documents against payment: The importer pays when the documents are presented.

• Sight draft documents against acceptance: The importer makes the payment a certain number of days after he
has accepted the documents.

Open account: With this method, no bank is involved in the transaction. The exporter sends the documents to
the importer and trusts that the importer will send him the money.

Consignment: The exporter ships the goods, and the importer only has to remit payment for them after the
goods have been sold and the importer gets paid from his customer.

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1.5. Trade Terms in Foreign Purchasing

International terms of sale are contained in the Incoterms. The Incoterms are a set of terms that define
respective responsibilities and are published by the International Chamber of Commerce. They are periodically
reviewed and updated by delegates selected from many countries in order to reflect current practice and
changing technologies. The last revision was in the year 2000, and the publication is referred to as Incoterms
2000. Although the International Chamber of Commerce is not a governmental body, the terms are recognized
worldwide as legally binding upon the parties to an international transaction.

1.5.1. Descriptions of International Commercial Terms(INCOTERMS)

The INCOTERMS are grouped in four categories, and 13 in number.

The terms arediscussed and summarized below in Table 1.5.1.

Group Of The Terms Acronym Of Incoterms Description Of The Terms

E-Terms EX Ex Works (… named place)

W
F-Terms FCA Free Carrier (... named place)

FAS Free Alongside Ship (... named

port of shipment)

FOB Free On Board (... named port of

destination)

C-Terms CFR Cost and Freight (... named port

of destination)

CIF Cost Insurance and Freight {...

named port of destination)

CPT: Carriage Paid To (... named place

of destination

CIP Carriage and Insurance Paid To

(... named place of destination)

D-Terms DAF Delivered At Frontier (... named

place)

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 DES Delivered Ex Ship (... named port
of destination)

DDP Delivered Ex Quay (... named

port of destination)

DDU Delivered Duty Unpaid (...

named place of destination)

Table 1.5.1: Trade Terms

I.5.2. Responsibilities of Foreign Purchaser (Importer) and Exporter (Seller) in Specific

INCOTERMS

In this section we will see the responsibilities and duties of parties’ i.e. exporter and importer
based on binding trade terms contracts.

1. EXW (Ex Works)

In this most basic transaction, the seller transfers all risk of loss and all responsibility for expenses to
the buyer at his loading dock. In an EX-Works transaction, goods are made available for pickup at the
seller’s factory or warehouse.

Seller’s Obligation
Place the goods for disposal at his premises or another named place (i.e. works, factory, warehouse,
etc.).
Points of prime importance
Even after the delivery of the goods, seller still bear a considerable financial risk until full payment
has been made.

These conditions are disadvantageous for buyer. He bears a high risk and has to arrange everything
himself such as export, transportation, insurance etc.

Buyer’s Obligation
Take delivery of the goods as soon they have been made available at the seller's premises or another
named place (i.e. works factory, warehouse, etc.);
Bear all costs and risks involved with organizing the transport from that time on.
Points of prime importance
Risk of loss or damage to the goods is transferred to buyer as soon as they have been placed at
disposal at the seller's premises or other named place (i.e. works factory, warehouse, etc.);
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The supplier is under no obligation to obtain marine insurance.

2. FOB-(Free on Board)
Officially, the Inco terms limit the use of FOB to carriage by water and define the point of title
transfer as occurring when the goods have passed over the ship’s rail. In other words, freight to a
vessel, loading aboard, and export clearance are the seller’s responsibility. Once the goods are
loaded, the risk of loss and costs of transport revert to the buyer.

Points of prime importance

Buyer may only be able to obtain restricted insurance from the port of shipment.
On the one hand, seller bears a considerable financial risk should no payment have been made
before the shipment; on the other hand, seller has no guarantee that the buyer has obtained marine
insurance.

The supplier has no obligation to obtain insurance for the maritime voye

3. FCA (Free Carrier)

The seller hands over the goods, cleared for export, into the custody of the first carrier (named by the
buyer) at the named place. This term is suitable for all modes of transport, including carriage by air,
rail, road, and containerized / multi-modal transport.
4. FAS (Free Alongside Ship)

In this transaction, the seller must arrange for delivery and assume all risks up to the ocean carrier at a
port of origin .Freight costs up to the ship, risk of loss, and costs of clearance are borne by the seller.
5. CFR (Cost and Freight)

CFR is a new term replacing “CNF,” which itself replaced “C&F.” The “Cost” portion of CFR refers
to the merchandise. The “Freight” refers to all the freight, including export clearance, up to the
foreign port of unloading.
What is not included is cargo insurance from the port of loading. Indeed, risks are shared in a CFR
transaction. The seller must deliver over the ship’s rail, so any loss up to that point is the seller’s
responsibility. Once loaded, the risk transfers to the buyer.

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6. CIF (Cost, Insurance and Freight)
This term is similar to CFR, but it can be used for any mode of transport including air cargo. CPT
means that the seller will pay all freight costs all the way up to the foreign port and that the buyer
assumes all risk of loss beyond the loading port.
Points of prime importance

Even after the delivery of the goods seller still bear a considerable financial risk until full payment
has been made and your customer has obtained marine insurance.

The supplier is under no obligation to take out marine insurance.

Damage which is not detected before the carrier takes delivery of the goods can no longer be
claimed for from the supplier.

Without a qualitative and quantitative examination of the goods at the time the carrier takes
delivery, only restricted coverage can be obtained for the subsequent transport.

8. CIP (Freight, Carriage and Insurance Paid to)

This term is similar to CIF except that it is primarily used in multimodal transactions where the place
of receipt and place of delivery may be different from the port of loading or place of unloading.
Points of prime importance

For subsequent transportation from the named place of destination (if different from the final place of
destination) your client can only obtain restricted insurance.

Sellers carry the risk for loss or damage to the goods during shipment. However, the seller has to
obtain insurance from warehouse to warehouse.

Buyer have the option of agreeing the scope of insurance with the seller. If no such agreement is
made, seller is only obliged to obtain insurance coverage which conforms to market standards.

You neither know the insurance company nor the exact scope of coverage.

9. DES (Delivered Ex Ship)

In this type of transaction, the seller must pay all the costs and bear all the risk of transport up to the
foreign port of unloading, but not including the cost or risk of unloading the cargo from the ship. In

19
the case of large pieces of equipment or bulk cargoes, the costs of unloading can exceed the cost of
the main freight.

10. DEQ (Delivered Ex Quay)

This is the same as DES except that the term provides for the seller to pay the costs of unloading the
cargo from the vessel and the cost of import clearance.

11. DAF Delivered At Frontier

Here the seller’s responsibility is to deliver goods to a named frontier, which usually means a border
crossing point, and to clear the transaction for export. The buyer’s responsibility is to arrange for the
pickup of the goods after they are cleared for export, carry them across the border, clear them for
importation and, effect delivery.
Seller’s Obligation
 Place the goods at the disposal of the buyer on the arriving means of transport not unloaded at the
named place of delivery at the frontier;
Bear all costs and the risk of loss or damage to the goods as far as the named place of delivery at the
frontier.
Points of prime importance
 Even after delivery of the goods you still bear a considerable financial risk until full payment has
been made and your customer has obtained marine insurance.

 Your client may only be able to obtain minimum insurance coverage for the subsequent transport.

Buyer’s Obligation
 Take delivery of the goods on the arriving means of transport not unloaded at the named place of
delivery at the frontier and from that time bear all costs to the final destination.
Points of prime importance
 The supplier is under no obligation to take out marine insurance.

 Damage which occurs before the goods reach the named place of delivery at the frontier, but which
is only detected at the named place of destination can no longer be claimed for from the supplier.

 Without a qualitative and quantitative examination of the goods at the named place of delivery at
the frontier, only restricted coverage can be obtained for the subsequent transport.

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12. DDP (Delivered Duty Paid)
This is a new term mainly used in intermodal transactions whereby the seller undertakes all the risks
and costs from origin to the buyer’s warehouse door, including export and import clearance and
import customs duties. Essentially, the seller pays everything in a DDP transaction and passes all
related costs in the merchandise price.
Seller’s Obligation
 Place the goods at the disposal of the buyer on any arriving means of transport not unloaded at the
named place of destination;

 Bear all costs and the risk of loss or damage to the goods as well as all costs incurred through
customs formalities, duties, taxes and other charges.
Points of prime importance
 Even after delivery of the goods you still bear a considerable financial risk until full payment has
been made and your customer has obtained marine insurance.

 Your client may only be able to obtain restricted coverage for the subsequent transportation.

 You may encounter insurmountable problems when attempting to clear customs in the country of
destination (e.g. missing import licenses which must be procured by the buyer).
Buyer’s Obligation
Take delivery of the goods on the arriving means of transport not unloaded at the named place of
destination and from that time bears all costs to the final destination.

Points of prime importance

 The supplier is under no obligation to take out marine insurance.

 Damage which occurs before the goods reach the named place of destination, but which is only
detected at the final destination can no longer be claimed for from the supplier.

 Without a qualitative and quantitative examination of the goods at the named place of destination,
only restricted coverage can be obtained for the subsequent transport

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13. DDU (Delivered Duty Unpaid)
This is the same as DDP except that duty is not paid. Since the importer is generally better informed
on local customs, a DDU transaction makes a great deal of sense even when the buyer does not want
to deal with transportation and insurance issues.
1.5.3. Cost Factors of in Export-Import Goods
In international trade or engaging in importing /exporting activities there are a number of factors that
drive costs. These costs are commonly categorized as material’s, labours and overhead costs,
commissions, transport and freight, and insurance costs, and other costs.
Materials, labour and overhead cost includes costs like, Custom packaging, Inspection fees, and
Licensing and Royalties fees. Commission and related fees, cost encompasses such as Buying agent’s
commissions, Trader’s mark-ups, Bank charges and commissions, overseas agent’s commissions,
Brokerage fees, Export levies, Export license fees, Certification fees, Consular fees.

Transport and freight costs related with conveying of the goods from the seller to buyer using
specified transportation mode and carriages. Some of the costs incurred on transportation and
freightare Freight forwarders charges, Uninsured damages, Theft and pilferage, Handling charges,
Demurrage, Insurance premiums ,Wharfage and Loading and unloading fees .
The other costs are like Advertising fees; Import duties and taxes, Import license fees Warehousing,
and Interest charges e.t.c.

I.6. Compulsory Documentation in Foreign Purchasing

In import /export the numbers and type of documents to be processed is depending on the complexity
of the transaction, nature of items and financial weight as well as the legal requirements and
documentations to cross boundary. Therefore the documents commonly referred as mandatory
documents in international trade are discussed below.
A. Bills of Lading
A bill of lading is a contract between the owner of the goods (normally the exporter) and the carrier of
the goods. There are two types of bills of lading:
1. A non-negotiable straight bill of lading: The straight bill of lading is issued by the exporter. It
pertains to the shipment of the cargo from the point of origin to the port of shipment. This document
serves as evidence that the shipping carrier has received the goods and will be transporting them to
the destination listed on the document.
2. A negotiable shipper’s order bill of lading: The negotiable shipper’s order bill of, which can also
be referred to as a marine or ocean bill of lading, is prepared by the freight forwarder and issued by
22
the steamship company. It covers ocean transportation. The importer needs this document as proof of
ownership to take possession of the goods. When we say that this is a negotiable bill of lading, I mean
that the goods being shipped can be bought, sold, or graded while they’re in transit. The bill of lading
is endorsed, justlike a check that can be endorsed from one party to another; a negotiable bill of lading
can be endorsed from one party to another.

B. Air waybill
The air waybill is a bill of lading for cargo being shipped by air. It is a nonnegotiable document, issued by
the air carrier that specifies the terms under which the air carrier will be transporting the goods to their
destination.
C. Commercial Invoices
The commercial invoice serves as a bill for the goods from the importer to the exporter, and it also serves
as evidence of a transaction. Additionally, the importer uses the commercial invoice to classify the
merchandise, so that he can get the shipment cleared expeditiously through Customs and make sure that
all duties and taxes have been accurately assessed.
Commercial invoice itemizing the merchandise sold and the amount due for payment. There must be one
invoice for each separate shipment. These commercial invoices must contain very specific items of
information, such as quantities, description, purchase price, country of origin, assists, transportation
charges, commissions, installation service, and financing charges.
D. Pro Forma Invoices
An abbreviated invoice sent at the beginning of a sale transaction, usually to enable the buyer to obtain an
import permit or a foreign exchange permit or both. The pro forma invoice gives a close approximation of
the weights and values of a shipment that is to be made.
E. Packing Lists
A documents describing the contents of a shipment. It includes more detail than is contained in a
commercial invoice but does not contain prices or values. It is used for insurance claims as well as by the
foreign customs authorities when examining goods to verify proper customs entry.
F. Inspection Certificates
A document issued by an inspection company or other person independent of the seller and buyer that has
inspected the goods for quality and/or value. It may be required for payment under the terms of the sales
agreement or a letter of credit.

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G. Certificate of Origin:
A document in which the exporter certifies the place of origin (manufacture) of the merchandise being
exported. Sometimes these certificates must be legalized by the consul of the country of destination, but
more often they may be legalized by a commercial organization, such as a chamber of commerce, in the
country of manufacture. Such information is needed primarily to comply with tariff laws, which may
extend more favourable treatment to products of certain countries.

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Chapter Two:
2. Modes or Terms of Payments in Foreign Purchasing

Learning objective
After studying this chapter you should able.
 Identify payment options for import transactions.

 Recognize the risks and advantages of payment options for both buyers and sellers.

 Distinguish between major categories of Letters of Credit Analyses the application of different
types of Letters of Credit to international trade transactions.

Introduction
Import –export transaction is more complex than domestic transactions; because the transaction is
takes place between buyer and seller found in different macro environment conditions and factors.
Some of the factors are associated with economic conditions, socio -cultural, legal and politics. Each
of those factors involves risks. In importing goods you must need to understand what those risks are
and what actions you can take to minimize them.
A Methods or terms of payments refer to the manner by which the seller will be paid for his. The
terms of payment in import –export is much complex than the domestic business transactions .In a
domestic sales transaction, the seller may be used to selling on open account, extending credit, or
asking for cash on delivery. In international agreements, it is more customary to utilize certain
methods of payment that are designed to give the seller a greater level of protection. The idea is that if
the buyer fails to pay, it is much more difficult for a seller to go to a foreign country, institute a
lawsuit, attempt to attach the buyer’s assets, or otherwise obtain payment. Therefore Payment is an
important contract issue that you have to give a due emphasis in import-export transactions.

The primary payments used in international transactions are: letter of credit, cash in advance, open
account, on consignment, draft or documentary collection (bill of exchange). This chapter will discuss the
natures, advantages and disadvantages of the above mentioned modes or terms of payment in depth.
2.1. Letter Of Credit
2.1.1. Meaning of letter of credit
Letters of Credit have been a cornerstone of international trade dating back to the early 1900s. They
continue to play a critical role in world trade today. For any company entering the international
market, Letters of Credit are an important payment mechanism which helps eliminate certain risks.

25
In simple terms, a letter of credit is a bank undertaking of payment separate from the sales or other
contracts on which it is based. It is a way of reducing the payment risks associated with the movement
of goods.
Expressed more fully, it is a written undertaking by a bank (issuing bank) given to the seller
(beneficiary) at the request, and in accordance with the buyer’s (applicant) instructions to effect
payment that is by making a payment, or by accepting or negotiating bills of exchange (drafts) up to a
stated amount, against stipulated documents and within a prescribed time limit.
The International Chamber of Commerce (ICC) publishes internationally agreed-upon rules,
definitions and practices governing Letters of Credit, called “Uniform Customs and Practice for
Documentary Credits” (UCP). The UCP facilitates standardization of Letters of Credit among all
banks in the world that subscribe to it.
The need for a letter of credit is a consideration in the course of negotiations between the buyer and seller
when the important matter of method of payment is being discussed. Payment can be made in several
different ways: by the buyer remitting cash with his order; by open account whereby the buyer remits
payment at an agreed time after receiving the goods; or by documentary collection through a bank in
which case the buyer pays the collecting bank for account of the seller in exchange for shipping
documents which would include, in most cases, the document of title to the goods. In the aforementioned
methods of payment, the seller relies entirely on the willingness and ability of the buyer to effect payment.

Letter of credit is the most widely used payment modality in international trade. Specifically, letters
of credit are used for the following reasons.
Credit risk is reduced if the documents comply with terms of the letter; it is, therefore, a
comparatively safe methods payment.

The letter of credit is covered by international rule and system for settling disputes.

They letter of credit provides the seller with firm evidence of an export sale, which is an aid of
obtain local or international pre –export finance,give the banker’s performance for granting loans
against the collateral an actual sale(i.e. letter of credit as given below.
2.1.2. Parties Involved In a Letter Of Credit Transaction
In order to help the reader understand the steps taken in a letter of credit transaction, the following is a
brief description of the parties most commonly involved in letters of credit.
Accepting Bank: The bank named in a letter of credit on whom term drafts are drawn and who
indicates acceptance of the draft by dating and signing across its face, thereby incurring a legal obligation
to pay the amount of the draft at maturity.

26
Advising Bank: A branch or correspondent bank at or near the domicile of the beneficiary, to which
the issuing bank either sends the letter of credit, or a notification that a letter of credit has been issued,
with instructions to notify the beneficiary. The advising bank advises the beneficiary of the letter of credit
without engagement. Applicant is the buyer or the party who requests the letter of credit to be issued.
Beneficiary: The seller or the party to whom the letter of credit is addressed.
Confirming Bank: A bank usually in the country of the beneficiary which, at the request of the
issuing bank, joins that bank in undertaking to honour drawings made by the beneficiary, provided the
terms and conditions of the letter of credit have been complied with.
Discounting Bank: A bank which discounts a draft for the beneficiary after it has been accepted by
an accepting bank.
Drawee Bank: The bank named in the letter of credit on whom drafts are to be drawn.
Drawer: The beneficiary of the letter of credit who will draw the draft in accordance with the terms of
the letter of credit.
Issuing Bank: The bank which opens a letter of credit on behalf of the applicant and forwards it to the
advising bank for delivery to the beneficiary.
Negotiating Bank: Usually the beneficiary’s bank which, after satisfying itself that the documents
conform with the letter of credit, agrees to purchase the draft (pay the beneficiary).
Paying Bank: The bank named in the letter of credit where drafts are to be paid. It is not necessarily
the issuing bank, but often a branch of the issuing bank or its correspondent. Once drafts have been paid
or accepted by the paying/drawee bank, there is no recourse to the drawers.
Reimbursing Bank: The bank authorized by the issuing bank to reimburse the drawee bank or other
banks submitting claims under the letter of credit.
Transferring Bank: The banks authorized by the Issuing Banks to transfer all or part of the Letter of
Credits to another parties at the Beneficiary’s request.
2.1.3 Characteristics of letter of credit (L/C)
1. Negotiability
Letter of credit is usually negotiable. The issuing bank is obligated to pay not only the beneficiary but
also any bank nominated by the beneficiary.
Negotiable instruments are passed freely from one party to another almost in the same way as money.
For an LC to be negotiable, it must include an un conditional promise to pay, on demand or at specific
time.
2. Revocability

27
LC may be either revocable or irrevocable. Whether revocable or irrevocable, it will state on the face
of the document what type of credit is being presented.
A revocable letter of credit may be revoked or modified for any reason, at any time by the issuing
bank without notification. A revocable letter of credit cannot be confirmed.It is not commonly used.It
is generally used to provide guidelines for shipment.
The most commonly used irrevocable letter of credit may not be revoked or amended without the
agreement of the issuing bank, the confirming bank, and the seller(beneficiary).
3. Transferable
Under transferable LC the rights and obligations of the beneficiary are transferred in whole or in part,
to another party, usually a supplier or a manufacturer. This will enable the beneficiary to pay the
supplier by letter of credit.To be transferable, the LC must state that it is transferable.
4.Revolving
For long terms business relationship, revolving LC allows companies to issue a LC that could revolve
either in value or in time without the need to reapply for a new letter of credit. In simple term it is a
single LC which can be used several times over a long period of time.
2.1.4. L/C Opening Procedure in International Practice
A. The Sales Contract
The sales contract is the formal agreement between the buyer and seller specifying the terms of sale
that both parties have agreed upon. The contract should include: a description of the goods; the
amount; the unit price; the terms of delivery; the time allowed for shipment and presentation of
documents; the currency; and the method of payment.
B. Application & Agreement

The bank’s letter of credit application and agreement forms, when executed, constitute a payment and
reimbursement contract between the issuing bank and its customer. It is also the customer’s
instruction to the issuing bank. The letter of credit must be issued exactly in accordance with the
customer’s instructions; therefore, it is important that the application be completed fully and
accurately, so as to avoid the inconvenience of having to have the letter of credit amended. The
agreement constitutes an undertaking by the customer to reimburse the issuing bank for drawings paid
in accordance with the terms of the letter of credit, and normally takes the form of an authorization to
debit the customer’s account.
C. Issuance of the Letter of Credit

28
The issuing bank prepares the letter of credit as specified in the application and forwards it by TELE
transmission or airmail to the advising bank, (a branch or correspondent of the issuing bank). The
issuing bank instructs the advising bank as to whether or not to add its confirmation, as per their
customer’s instructions.
Advising bank
The advising bank forwards the letter of credit to the beneficiary (seller) stating that no commitment
is conveyed on its part. However, if the advising bank has been asked to confirm the letter of credit
and agrees to do so, it will incorporate a clause undertaking to honour the beneficiary’s drafts,
provided the documents evidence that all terms and conditions of the letter of credit have been
complied with.

D. Shipment of Goods
Upon receiving the letter of credit, the beneficiary should examine it carefully and be satisfied that all
the terms and conditions can be complied with. If this is not possible, the beneficiary should request
the applicant to arrange an amendment to the letter of credit. Once completely satisfied, the
beneficiary will then be in a position to assemble and ship the goods.

E. Presentation of Documents by Beneficiary

The beneficiary prepares an invoice in the number of copies required, with the description of goods
shown exactly as stipulated in the letter of credit. The beneficiary obtains the bill of lading and/or
other transport documents from the carrier and prepares and/or obtains all other documents required
by the letter of credit. These are attached to the draft, drawn on the bank indicated and at the term
stipulated in the letter of credit, and are presented to the advising/confirming/negotiating bank.
F. Sending Documents to the Issuing Bank

The advising/confirming/negotiating bank checks the documents presented by the seller against the
letter of credit. If the documents meet the requirements of the letter of credit, that bank will send them
to the issuing bank, claiming reimbursement and paying the seller.
G. Delivering Documents to the Applicant

The issuing bank will also check the documents for compliance and then deliver them to the applicant
either against payment or as an undertaking to pay on maturity of the drawing under the letter of
credit.
H. Payments under letter of credit
29
The seller reviews all the conditions specified in the letter of credit and if they cannot fulfill any of
the terms, they will ask the buyer to adjust the letter of credit. When the final terms are settled, the
seller ships the goods to the specified port or location
After shipping the goods, the seller obtains the required documents. The documents are presented to a
bank, in most cases the advising bank (prior to presenting the documents to the bank, the seller should
ensure there are no inconsistencies with the letter of credit, and if there are amend the documents
where necessary).
The seller's advising bank reviews the documents. If they are in order, it will forward them to the
buyer's issuing bank. If the letter of credit is confirmed, the advising bank

Once the buyer's issuing bank takes delivery of and reviews the documents, it either pays if there are
no inconsistencies; or sends the documents to the buyer if there are discrepancies for their review and
approval.
After applicant reviews and accepts the documents, the beneficiary receives payment from the
advising bank. The issuing bank pays for the advising bank for the goods according to the letter of
credit.Finally; the applicant pays the issuing bank for the goods
2.1.5. Common Defects in Documentation under L/C Mode of Payments
1. The agreed time schedule is not followed, because of late shipment or late presentation.
2. The specified documents are not prepared as specified by the letter of credit, other than the
transport document, insurance document and invoice.
3. Certificates, such as the certificate of origin and certificate of inspection, are not signed.
4. The goods description on the commercial invoice does not match the description on the letter of
credit.
5. Documents are not properly endorsed.
6. Drafts (bills of exchange) are not presented as stipulated by the letter of credit or are not prepared
properly.
7. The insurance document is dated after the shipment date, or does not cover the risks as required by
the letter of credit. The types of risk, extent of risk coverage or currency differ from what is stated in
the letter of credit.
8. The transport document is not properly signed as defined by the UCP, or it is not prepared in
compliance with the letter of credit.
9. The documents are inconsistent with one another.
10. The type and number of stipulated documents and copies are not the same as those stipulated by
the letter of credit.
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2.1.6. Benefits and Basic Types of Letters of Credit
The payment of international trade using letter of credit offers both benefits and risk for both importer
and exporter. The advantages and risks of letter of credit for the exporter/seller are listed below.
Advantages of letter of credit to exporter/seller
 The bank’s creditworthiness must be taken into account.

To be able to obtain financing for the purchase or manufacture of goods that will be shipped under
LC.

The seller will receive funds shortly after presentation of shipping documents to the bank.

The seller can reduce the risk that payment for the goods might be delayed.

The Risk of Letter Of Credit to Exporter

The seller’s documents must comply strictly with the terms and conditions of the LC to entitle the
seller with payment.

The seller is exposed to the commercial risk that the bank providing its undertaking is unwilling
and unable to perform.

 The seller assumes any political and foreign exchange risk affecting the issuing bank’s obligation.
The Risk of Letter Of Credit to Importer
 Banks deal only with documents. The goods may not be the same as stated in the documents

Special Types of Letters Of Credit

So far a description has been provided of the basic types of letters of credit used to cover the shipment
of goods. In addition to these basic types, there are various specialized formats which meet particular
sets of circumstances.
Red Clause Letter of Credit
A red clause letter of credit incorporates a clause, traditionally written in red, which authorizes the
bank acting as the negotiating or paying bank to pay the beneficiary in advance of shipment. This
enables the purchase and accumulation of goods from a number of different suppliers, and the
arrangement of shipment in accordance with the letter of credit terms. Such advances will be deducted
from the amount due to be paid when the documents called for are presented under the letter of credit.
If the beneficiary fails to ship the goods or cannot do so before the expiry of the letter of credit, the
issuing bank is bound to reimburse the negotiating or paying bank, recovering its payment from the

31
applicant. Variations of such credits may also require that any advances be secured by temporary
warehouse receipts until shipment is affected. Beneficiaries of red clause letters of credit are
invariably brokers/agents of buyers in a particular field.

Transferable Letter of Credit

A transferable letter of credit allows the beneficiary to act as a middleman and transfer his rights
under a letter of credit to another party or parties who may be suppliers of the goods. Depending on
whether the letter of credit permits partial shipments, fractional amounts may be transferred to more
than one beneficiary. The letter of credit however, can be transferred only once: the secondary
beneficiaries cannot transfer their rights to a third party. Transfer of a letter of credit can be made on
specific application by the original beneficiary to the authorized transferring bank To be transferable,
a letter of credit must be so marked by the issuing bank which can only do so on the applicant’s
specific instructions. The applicant should be aware that any second beneficiary, the probable
supplier, is usually a party not likely known to the applicant.
The terms and conditions of the transferred letter of credit must be identical to those of the original
letter of credit with the following exceptions
The original beneficiary may be shown as the applicant on the transferred credit.
• The amount of the letter of credit, and unit prices if any, may be less than in the original letter of
credit (the difference being the original beneficiary’s profit margin).
• The latest shipment date, if any, and expiry date as shown on the original letter of credit should be
shortened.
• The percentage of insurance coverage, if any, should be increased to satisfy the requirements of the
original letter of credit.
• When a drawing takes place, the original beneficiary normally substitutes his invoices for those of
the second beneficiary for up to the amount and unit prices available under the original letter of credit,
and draws the difference as profit.
Back-to-Back Letter of Credit
Although not recorded on a letter of credit, “back-to-back” is a term used in transactions involving
two irrevocable letters of credit. Such transactions originate when a seller receives a letter of credit
covering goods which must be obtained from a third party that in turn requires a letter of credit. The
“second” issuing bank looks to the first issuing bank for reimbursement after paying under the second
letter of credit.
The difference between back-to-back letters of credit and transferable letters of credit is such that in a
transferable letter of credit, the rights under the existing letter of credit are transferred. In a back-to-
32
back transaction, different letters of credit are actually issued. Because technical problems can arise in
back-to-back transactions, banks tend to discourage their use.
Deferred Payment Letter of Credit
Under a deferred payment letter of credit, the applicant does not pay until a future date determined in
accordance with the terms of the letter of credit. No drafts are called for, which avoids “stamp duties”
charged by some countries on bills of exchange (drafts). One reason an exporter might extend credit
terms to an importer could be the competitiveness of the market and the need for the exporter to
finance the importer if the exporter is to make the sale.

33
2.2 Other Modes of Payments
2.2.1 Documentary Collection: bill of exchange (B/Ex) (Draft\
The Draft or Documentary collection method is employed when either the cash in advance method is
not acceptable to the buyer, or the open account method is not acceptable to the seller. With the Draft
or Documentary Collection Method, the seller or exporter ships the goods and draws a draft or bill of
exchange on the buyer or importer through an intermediary bank. The draft is an unconditional order
to make a payment in accordance with certain terms. The documents needed are specified before the
title for the goods is transferred. The process of using a bill of exchange is normally referred to as a
documentary collection. It’s a transaction where the exporter entrusts the collection of payment to the
exporter’s bank, which sends documents to the importer’s bank along with instructions for payment.
Funds are received from the importer and remitted to the exporter through the banks involved in the
collection in exchange for the documents. This method of payment involves the use of a draft that
requires the importer to pay the face amount either on sightdraft documents against payment or on a
specified date in the future (known as sight-draft documents against acceptance).

Documentary collections are less complicated and less expensive than letters of credit. The importer
is not obligated to pay for goods prior to shipment. The exporter retains title to the goods until the
importer either pays the full amount of the draft or signs a letter of acceptance and agrees to pay at
some specified future date. Similar to a letter of credit, the bank is responsible for controlling the flow
of the documents, but the bank does not verify them or take any risks.

There are four parties involved in the documentary collection method: The buyer,
collecting/presenting bank (buyer’s bank), the seller and the remitting bank (seller’s bank). Also,
there are four main steps in the documentary collection method.
In the process of documentary collection method,
 First of all, the seller sends the draft to the remitting bank.
 The remitting bank, as an intermediary, sends the draft to the collecting/presenting bank.
 The collection/ presenting bank, as an intermediary, makes the documents available to the buyer.
The buyer, after examine the documents, has three options:
 To pay immediately
 To pay at a future date
 To refuse to pay for the draft

34
When the draft is paid, the title documents are released to the buyer so he/she can obtain possession
of the goods. As the title to the goods is not transferred until the draft is paid or accepted, both the
buyer and seller are protected. However, nothing prevents the buyer from refusing a draft for
payment. In such cases, the exporter, who has already shipped the goods, faces the problem of getting
his/her merchandise back, which may involve warehousing or insuring the goods, or even disposing
of the merchandise at the collection point. If the buyer refuses or defaults on payment of the draft, the
seller may also have to pursue collection through the courts (or possibly, by arbitration, if such had
been agreed upon between the parties). The use of drafts involves a certain level of risk; but they are
less expensive for the purchaser than letters of credit.

Sight Drafts: If the exporter and importer have agreed that payment should be made immediately
upon receipt of the draft and/or shipping documents by the buyer's bank, the draft is said to be drawn
at sight.A sight draft is an order signed by the seller instructing the buyer to pay a specified amount to
the seller upon presentation of the draft.
Time Drafts:
If the seller has provided credit terms to the buyer, thereby allowing the merchandise to be released
before payment is received; it is called a time draft. The exporter will need a written promise from the
buyer that payment will be made at a specified future date. When a bank receives time drafts, the
bank is requested to deliver the documents only when the buyer has accepted. The buyer's acceptance
of the draft is his/her agreement to pay at an agreed upon future date.

Advantages and Risks of Draft or Documentary Collection Method

Advantage To the buyer
 May refuse to pay or accept the draft
 Gives a time to sell before having paying them
 Low cost
Risks to the buyer
 Goods may not be as represented in the documentation
Advantage To seller
 Knows the title of the document is controlled by the bank.
 Evidence of indebtedness.
Risks of the seller
 Buyer May refuse to pay or accept the draft.
 Foreign exchange risk.
35
 Political risk
2.2.2 Consignment
With consignment sales, the seller does not receive payment until the importer sells or resells the
goods. The product stays with the importer until all the terms of the sale have been satisfied. In the
consignment method, the importer is called the consignee and he/she is responsible for paying for the
goods when they are sold. Consignment sales are very risky and there is no control available to the
exporter. Obtaining sales proceeds or return of the merchandise if it is not sold can be difficult.

Advantages and Risks of the On Consignment Method

There are several advantages and risks of the on-consignment payment method. These advantages and
risks are listed below.
Advantage and disadvantage of payments in consignment.

Advantage Risk
To the Buyer  pays only when goods are  none
sold
To the Seller  retains the ownership of  limited control over the
goods goods
 consignee the intermediary  no control over the
for the sale of the goods buyer willingness of the
consignee to pay for the goods

On Consignment payment method is useful if;

 The consignee is reliable.
 The consignee has a good credit history.
 The consignee’s country has economic and political stability.
 The consignee is the branch office of the main company.

2.2.3 Cash on Delivery (COD)

The Cash in Advance or Advance Payment method allows the buyer to pay cash in advance to the
seller. Paying in advance gives the greatest protection for the seller and puts the risk on the buyer.
Payment does not guarantee the shipment or delivery of the goods from the seller. Therefore, the
buyer will rarely pay cash up front before receiving an assurance that the goods will be shipped and

36
that the quality and quantity of the goods ordered will be delivered. Although this method of payment
is not uncommon, the seller requiring full payment in advance may cause lost sales to a foreign or
domestic competitor who is able to offer more attractive payment terms. In some cases, however,
where the manufacturing process is specialized, lengthy or capital- intensive, it may be reasonable to
ask for some of the full payment in advance, or with progressive payments. This method is often too
expensive and risky for foreign buyers, but useful when shipping to politically unstable countries,
when the buyer's credit is unsatisfactory or when goods are custom made to the customer’s
requirements. In some circumstances this payment method can be modified to a partial payment in
advance with agreed upon instalments or additional terms available.

Advantages and Risks of Cash in Advance Method

The cash in advance method is advantageous for the seller as there is no risk for him/her. The
advantages and risks for both the buyer and seller are illustrated in the figure bellow.

2.2.3 Cash on Delivery (COD)

COD payment method is a type of transaction in which the buyer makes the payment for a good at the
time of delivery.

Advantages cash on delivery method

1. Flexible payment option for the customer; the customer can pay only after you get the product
on hand. There is no risk of loss money, if you pay online beforehand and the seller dose not
deliver, your hard earned money gets stuck with the seller. The customer can also check the
product and see weather everything is perfect before paying for it.
2. No dependence on payment card; the deliverycomes, you check the product and pay and the
transaction is completed.
3. No online payment frauds;there is security you do not have to divulge any financial
information, such as debit card or bank account details to the seller.

Disadvantages of COD

1. Vulnerable to losses; it makes the seller vulnerable to losses when the customer returns the
product without paying for it. You spend all the money to deliver the product, but ultimately it
got replaced, this adds to your revenue loss.

37
 2. Additional cost; courier companies charge you an amount when you opt for the cash on
delivery payment option. Since shifting these costs to your customers can be trickily, most
sellers soon feel the burden of these costs.

2.2.4 Cash with Order / Telegraphic Transfer / Advance Payment

The Cash in Advance or Advance Payment method allows the buyer to pay cash in advance to the
seller. Paying in advance gives the greatest protection for the seller and puts the risk on the buyer.
Payment does not guarantee the shipment or delivery of the goods from the seller. Therefore, the
buyer will rarely pay cash up front before receiving an assurance that the goods will be shipped and
that the quality and quantity of the goods ordered will be delivered.

Although this method of payment is not uncommon, the seller requiring full payment in advance may
cause lost sales to a foreign or domestic competitor who is able to offer more attractive payment
terms. In some cases, however, where the manufacturing process is specialized, lengthy or capital-
intensive, it may be reasonable to ask for some of the full payment in advance, or with progressive
payments. This method is often too expensive and risky for foreign buyers, but useful when shipping
to politically unstable countries, when the buyer's credit is unsatisfactory or when goods are custom
made to the customer’s requirements.

In some circumstances this payment method can be modified to a partial payment in advance with
agreed upon instalments or additional terms available.

Advantages and Risks of Cash in Advance Method

The cash in advance method is advantageous for the seller as there is no risk for him/her.

The advantages and risks for both the buyer and seller are illustrated in the figure bellow.

Advantages Risks

Buyer* None * No control over the goods

 Use of the funds is lost

38
  Seller may refuse to ship

*Political risk in the seller country

Seller * Goods shipped when

*Seller convenient use of buyer’s fund

The cash in advance may be most practical method if;

 The buyer lacks creditworthiness

 The buyer is not able to offer sufficient security for payment

 The buyer is located in a region of politic and/or economic instability

2.2.5 Open Account

An open account transaction means that the goods are manufactured and delivered before payment is
necessary (for example, payment could be due 14, 30, or 60 following shipment or delivery). The
method provides great flexibility and in many countries sales are likely to be made on an open-
account basis if the manufacturer has been dealing with the buyer over a long period of time and has
established a secure working relationship.

The open account method is a preferred method of payment for the importer, since it places the risk
on the exporter or seller. This method cannot be used safely unless the buyer is credit worthy and the
country of destination is politically and economically stable. However, in certain instances it might be
possible to discount open accounts receivable with a factoring company or other financial institution.

Advantages and Risks of the Open Account Method

The Open Account method is advantageous for the buyer as there is no risk for him/her.

Advantages Risks

To The buyer * Control over the goods * None

* Pays when convenient

To the seller * none * No control over the goods/payment

* Buyers may refuse to pay Seller

39
The open account method may be useful if:

 There is long-term relationship and confidence between the buyer andthe seller

 The seller is under pressure to sell his goods

 The buyer has a very good reputation and is well-known in the market

 The buyer is solvent

Chapter Three

3. Ethiopian Import/Export Bank and Customs Clearing Procedures and

Practices.

Learning objectives

After studying this chapter students will able to:

 Understand Bank and banking practice in Ethiopia.

 Understand Ethiopian commercial banks practice in letter of credit opening and settlement
procedures.

 Understand Harmonized and nomenclature tariff system in Ethiopian.

 Know Ethiopian Custom regulations and operations.

 Recognize tariff and tariff types in Ethiopia

Introduction

Customs and commercial banks are the main actors in facilitating import –export transaction.
Customs agency is responsible to control the movement of goods and peoples in and out of a given
nation. It is responsible to control illegal or contraband or underground trade, inspects goods for
import or export to confirm with stated quality standards, controls the inflow of forbidden goods and
dangerous drugs, refrain and control the out flow of strategic and scarce resource of the country and
to hostile country and collects taxes and duties from goods of imported and exported. Banks are
financial institution facilitate import -export transaction by assessing the risks associated with
payments, offering credits and supplying foreign currency and effecting payments.

Therefore, this chapter highlights the operations and practice of Ethiopian customs authority and the
laws and regulations that in forces to control of goods in international transaction. Harmonized tariff
40
systems, nature of tariffs and duties in Ethiopian custom are themes of the chapter. In addition the
chapter covers the practice and nature of commercial banks in Ethiopian and procedure in opening
and settling letter of credit.

3.1 Definitions of Important Terminologies and Concepts

3.1.1 Harmonized System (HS)

The Harmonized Commodity Description and Coding System generally referred to as "Harmonized
System" or simply "HS" is a multipurpose international product nomenclature developed by the
World Customs Organization (WCO). It comprises about 5,000 commodity groups; each identified
by a six-digit code, arranged in a legal and logical structure and is supported by well-defined rules to
achieve uniform classification. The system is used by more than 200 countries and economies as a
basis for their Customs tariffs and for the collection of international trade statistics. Over 98 % of the
merchandise in international trade is classified in terms of the HS. The HS contributes to the
harmonization of Customs and trade procedures, and the nondocumentary trade data interchange in
connection with such procedures, thus reducing the costs related to international trade. It is also
extensively used by governments, international organizations and the private sector for many other
purposes such as internal taxes, trade policies, monitoring of controlled goods, rules of origin, freight
tariffs, transport statistics, price monitoring, quota controls, compilation of national accounts, and
economic research and analysis. The HS is thus a universal economic language and code for goods,
and an indispensable tool for international trade.

The Harmonized System is governed by "The International Convention on the Harmonized

Commodity Description and Coding System". The maintenance of the HS is a WCO priority. This
activity includes measures to secure uniform interpretation of the HS and its periodic updating in light
of developments in technology and changes in trade patterns. The WCO manages this process through
the Harmonized System Committee (representing the Contracting Parties to the HS Convention),
which examines policy matters, takes decisions on classification questions, settles disputes and
prepares amendments to the Explanatory Notes. The Ethiopia tariff is based on the Harmonized
System (HS). The legal framework for the application of the HS is Article 4 of the
International Convention on the Harmonized Commodity Description and Coding System and
Ratification Proclamation No. 67/1993, Article 5 of the Definitions of Power and Duties of the
Council of Ministers and the Executive Organs of the Federal Democratic Republic of Ethiopia
Proclamation No. 4/1994 and Article 51 (1) of Proclamation 60/1997. All Customs tariffs revisions
41
and amendments since 1993 have been done based on the Internationally Accepted
Commodities Descriptions and Coding System of the HS including the latest amendment of import
tariffs Regulation No. 209/2003, dated January 9, 2003.

The Harmonized System (HS) is articulated in 4 digits, 6 digits and 8 digits of the Harmonized
System (HS) tariff item number. The HS 1996 version had been replaced by the 2002 version as from
January 1, 2003. Both import and export tariffs are based on ad valorem duties. There are no
preferential tariffs other than for imports from the COMESA member states. All imports from the
Sudan (Proclamation No 318/2003 and Article 4 of the Agreement), and imports of salt, fish and fish
products, and bottled or canned water from Djibouti are zero-rated. The import duty rates for the rest
of imports from COMESA member states are 10 percent less than the (most favored nation) MFN
duty rates.

A series of customs tariff amendments and measures have been taken since 1993. The maximum
import tariff has been decreased step by step from 230 percent to 35 percent. The average tariff rate
has also been reduced from 41.6 percent to 17.5 percent and tariff bands from 23 to 6 including the
zero rate bands. As per Regulation No.80/2002, the existing customs tariff amendment has been done
in January 2003. At present, there are five import tariff bands excluding zero rates. They are
5,10,20,30 and 35 percent.

The number of tariff lines is 5608, out of which 5424 are subject to ad valorem duties while the rest
are duty free items and prohibited. Currently the lowest and highest tariffs are 5% and 35%
respectively, which makes the dispersion of 30%. The current simple arithmetic average of all tariff
lines is 20 % and the weighted average tariff rate is 17.5 %. In general, the duty-free category of
imports is mostly comprised of fertilizers, articles of wood, railway or tramway locomotives, rolling-
stock and parts thereof, aircraft, spacecraft and parts thereof, etc. Within the 5 and 10 percent bands
are raw materials and machineries, which are used by manufacturing industries. Items within the 20
percent band include organic chemicals, carton, boxes, envelopes, sacks and bags, thread, synthetic
filaments, artificial filaments, yarn and synthetic monofilament staple fibers. Items within the 30 and
35 percent bands include perfumes, soaps, tiles, transmission belts, ornaments, silk, cotton, jewelry,
footwear, motor vehicles, textiles products and toys. To encourage sectoral development, and to
accommodate social health and security issues, the Ethiopian customs tariff book also contains the
second schedule which mainly lists conditional exemptions at nil or reduced rates and exemptions at
nil for importation by or on behalf of privileged organizations, persons, public bodies and institutions.

3.3 L/C Opening and Settling Procedures: Ethiopian Commercial Banks' Practices
42
A buyer and seller conclude a commercial contract requiring that the seller be paid by L/C. The
buyer then applies to this bank where the later issues L/C in favor of the seller .the buyer usually
completes a detailed application form enables the buyer to stipulate the terms of the L/C concerning
the method of payments ,and the documents the seller must present . It also contains terms and
conditions intended to protect the issuing bank. Normally the applicant undertakes to reimburse the
bank. If the obtains the required documents and agrees the documents become the banks property if
she/he doesn’t reimburse it .the actual reimbursement arrangement between the applicant and the
bank will reflect the applicants credit standing either country’s foreign exchange position but its
control of the documents does represent some security for the bank. The lesser is the margin
percentage to be held by the bank, the more is the credit worthiness of importer (applicant).

The issuing bank transmits the L/C to the advising (nominated) bank, which is usually its
correspondent bank or a bank with which the issuing bank has a test key or bilateral key arrangement
in the seller’s country .the advising bank then advises the L/C TO the beneficiary, adding its
confirmation if asked to do so .the advice of the L/C imposes a conditional obligation on the issuing
bank to pay the exporter for the presentation of the right documents at the right time.

Specifically the banker

 Receives L/C applications with pro forma invoice, import permit and insurance certificate (if
applicant is granted with L/C facility).

 Checks them against checking form number, L/C 1025 and their inter compliance.

 Marks the date of receipt of the application on the face of the application.

 Register some details of the application on register book.

 Nominate advising bank

 Assign L/C number and prepare L/C file.

 Prepare L/C instrument using L/C 1025.

 Calculate margin and charges per the bank’s tariff and prepare tickets 9from number (L/C 1003). 
Fills L/C history card (L/C-1003)

 Gets L/C instrument and tickets checked and signed by signatures.

 Posts tickets on posting machine or PC.

 Sends original and first copy of the instrument for the transmission to telex division.
43
 Attaches second copy of the instruments and file copy of the tickets to the L/C file.

Letter Of Credit Amendment

After the establishment of the letter of credit there may raise a need to change some terms and
conditions of the L/C .this can be initiated by the applicant or beneficiary .if both parties i.e. seller and
buyer, agree on the change, the applicant submits an application to the issuing bank to make the
requested changes on the letter of credit .this alternation of terms and conditions on the letter of credit
is known as amendment. When requested for an amendment on L/C terms and condition agreed upon
by both parties, i.e. buyer and seller, is received the banker.

 Check the contents

 Take the specified L/C files

 Prepare the amendment telex message.

 Calculate the related charge per the bank’s tariff and prepares tickets.

 Update the L/C history card if it has to be done.

 Sets the telex messages and tickets checked signed by signatories, post tickets on posting machine.
 Sends original and first copy of the telex message for the transmission of the telex division.

Some of the reasons that might require letter of credit amendments could be:

 Increase in the amount of money there in the L/C

 Extension of expiry date and shipment date.

 Changes in trade terms .E.g from C and F to FOB.

 Corrections of misspellings.

 Change in the origin of goods.

 Omission or addition of documents.

 Change in payment conditions.

 Change in beneficiary address …e.t.c.

As described above the two banks i.e. the opening (issuing bank/the advising bank communicate
about the L/C through the telex message normally called SWIFT (society for World Wide Web
interbank financial telecommunication) message. Thus the SWIFT is an instrument used as a method
44
of advice between these banks. The SWIFT message prepared in three copies of which ,ones goes to
SWIFT section ,and one for customer and the last copies is for file.

Letter of credit sight advice and settlement procedure

Upon dis-patchment of the goods, the exporter presents the requested documents to the advising
(nominated bank). The advising bank will then check the document carefully to ascertain whether
they are in accordance with the L/C stipulations. If they are, the advising bank, which usually
becomes a negotiating bank. Automatically in this case, will pay the beneficiary, or agree to pay him
later in accordance with the terms of the L/C. Unless it has confirmed the L/C, the advising bank
performs these services as agent of the issuing bank. If it has confirmed at L/C the advising bank
checks and pay on its account as the confirming bank.

The advising bank then sends the documents to the issuing bank, claiming reimbursement in
accordance with the L/C .if they are in order, the issuing bank reimburse the advising bank. if then
passes the documents to the importer in return for the sight or differed payment.

In summary the L/C presentation and settlement procedure consists of the following activities carried
out by the banker.

 Receive the incoming documents.

 Marks documents arrival date.

 Checks documents against L/C instrument and themselves for their inter compliance using L/C
checking form.

 If documents are discrepant, make correspondence with negotiating /confirming bank.

 Give guidance to applicant of the discrepancy or if the discrepancy is accepted by the applicant,
make necessary computation and prepare tickets –advice sight and L/C settlement tickets.
 Post tickets.

 Advice the applicant to collect documents after being certain that unpaid balance (margin) with
charges collected like interest charges on advance is made.

 Gets the bill of lading endorsed by the appropriate signatories.

 Hand over the whole documents to the applicants or to the legal representative against signature.

3.4 Import Customs Clearance Procedures: ECuA Practices

45
Definition of Custom

Custom, which is responsible s an authority or agency in country for collecting custom duties and for
controlling the flow people and goods (including personal effects and hazardous items) in and out of
the country .depending on local legislation and regulations, the import or export of some goods may
be restricted or forbidden and the customs agency enforces these rules. The custom agency may be
different from the immigration authority, which monitors persons who leave or enter the country.
Checking for appropriate documentation, apprehending people wanted by international search
warrants and impeding the entry of others deemed dangerous to the country.

Under this chapter we will see the practice of Ethiopian custom authority taken from federal
NegaritGazet proc.no 60/1977 re –establishment and modernization of Ethiopian custom authority.
Objectives of ECUA

The Authority shall have the following objectives:

I) Collect duties and taxes on goods imported or exported;

2) Implement Laws and International Conventions related to its objectives;

3) Control the importation or exportation of prohibited or restricted goods.

The Powers and Duties of ECuA

To achieve its objectives, the Authority shall have the following powers and duties;

A. To assess duty paying values, collect duties and taxes, collect license and service charges;
B. To examine documents of importers or exporters so as to enforce customs law;
C. To establish customs stations in any customs port, frontier post and transit routes;
D. To approve the place for the deposit of import and export goods, establish warehouses,
give license for those who establish customs warehouse, supervise the proper handling of
deposited goods; suspend or revoke warehouse license;
E. To prevent and control the importation or exportation of goods in contraband;
F. To search any goods and means of transport entered in to or departing from Ethiopia
through customs ports, frontier posts and other customs stations;
G. To detain prohibited, restricted or uncustomed goods; and take the necessary measure;
H. Under the authority given by and supervision of the Attorney General, to investigate
customs offences; institute criminal proceedings; and follow up the case in court; ix. To
collect, organize and disseminate import and export data's;

46
 I. To carry out studies as to the leveling, assessment and collection of customs duties, devise
ways of combating and repression of contraband activity, and implement same upon
approval;
J. To sale or dispose otherwise goods without owner, abandoned or forfeited;
K. To issue or revoke customs clearing license;
L. To prepare forms and brochures necessary for customs activity;
M. To prepare and implement systems for the assessment, and collection of duties, financial
accounting and other related activities;
N. To arrange for trainings and workshops to upgrade the efficiency of customs officers;
O. To own property, enter into contract, sue and be sued in its own name;
P. Perform such other related activities required for the attainment of its objectives.

3.5.1. Custom Clearance Procedures and Documents in Ethiopia

According to the Ethiopian custom law, all legally imported goods are subjected for custom
clearance so the customs duties are paid on imports; they have to be declared up on their
arrival .customs clearance procedure includes:

1. Applying for customs clearance by filling Ethiopian customs declaration form (ECDF).

2. Submission of all required documents together with copy of ECDF.

3. Verification of documents by the customs officer (checking the truthfulness).

4. Customs inspections of goods in the presence of the importer or the agent.

5. Customs valuation of the declared goods (giving value in terms of money).

6. Customs calculation of taxed, fees and duties.

7. Authorization of their released.

The documents required for completing custom clearance include.

 Commercial invoice (total/Performa/single price of goods)/

 Shipping documents (bill of lading or air way bill).

 packing list (a list of goods contained in a specific package container).

 Import license/import permit

47
 Certificate of origin: a document certifying the country from which the goods originated as distinct
from which they were immediately exported.

 Insurance documents

 Bank permit

 Permit from controlling agencies for restricted items.

 Duty free entitlement letter for duty free imports

 Freight invoices, etc.

3.5 Control of ECuA over Imported/Exported Goods

For the implementation of the objectives of customs, the following goods shall be under the
supervision and control of Customs:

(a) Imported goods from the time they get at Customs port until the completion of customs formalities
and received by the importer;

(b) Goods under drawback procedure from the time of drawback claim until exportation;

(c) Goods, entered into customs warehouse until removed from the warehouse;

(d) Goods of export from the time they entered in to customs port until the completion of customs
formalities and be exported;

(e) Goods in transit, from the time their movement is allowed until the completion of transit
procedure;

(f) Goods found without owner, abandoned, forfeited or contraband goods until they are sold or
disposed otherwise.

(g). Without prior authorization of customs, no one is allowed to enter in to customs warehouse in
which goods are deposited or; open or do any acts on those goods controlled and supervised by
customs in accordance with sub Article (1) of this Article. (h). The Authority shall be responsible for
the damage on goods under its control and supervision caused by its employees while discharging
their official duties.

Postal consignment

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a) Goods imported or exported through post office shall not be released without accomplishing
customs formalities.

b) The goods imported or exported through post office shall accomplish customs formalities under
the control and supervision of customs officer.

Prohibited Goods

Any goods the importation, exportation or transit of which is prohibited by laws or international
agreements to which Ethiopia is a party, shall be re-exported or forfeited without any special
procedure to be followed.

Restricted Goods

a) Goods the importation or exportation of which is restricted by law, unless they fulfilled
specific formalities or conditions, shall be detained in customs port unit a decision is passed
upon.
b) b) Goods detained in accordance with sub Article (1) of this Article shall be barred of
departing from Ethiopia or shall be re-exported to the country from which it is imported,
unless a permission is given to it, within 30 days, by the office controlling its importation or
exportation.
c) Where restricted goods are not re-exported within 30 days from the date of notification it shall
be considered as abandoned to the customs.
Declaration, Examination and Release of Goods
Lodgement of Customs Declaration
I. Except exempted by directives all goods entered in accordance with Article 17 of this
proclamation shall forthwith lodged for clearance inspected copies of customs declaration.
II. Goods exempted from clearance shall be determined by directives issued by the Board.
III. Where customs clearing agent applies for hold function and fulfils supporting documents,
pre lodgement of customs declaration may be allowed for any five days before the arrival
of the goods at customs port. However, if the goods do not arrive within the five days, a
new declaration shall be lodged at the time of arrival of the goods.
IV. The Authority may allow goods to be cleared urgently due to their nature or the service
they are required for. The details and the reasons that justify this procedure shall be
prescribed in the directives issued by the Authority.
V. All information supplied in the customs declaration shall be filled and signed by the
customs clearing agent.
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 VI. Any imported goods registered for home consumption shall be identified and declared in
the customs declaration in dutiable, duty free or duty draw back import regimes.
VII. Goods entered for an outright export or temporary export shall be declared in Customs
declaration.
VIII. Customs declaration accepted by the entry reception shall immediately be registered for
the accomplishment of customs formalities.

Supporting Documents of Customs Declaration

On the lodgement of customs declaration and declaration of facts the following original documents
shall be supplied to customs in a number of copies fixed by the Authority:

(a) Transportation document,

(b) Price document,
(c) Bank permit,
(d) Packing list,
(e) Certificate of origin, and
(f) Other necessary documents to be prescribed in the directives issued by the Authority.

Transportation document that is required in support of export goods shall be a document that is used
as evidence for the transportation of goods up to the customs port of exit. The Authority may require
any document to be presented in an Amharic translation made by official translators. Customs
declaration shall be acceptable where the necessary documents which are prescribed under this
Article are presented and approved by the customs officer.

Verification of Documents and Examination of Goods

The proper customs officer shall verify documents and examine goods to assure the accuracy of
information supplied in the document. And the owner of the goods or his authorized agent shall attend
during examination of the goods. Where the owner or his agent fails to appear at the time of
examination, the proper Customs Officer shall open and examine the goods in the presence of
relevant officials. Procedure of goods examination shall be prescribed by directives issued by the
Authority.

Examination at the Request of Importer

If any importer or his agent believes that the goods have suffered damage, short or pilferated in route
may request for prior examination of the goods before the lodgement of goods declaration. Where the

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request made in accordance with sub- Article (1) of this Article and its reason are justified by the
Authority; goods examination may be carried out upon payment of service charge. Customs
declaration shall, therefore, be filled in accordance with the examination report. Service charges for
prior examination of goods shall be prescribed by directives issued by the Authority.

Delivery of Goods

All goods listed in customs declaration shall be removed from the warehouse by the owner or his
agent immediately upon the accomplishment of customs formalities. A goods which is not removed
from the warehouse with in the period specified in sub Article (3) of Article 43 of this proclamation,
shall be sold or disposed otherwise as deemed abandoned to the customs.

Goods in Transit

Condition for the Movement of Goods in Transit any goods in transit shall:

A. Accomplish transit formalities at the customs port of departure before the commencement of
transit operation. The details shall be specified in directives issued by the Authority;

B. Start the operation under the cover of guarantee prescribed by the Authority;

C. Move only by a clearing agent licensed by the Authority.

Arrival of Transit Goods

All transit goods shall arrive at the port of customs destination in the condition prescribed and within
the period specified by the customs. Customs Clearing Agent shall report forth with to the customs
destination office, the arrival of the goods in accordance with sub-Article (1) of this Article.

Customs Port and Transit Routes

Goods in Transit shall be imported in prescribed customs ports and be transported through allowed
transit routes. Customs ports and transit routes shall be determined by the Board and prescribed in
public notice issued by the Board.

Temporary Importation and Exportation of Goods

Temporary Importation

Goods necessary for trade promotion, technology transfer, tourism and cultural exchange,
development works and consultancy service may temporarily be imported without payment of duties
and taxes subject HO is re-exported on the completion of its objectives.

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A person who imports goods temporarily, without payment of duties and taxes shall submit security
equivalent to the duties and taxes in accordance with the provisions of chapter 7 of this Proclamation.

It is prohibited to use goods imported on temporary basis other than the purposes for which they are
imported or to use out of the localities where the activities are carried out.

Time Limit

1) Temporarily imported goods shall be re-exported within six months or within the time specified in
the project agreement or in agreement entered with the Government. 2) The Authority may extend the
time limit for a period of not more than one month where the importer proves on acceptable ground
that the goods imported temporarily cannot be re-exported within the time specified in sub-Article(1)
of this Article.

3) Goods for trade promotion, technology transfer, tourism and cultural exchange may, upon request,
be sold or remain within the country upon payment of taxes and duties based on their value at the
time of request, where the request is made within the period prescribed for their stay and authorized
by appropriate offices to remain in the country. 4) Goods for development work and consultancy
services may remain within the country upon payment of taxes and duties based on their value at the
time when the goods are imported; where it is requested within the period prescribed and authorized
by appropriate offices to remain in the country.

5) Where temporarily imported goods, are destroyed or irrecoverably lost by force majeure and where
it is proved with sufficient evidence, the goods may remain in the country upon payment of duties and
taxes based on the value of goods less the amount of damage.

Temporary Export

Goods exported temporarily by accomplishing customs formalities may be allowed to reenter into the
country without payment of duties and taxes, on the following conditions:

(a) Imported goods sent abroad for repair and maintenance without repayment of duties\ and taxes;

(b) Temporarily imported goods sent abroad for repair and maintenance without cancellation of the
guarantee given at the time of their importation;

(c) Personal effects, automobiles for personal use, machinery and other equipment necessary for his
work abroad;

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(d) Goods exported for trade fair, exhibition or cultural show.Goods returning pursuant to sub-Article
(1)(a) and (b) of this Article shall be subject to duties and taxes on the cost of maintenance and repair
incurred abroad.

Goods may be eligible for exemption from duties only if returned from abroad within six months,
unless a greater period is specified in the agreement approved by the government.

Establishment and Administration of Warehouses and Conditions for Warehousing Goods

Establishment of Warehouses

Customs warehouse, for the storage of import or export goods until the accomplishment ofcustoms
formalities, may be established by the Authority, business organizations or byindividuals.

Customs warehouse established by the Authority shall be notified to the public by Government
Gazettes. Business organizations and individuals shall establish customs warehouses by a license
given by the Authority.
Warehousing of Goods
Goods arriving at any Customs Port shall enter into appropriate customs warehouse within5 days
from the date of unloading.Goods not entered into warehouses within the time specified in sub-Article
(1) of this Article, shall be deposited in the Authority's warehouse as ‘deemed imported for home
consumption pursuant to sub-Article (3) of Article 17.

Controlling Warehouses

All goods deposited in the Authority's ware house or in any licensed customs warehouses shall be
controlled by Customs Officers.

Warehouse Registers
1) All warehoused goods shall be registered in the appropriate register book. Method of registration
and the details of the register book shall be prescribed in directives issued by the Authority.

2) Customs officer shall verify the goods described and its registration by signing on the books of
registration and cargo manifest.

Time Limit of Storage in Customs Warehouses

1) Any goods entered in. to licensed customs warehouse shall be removed within threemonths, by
accomplishing the necessary customs formalities.

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2) Goods entered in to licensed customs warehouse that is not removed within the time specified in
sub- Article (1) of this Article, may be sold or disposed otherwise after being transferred to the
Authority's warehouse.

3) Where a license for customs warehouse is cancelled before the expiration of three months, that is
prescribed for the storage of goods, the goods shall be transferred to the Authority's warehouse to
accomplish the remaining time for storage.

4) Any expenses for transferring the goods from licensed customs warehouse to the Authority's
warehouse shall be covered by the owner of the warehouse.

5) Goods entered into the Authority's customs warehouse shall be cleared within three months upon
accomplishing all customs formalities.

6) Any'. Goods which are not removed from the Authority's warehouse within the time specified in
sub-Article (5) of this Article may be sold or disposed otherwise by the Authority.

7) The Authority may sale, at any time goods that are perishable or not convenient for preservation.

Sale of Goods

The proceeds of sale of goods which is not removed from customs warehouse and sold by the
Authority shall be applied in the payment of:

(a) Expenses of the sale,

(b) Duties and taxes,

(c) Charges for the Authority's warehouse,

(d) Cost of transport and the balance, if any, shall be deposited by the Authority for the account of the
owner.Where no claim is lodged to the Authority within six months from the date of the sale, the
balance deposited shall be transferred to the government.

The Board shall issue directives regarding the sale and disposal of goods under this proclamation.

Storage of Goods
1) The Authority shall issue directives for stacking and storage of goods in customs warehouse.

2) Any person who operates customs warehouses shall respect the conditions specified in the
directives issued by the Authority.

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3) The operator of a warehouse shall be liable for any damages on goods in disrespecting the
directives issued by the Authority under sub-Article (I) of this Article.
Goods Taken for Sample

I) for the reasons listed hereunder goods may be taken for sample from the warehouse before the
accomplishment of customs formalities:

(a) when required for checking the type and the content of goods to classify in the proper tariff
heading;

(b) When required for identifying the type, quality and country of origin of the goods for valuation
purposes;

(c) When court or police order its presentation for inspection purposes;

(d) To ascertain the price indicated on the invoice is appropriate for the specified item;

(e) For other reasons allowed by the General Manager.

2) Goods issued for sample shall be returned in the same condition and quantity as they were taken
out. Where it is destroyed during examination or retained for reference it shall, be. Presumed as
warehoused for the purpose of duties, taxation and for other reasons related with accounts and
charges.
Access to Customs Warehouse

Except those authorized by customs, no one is allowed to enter into customs warehouse. The
Authority shall issue directives regarding persons to have access to customs warehouses and the
conditions thereof.

Establishment of Licensed Customs Warehouses

Persons specified in sub-Articles (2) and (3) of custom proc. No.60/1997 may establishgeneral or
private customs warehouses upon receiving of license from the Authority.

Goods to be deposited in the Authority's Warehouse

The following goods may be deposited in customs warehouses at customs port of entry,and of exit or
at any other places that are established by the Authority:

1) Goods not indicated in the cargo manifest;

2) Goods not declared the purpose they are imported for;

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3) Goods not declared to be deposited in a licensed customs warehouse;

4) Goods imported to be deposited in the Authority's warehouse;

5) Goods transferred from licensed customs warehouse to the Authority's warehouse for whatever
reasons;

6) Goods seized by reason of contraband or for contravention of any laws that are to be enforced by
the Authority.
Calculation of Warehouse Fee

1) Storage fees for goods deposited in the Authority's customs warehouse shall becalculated as
follows:

(a) Goods entered in customs warehouse; from the date of entry until released uponaccomplishing
customs formalities;

(b) Goods transferred from licensed warehouse; from the date of transfer until releasedupon
accomplishing customs formalities.

(c) Goods seized by reason of contraband or contravention of laws that are enforced bytheAuthority;
from the date of sales until the buyer collects them;

2) The amount of fees payable for storage pursuant to this Article, shall be prescribed bythe Authority
in public notice.

3) Goods sold or accomplished customs formalities pursuant to sub-Article (1) of this

Article shall not stay in the warehouse for more than one month. If it stays for more thanone month
the Authority can sale or dispose it in any way it thinks fit.

4) Goods which could not be released upon deposition of guarantee under sub-Article (2)of Article 44
of this proclamation are free from warehouse fee from the date of seizure bycustoms until released by
a final decision of court.

Guarantee

Conditions for Guarantee

The Authority may release goods upon receiving guarantee for the following reasons:

(a) When an extension of time is required to fulfill documents necessary for the accomplishment of
customs formalities;
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(b) When documentary proof is required to ascertain the re exportation of duty relieved temporarily
imported goods;

(c) When it is necessary to ascertain that transit, goods have been exited through the approved
customs port of exit or arrived at the predetermined customs port of destination;

(d) When it is necessary to ascertain the exportation of goods which are produced by duty relieved
imported raw materials;

(e) Until the disputes on tariff classification or price valuation of goods are settled;

2) Goods seized by reasons of contravention of customs laws, except those goods seized due to
contraband, prohibition, restriction or goods required as evidence by court, may be released by the
Authority upon receiving sufficient guarantee until a final decision is passed upon.

Amount of Guarantee

1) The amount of guarantee for the goods specified in sub-Article (1) of Article 44 of this
proclamation shall not be less than the duties and taxes payable for the goods.

2) The amount of guarantee for the goods specified in sub-Article (2) of Article 44 of this
proclamation shall be equal to the value of the goods and duties payable for the goods;

Types of Guarantee

1) A guarantee to be accepted by the Authority shall be cash deposit or document of guarantee given
by insurance or bank registered in accordance with Ethiopian laws.

2) Guarantee given under this proclamation shall be governed by surety ship provisions of the civil
code.

3) The Authority shall decide on methods of payment of the guarantee. Valuation, Tariff
Classification and Calculation of Duties and Taxes

Duty Paying Value

The duty paying value of any import or export goods shall be the actual total costs of the goods.

Duty Paying Value of imports

1) For the purpose of customs, the duty paying value for imported goods shall be the sum of the
transaction value, freight cost and insurance premium that is paid to deliver the goods up to a
prescribed customs port.
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2) Transaction value and other related costs given by a supplier who is associated inbusiness with the
importer shall be considered genuine unless the given price is influenced by their relationship.

3) Where a document which show the correct freight cost up to the first customs port is not produced
or the document produced is rejected by the Authority; the freight cost ofidentical goods transported
at or about the same time with' the same means of transportshall be taken to calculate the cost of
freight.

4) Goods imported without insurance coverage or transported under insurance coveragebut the bill
produced is rejected by customs, the insurance cost paid for identical goodstransported at or about the
same time with the same means of transport shall be taken to calculate the cost of insurance.

5) To determine the accurate value of the goods pursuant to sub-Articles (2) and (3) of this Article,
the following additional costs shall be considered:

(a) Commissions and brokerage costs incurred by the buyer;

(b) The cost of container and cost of packing the goods be it for labor or material;

(c) The value of goods and services supplied by the buyer free of charge or at reduced cost, to the
extent that such value has not been included in the price actually paid or payable;

(d) Royalties and license fees related to the goods that is paid directly or indirectly by the buyer;

(e) Loading, unloading and handling charges paid up to the port of importation.

6) The method of calculating the costs specified under sub-Article (5) of this Article and conditions
that may have impact on the duty paying value shall be prescribed in directives issued by the Board.

7) Where documents necessary to determine duty paying value of the goods are not presented, or
rejected by the Authority, the transaction. Value of identical goods imported from the same country at
or about the same time shall be taken to determine the value of the goods.

8) Sub-Article (7) of this Article shall apply, where the goods are purchased at the same commercial
level and quantity as the goods being valued. Where no such purchase is found, upon some
adjustment, the transaction value of identical goods sold at different commercial level and in different
quantities shall be taken to determine the value of the goods.

9) Where the value of the goods cannot be determined in accordance with sub-Article (8) of this
Article, the transaction value of similar goods imported from the same country at or about the same
time shall be taken to determine the value of the goods.
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10) Sub-Article (9) of this Article shall apply, where the goods are purchased at the same commercial
level and quantity as the goods being valued. Where no such purchase is found, upon some
adjustment, the transaction value of similar goods sold at different commercial level and in different
quantities shall be taken to determine the value of the goods.

11) The application of valuation methods listed in this Article, and other alternatives to be followed
by the Authority, shall be prescribed in the directives issue by the Board.

Deductibles from import values

The following adjustment costs shall be deducted from import values:

(a) Costs for damages in routes;

(b) Costs for damages in customs warehouse.

When it is requested and agreed upon by the customs office to destroy or dispose any dangerous
goods deposited in the warehouse, the goods shall be destroyed or disposed otherwise at the presence
of customs officer and other officials concerned, and the value of the goods destroyed or disposed
otherwise shall be deducted proportionally from the duty paying value of the goods.

Value of Export Goods

For customs purpose the value of export goods shall be the transaction value of the goods and the cost
of transportation up to the port of exit.

Exchange Rate

For goods imported through letters of credit, the exchange rate shall be the rate specified on the bank
document against the utilized currency.

For any other purchase the official rate of exchange prescribed at the time of acceptance of customs
declaration, shall be applicable.
Commodity Classification & Tariff Rate

Any goods imported or exported shall be subject to:

a. Pay duties and taxes according to the tariff of Harmonized Commodity

Description and coding system;

b. Pay duties and "taxes according to the preferential tariff rate where goods are imported from the
preferred country;
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c. Pay duties and taxes at the rate in force on the day the declaration of the goods is presented to, and
accepted by the customs office.

Disputable Cases

1) Where any protest arises as to valuation, commodity description and classification and tariff rate,
the duties and taxes shall be payable upon registration of the point of protest.

2) Payment made under protest pursuant to sub-Article (1) of this Article shall be resolved within 3
months by the General Manager.

3) Where final decision is given in favor of the person who paid under protest, the duties and taxes
paid excessively shall be refunded to him within 30 days after the decision is given by the Authority.

4) Where the Authority's decision is given in favor of customs the sum of money paid on protest shall
be -deemed as the duty and tax payable for the goods, unless the person paid under protest brought an
action in a court having jurisdiction within 30 days after he is notified of the decision by the
Authority.
Duty Free Imports

1) Goods may be imported or exported free from any duties and taxes in accordance with law or
international agreement to which -Ethiopia is a party or by an agreement made and permission given
by the government.

2) Any goods imported duty free may be sold or disposed to, any person who enjoys similar
privileges, or exported, without paying duties and taxes; or subject to pay customs duties and taxes at
the rate and value prevailing during the time of sales or disposal, be transferred to any person.

3) Where duty free imported goods are lost or damaged due to force majeure the importer shall report
forthwith to the Authority, and if it is proved to the satisfaction of the Authority the whole or part of
the duties and taxes may be cancelled.

Re-payment of Duty

1) Not withstanding other duty draw back regulations, repayment claims shall be granted if duties are
over charged as a result of incorrect commodity classification, tariff setting, valuation, and other
calculation or assessment mistakes.

2) Pursuant to sub-Article (1) of this Article, duties and taxes shall be repaid when the Authority
discovers or. When the importer claims for it. However, the duties and taxes may be repaid only if the

60
errors are discovered and lodged to customs within 6 months from the date of clearance for
importation or exportation of the goods.

Re-exportation from the Customs Port

Goods imported and declared for home consumption may be re-exported at the request of the
importer before accomplishing customs formalities upon payment of 5% the fee of the value of the
goods.

Deferred Payment
1) If the duty paid for the goods imported or exported is less than the actual duty required to be
payable the different hall be collected by the Authority from the owner or his agent.

2) The collection of the difference referred to under sub-Article (1) of this Article shall be made by
the Authority within two years from the date of clearance of good.

3.6 Types of Customs Clearance Payments

3.6.1. Import/Export Related Taxes and Assessment Method.

All goods that we can see, feel, use buy e.t.c are coded in customs. The coding will differentiate one
commodity from another, which means each commodity or a group of items will have a separate code
from other. This makes life for customs officer easy as clearance of goods for whatever reason is
facilitated.

The difference in the type of goods, in some cases, also means the difference in the application of
percentage rates of duty, which are normally indicated against the codes items.

For example, goods, which are mostly luxurious like perfumes will attract a higher rate of custom
duty as computed to necessities, like soap, which has lower rates of duty or even. Some other may be
which are considered important, duty free like medicaments.

The coding of items also helps to complied at of imports and exports.The arrangements of the codes
and goods in the customs tariff is systematic and progressive and because of this, the tariff is
sometimes called NOMECLATURE, which means the systematic naming of goods in the tariff. It is
anomenclature because of goods are systematically and progressively arranged from raw materials,
semifinished goods products, then finished products. It is not possible to know all the codes by heart
but what is important is the art of applying the techniques of signaling out one item from the many in
the tariff for the purposed of customs clearance ,duty collection and compilation of statistics on
imports and exports.
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The language in nomenclature tariff is legal and the process of trying to signal out a code for a
commodity which is called classification should be legally done.

Generally proper classification or coding of goods means proper application of duty rates resulting in
collecting correct amounts of duty and correct data on imports and exports, as the case may be.

3.6.2. Tariff

Tariff Definition

Tariff is a legal working document as prescribed in the custom and excise Act. Itsystematically and
progressively lists of goods, which are involved in international trade.

The Ethiopian custom tariff is based on internationally harmonized commodity description and
coding system in short H.S it is a multipurpose and Digital nomenclature.

It was developed by the world customs organization in Brussels,Belgium with principal objective of
meeting the needs of all those interested in world trade such as customs administration,trade
statistics,transporters etc.

Function of the Tariff

 Collection of revenue by using the percentage rate of duty as indicated in the various tariffs.

 Collection of statistics as provided for in tariff.

 Negotiation of trade agreement in so far as they relate to Ethiopia duties, there by facilitating
international trade.

 Protection of local industries by imposing customs duty rate on imported goods, which are similar
in nature to those locally manufactured.

 Provisions of preferential rate of duty rates.

 Assisting and encouraging establishment of local industries by giving relieves.

To conclude the customs tariff is indeed a fiscal tool should always be well maintained and kept up to
date. Amendments will be coming from time to time and it is therefore the duty of every officer to
have their tariff books amended when required to do so.

Types of tariff

A. Customs Tariff

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Used for collection of customs duties and taxes on certain imported goods only. In the case of
Ethiopian the collection method or rate in these categories varies depends on the item imported.

B. Excise Tariff

Used to collects excise duties on certain imported and certain locally manufactured goods.

This also vary depends on the item imported or exported but sometimes in Ethiopia, todiscourage
purchasing (importing) of luxury goods, it reaches 100% of the item’s list price.

C. Surtax Tariff

Used to collects surtax duties on certain imported and on certain locally provided services.

D. Export Duties Tariff

Used to collects export duties on certain exports Ethiopia.

E. Damping Duties Tariff

Used to check dumping there are also some other types of duties and taxes

a. Value added taxes (15% of list price)

b. Withholding tax (3% of list price)

Note

This rate is only applicable in Ethiopia tax calculation

Ethiopian general tax calculation formulas

Total Cost of the Goods = Fob Cost + Insurance + Freight

Total Cost of the Goods X Import Customs Duty = A

(Total Cost Of the Goods + A) X Excise Tax Rate (If Applicable) = B

(Total Cost Of the Goods + A + B) X Vat = C

(Total Cost Of the Goods + A + B + C) X Surtax = D

Total Cost of the Goods X Withholding Tax = E

Total Payable at the Time of Import = A+B+C+D+E

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