Incoterms_® and Commercial Contracts

14.1 Global e-commerce: practical considerations

E-commerce is a major economic growth factor in developed as well as emerging economies. The low cost of Internet contracting is enabling companies of all sizes to expand their overseas sales and sourcing through e-commerce.

E-commerce is sometimes divided into the following categories: business-to-consumer (B2C), business-to-business (B2B), and more recently consumer-to-consumer (C2C) activities. Global e-commerce measurement remains speculative as private research firms and government officials have yet to agree on standard metrics and terminology. Despite the lack of comprehensive data, most estimates point to rapid e-commerce growth. The European Union (EU) has reported that the percentage of consumers buying online rose to 37% in 2009 from 20% in 2004. The U.K. had the highest percentage of online shoppers among European countries in 2009, with 66% of consumers shopping online. The United States appears likely to remain the largest global e-commerce market with retail e-commerce sales of 135 USD billion reported in 2009.

14.2 Customs classification and Incoterms for e-commerce

Many small online retailers, by using the mails and accepting credit cards, have found it possible to fulfil domestic orders with a small staff. The situation becomes more complicated in international e-commerce, because the seller must quote a different price to each buyer depending on the freight and/or customs duties that will have to be paid for that destination. Large exporters (or small exporters with large value exports) can use customs brokers to calculate these costs for them, or they can employ specialized export support staff to classify all goods sold internationally. For smaller firms it can be a significant problem, which explains why so many small firms turn to service providers to assist them with this task.

When export goods arrive at their destination, the importing country requires payment of all applicable duties or tariffs (import taxes levied by the destination country) and local taxes, including Value Added Taxes (VAT). Most small e-commerce providers prefer to make the buyer pay the customs duties, tariffs and taxes. Buyers, however, prefer to know the final price, with shipping and taxes included (sometimes referred to as “landed cost”) before they agree to order. Since customs duties and taxes vary widely internationally, determining those rates before shipment can be difficult.

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As more fully set forth in Chapter Three, shippers worldwide use standard trade definitions developed by ICC called Incoterms, which spell out the responsibility for shipping costs, insurance and duties. In the current version of Incoterms® 2010 there are 11 valid Incoterms rules (see Chapter 3).

With the exception of DDP (Delivered Duty Paid), all Incoterms require the buyer to pay all import duties and taxes upon arrival. As regards payment of foreign import duties, the two basic options are:

1. Duties for Shipper (DDP): The package sent DDP arrives at the buyer’s shipping address with all customs duties and taxes paid. For the buyer, this is the easiest option - the package arrives and the buyer only has to take delivery. The seller, however, assumes the risk of unexpected charges. The seller must estimate what the duties and taxes will be when the order arrives and charge the customer the appropriate amount.

2. Duties for Buyer (All other Incoterms, such as CPT, CIF, or DDU): These shipping terms make the buyer responsible for paying all import duties and taxes when the goods arrive. The delivery service will only release the package to the buyer after the buyer has paid all applicable duties and taxes. Typically, the delivery service will send a note informing the buyer that the package has arrived, that duties are owed and that the package will be released only upon payment of those charges. Although the buyer bears the burden of additional fees when the package arrives, the seller takes the risk that the buyer may be so unhappy with the additional fees that he refuses delivery of the package. In the latter case, the seller must pay for return shipping.

Note that the EU requires all retailers to collect VAT for online sales to EU customers. Calculating taxes can be complicated and time-consuming for small- and medium sized exporters.

14.3 Payment options for international online sales

Most firms that sell online accept payment on credit cards issued by banks in other countries. American Express, Visa, MasterCard, and Discover are among the most frequently used payment systems worldwide, both in brick-and-mortar and online stores. In many European countries, people prefer country-specific cards, such as Carte Bleue in France.

Many companies specialize in processing payments from international customers. To locate these companies, search for “international online payment” on any Internet search engine such as Google or Bing.

One popular payment option is PayPal, a third-party service that processes payments from customers’ credit cards and bank accounts and forwards the money to the seller. PayPal has become increasingly popular among small firms selling online to foreign buyers because they do not assume the risk of collecting the buyer’s payment information. PayPal guarantees payment to the seller.

a. Online fraud

Accepting online payment exposes the seller to a risk of fraud. According to Cybersource’s Online Fraud Report (cybersource.com), U.S. merchants reject three times as many international orders (7.7%) as domestic orders (2.4%). There has been recent success in reducing online fraud; international e-commerce fraud rates for U.S. merchants fell from a 2008 average of 4.0% of total online orders to 2.0% in 2009.

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b. Chargebacks

The possibility of incurring chargebacks, i.e., the process whereby the card holder’s issuing bank requests a reversal of charges on behalf of the card holder, is one of the most challenging aspects of e-commerce payments. Chargebacks account for nearly 50% of fraud claims (the other half are claims made by the card holder to the issuing bank, which then issues its own credit on the account). Because of the dollar volume involved in fraud, credit card firms are playing a more active role in the mediation process on chargebacks. Cybersource reports that merchants win about 42% of chargebacks disputes with credit card companies.

14.4 Customs classification information for global e-commerce

Exporters and importers must provide key customs information to government agencies and shipping companies in order to calculate import duties, tariffs and taxes. Customs classification for all products exported is the first step for all e-commerce sellers as it is for other exporters, but the transition to international sales can be more sudden and complex in the e-commerce context. Every imported or exported item is assigned an international standard classification code that corresponds to its product type. These numerical codes are used to determine which tariffs, if any, will be applied to a given product.

E-commerce exporters need to know their product’s customs codes so they can determine import tariff rates and whether a product qualifies for a preferential tariff under a free trade agreement. These classifications codes will be needed in order to complete required shipping documents, including commercial invoices and certificates of origin. If a company has a large inventory of different types of goods (i.e., thousands of stock-keeping units or SKU), it may not be advisable to classify all of them immediately. A customs code is only needed for items that will actually be exported. Classifying new products that are ready for export should be part of the global e-commerce process.

14.5 Legal rules and self–regulation in global e-commerce

In 2006, the United Nations Commission on International Trade Law (UNCITRAL)¹adopted its Convention on the Use of Electronic Communications in International Contracts. Global business welcomed the signing of this convention as a sign of the increasing legal recognition of electronic contracting, particularly in developing countries. This was a useful evolution to spur the development of cross–border online commerce and transactions.

a. How the UNCITRAL convention benefits e-commerce

This convention can be helpful in three specific ways:

• The UNCITRAL convention allows electronic communications to satisfy the requirements of other international conventions without the necessity to individually renegotiate each of these conventions.

• The convention contains provisions that require signatory countries to recognize the legal validity of electronic communications used in contracts, as well as those dealing with issues that commonly arise in electronic agreements, such as location of the parties, information and form requirements, time and place of dispatch, receipt of electronic communications and invitations to make offers.[Page205:]

• The convention enhances legal certainty and support for the concept of party autonomy. Party autonomy is essential to electronic contracting. The convention allows contracting parties to shape their electronic agreements in the most productive way possible.

The UNCITRAL convention on electronic contracting has been ratified. http://www.uncitral.org/pdf/english/texts/electcom/06–57452_Ebook.pdf- United Nations Convention on the Use of Electronic Communications in International Contracts

b. Related ICC e-contracting initiatives

The UNCITRAL convention also relates to certain ICC initiatives that complement it.

ICC eTerms

• In 2004, ICC developed “eTerms” that provide complementary provisions for businesses around the world to use in international contracts. ICC eTerms are a set of articles developed so that business parties can incorporate them into their contracting documents and make clear that they intend to agree to a binding electronic contract.

eUCP

• ICC developed a supplement to the UCP 500 for the electronic presentation of documents in letter of credit transactions. Termed “eUCP” for short, the supplement consists of 12 articles and was intended to be used in tandem with UCP 500 where part-electronic or all-electronic presentations are made². The eUCP was updated in 2006 to bring it into line with UCP 600, the revision of the UCP which came into effect on 1 July 2007. The new version is eUCP Version 1.1.

c. Other initiatives supporting electronic contracting

• TradeCard (www.tradecard.com) is a business-to-business service for international payments. It is intended to provide an electronic alternative for other international payment devices by providing a secure way to manage procurement-payment worldwide, with buyers, sellers and partners connected to a hosted, paperless platform.

• Bolero (www.bolero.net) provides a neutral secure platform for processing traderelated documents in order to enable paperless trading between buyers, sellers and their logistics service and bank partners. Its services improve operational efficiencies and reduce the time it takes to process trade transaction documents.

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d. Electronic signatures, authentication and digital identity management

Electronic signatures* are important to ensure proper identification of communicating partners, authenticity and non-repudiation of messages exchanged. For this to be realized, a number of international actions need to be taken. Many countries are developing, or have already implemented, electronic signature laws that include rules pertaining to certification services.

ICC has developed several recommendations that should be implemented to help governments and businesses ensure that electronic authentification and signatures will be dependable and will facilitate international electronic transactions. Some of these include the following:

1. ICC has provided common definitions and best practice guidelines for authentication and certification practice which have been published by several business organizations and must be continually revised to reflect business practice.

2. ICC recommends that there should be freedom of contract to establish parties’ rights and responsibilities when using electronic signatures.

3. ICC recognizes a need for the legal acceptability of certificates and electronic signatures, both within a nation and internationally. These, ICC says, should be supported by appropriate government policies.

4. ICC recommends that government policies provide a predictable legal framework based on the fundamental concept of freedom of contract. The policies should be non-discriminatory; technologically and architecturally neutral; promote flexibility as to the content, form and function of certificates and similar authenticating devices; and promote competition among providers of authentication services.

5. ICC urges that rules for evaluating the legal validity of electronic signatures not be written to require localization, local partners, local insurance or guarantee schemes, mutual recognition or otherwise act as trade barriers. Neutral criteria relating to adequacy should be used to determine recognition.

6. ICC urges that standards for electronic signatures used or recognized by governments be technology neutral, commercially available, allow for technological innovation and should not endorse or favour any particular solution.

e. Information compliance issues

The legal and regulatory requirements that affect the use of ICTs are referred to as “information compliance”. Requirements affecting companies’ ICT deployment have been covered by many different types of legislation - environmental, labour, tax, corporate governance, anti-terrorism, anti-money laundering, supply chain compliance, consumer protection, financial stability, etc.

* The terms “digital signature” and “electronic signature” are often used interchangeably. This has led to significant international confusion as to the use of the term. This topic is not appropriate for an in–depth discussion in this chapter. Interested parties are referred to http://www.iccwbo.org/home/guidec/guidec.asp or www.ilpf.org/work/ca/draft.htm and related information sources for further information and definitions. For the purpose of clarity, the term “digital signature” as used in this chapter refers to “a transformation of a message using an asymmetric cryptosystem such that a person having the ensured message and the ensurer’s public key can accurately determine: (a) whether the transformation was created using the private key that corresponds to the signer’s public key, and (b) whether the signed message has been altered since the transformation was made.” The term “electronic signature” as used in this chapter refers to “a signature in electronic form in, or attached to, or logically associated with, a data message, and used by or on behalf of a person with the intent to identify that person and to indicate that person’s approval of the contents of the data message”. [Page207:]Information compliance problems create significant challenges to business. Obligations frequently differ and sometimes even conflict among different regulatory areas and jurisdictions. This can create significant implementation and operational problems. For instance, companies may be subject to data protection rules in one jurisdiction, which restrict the transfer of personal information across borders, and security requirements in another, which require companies to compile “watch lists” of their global clients. The requirements in each country can be difficult to access and, in some cases, may not even be set out in writing. Often these laws impose serious sanctions. ICC has joined other business organizations in calling for concrete guidance from policy makers on how to comply and how companies can avoid sanctions.

14.6 Data protection, privacy and e-commerce

a. Privacy protection regimes

The Internet has created new challenges with respect to privacy. Especially important is ensuring balanced data protection and privacy regimes flexible enough to keep up with societal needs, new technologies and innovations in business methods, as well as to ensure useful protection of users’ personal data. These issues have been discussed and addressed in many international fora, including the OECD, Internet Governance Forum (IGF), the Council of Europe, the European Commission and the Asia-Pacific Economic Cooperation (APEC). Privacy laws and regulations can have the unintended consequence of stifling innovation and growth. Data protection and privacy regimes need to be flexible enough to keep up with changing social needs and innovation in business methods and technologies. Existing regulatory systems must provide consumers with useful protection of their personal data, but at the same time must guarantee the free flow of information needed for the information society to produce the anticipated benefits.

b. Privacy protection principles

ICC has encouraged governments to take the following steps to achieve optimum privacy protection:

1. Adopt a flexible and responsive approach to the protection of personal information, including the acceptance of self-regulatory solutions and technological innovations that empower the user and protect consumers from harm.

2. Educate the public about privacy protection and the use of privacy-enhancing technologies.

3. Cooperate internationally to ensure a seamless environment for different privacy regimes. Avoid developing laws, policies and practices that create obstacles to trans–border flows of personal data.

4. Endorse model contracts, codes of conduct, seal programmes and other self regulatory mechanisms prepared by the private sector to promote the free and secure flow of information within and between companies and across borders.

http://www.iccwbo.org/uploadedFiles/TOOLKIT.pdf - ICC privacy toolkit

http://www.iccwbo.org/policy/ebitt/id2334/index.html - Information security guidelines and codes of practice

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c. Binding corporate rules

In July 2006, ICC created a “Standard Application for Approval of Binding Corporate Rules for the Transfer of Personal Data outside the EU” (to be used in all EU Member States)³. The EU Data Protection Directive 95/46/EC allows for personal data to be transferred outside the EU only when the transfer provides an “adequate level of protection” for the data. Binding corporate rules (BCRs) are one of the ways in which such an “adequate level of protection” may be demonstrated.

d. Spam - online resources, best practices

Businesses and consumers worldwide have come to rely on the speed and convenience of e-mail and other types of electronic communications. However, e-mail brings with it the problem of “spam”, unwanted messages that crowd the user’s inbox and dilute the efficiency of the service. There has been considerable controversy about spam and how it can be curtailed. Since different legal rules apply to electronic communications in different jurisdictions, there is no generally accepted definition of the term “spam”. Identifying illegitimate or unacceptable electronic communications can cause users and service providers many problems and create cost burdens. Spam has been addressed by many international fora, including the OECD and the IGF.

ICC endorses a multi-faceted toolkit approach to fighting spam. In particular, business can best manage legitimate unsolicited commercial e-mail with industry codes of conduct and other self-regulatory tools.

Users can fight spam with software spam filters and firewalls. There are also services that preview e-mail before it is downloaded and request verifications from the senders to filter out spam messages.

14.7 Multilateral trade negotiations: world business objectives

The World Trade Organization (WTO) has not ruled whether e-commerce should be considered a good or a service. If considered a service, the General Agreement on Trade in Services (GATS) would dictate e-commerce trading rules. Under GATS, WTO members must provide market access only in those sectors where they have made affirmative and specific commitments. Conversely, if e-commerce were considered to be a good, the General Agreement on Tariffs and Trade (GATT) would apply. GATT requires market access and national treatment for all WTO members.

ICC has identified four core objectives for world business in multilateral trade negotiations:

1. the development of the domestic and global infrastructures necessary to conduct e-business while avoiding barriers that would hinder such development; [Page209:]
2. full implementation of existing commitments and further liberalization of all basic telecommunications, value-added and computer and related services;
3. the development of trade in goods and services via e-business; and
4. strong protection of intellectual property made available over digital networks.

To promote the development of the domestic and global infrastructures necessary for e-commerce, world business urges the elimination of duties on all IT products, full market access and an open, competitive market for electronic commerce, including commitments not to impose new barriers to the development of the e-commerce infrastructure.

Promoting strong protection of intellectual property made available over digital networks is vital. Effective and timely implementation and enforcement of the WTO Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) serves to protect these interests. It is also important that there be timely ratification of the World Intellectual Property Organization (WIPO) Copyright Treaty and the WIPO Performances and Phonograms Treaty which ensures balance between the rights and obligations of network operators, service providers, and content providers, and users.

14.7.1 Policy shaping forums, initiatives and approaches

International discussions regarding the policy issues that impact ICTs and the Internet have emerged which bring together governments, business, technical experts and international organizations.

a. Business Action to Support the Information Society (BASIS, an ICC initiative)⁴

ICC and a number of its member companies created Business Action to Support the Information Society (BASIS) in 2006. This initiative serves as the voice of global business in the international dialogues on how information and communication technologies (ICTs) can better serve as engines of economic growth and social development.

b. World Summit on the Information Society (WSIS Geneva 2003), Tunis 2005

The UN General Assembly Resolution 56/183 (21 December 2001) endorsed the holding of the World Summit on the Information Society (WSIS) in two phases. The first phase took place in Geneva from 10 to 12 December 2003, and the second phase took place in Tunis, from 16 to 18 November 2005 ⁵.

c. Internet Governance Forum (IGF)⁶The Tunis Agenda for the Information Society signed at the second phase of the World Summit on the Information Society (WSIS, 13-15 November 2005) invited the Secretary General of the United Nations to convene a new forum for multi-stakeholder policy dialogue, called the Internet Governance Forum (IGF). The first IGF took place in Athens, Greece in 2006 and the most recent event took place in Nairobi, Kenya in 2011.

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d. The UN Global Alliance for Information and Communication Technologies and Development GAID)⁷

An initiative approved by the United Nations Secretary General in 2006, GAID was launched after consultations with governments, the private sector, civil society, the technical and Internet communities and academia. The WSIS emphasized the importance of ICT in achieving the internationally agreed development goals, including the Millennium Development Goals (MDGs). GAID was created to provide a global forum that would comprehensively address cross-cutting issues related to ICT in development and provide an opportunity for forging partnerships. GAID adopted a multi-stakeholder approach to promote the objective of a people-centered and knowledge-based information society for more people worldwide.

e. Organization for Economic Co-operation and Development (OECD)

The OECD groups 30 member countries sharing a commitment to democratic government and the market economy. With active relationships with some 70 other countries and economies, NGOs and civil society, it has a global reach. Best known for its publications and its statistics, OECD’s work covers economic and social issues from macroeconomics, to trade, education, development, science and innovation. By deciphering emerging issues and identifying policies that work, it helps policymakers adopt strategic orientations. OECD produces internationally agreed instruments, decisions and recommendations to promote rules of the game in areas where multilateral agreement is necessary for individual countries to make progress in a globalized economy.

The Business and Industry Advisory Committee to the OECD (BIAC) contributes business expertise to the work of the OECD committees⁸. OECD, with input from BIAC, produces guidelines and principles on issues such as privacy and information security, which help to facilitate online trade.

f. Asia-Pacific Economic Cooperation (APEC)⁹

The Asia-Pacific Economic Cooperation (APEC) works in three broad areas to meet the Bogor Goals of free and open trade and investment in the Asia-Pacific region by 2010 for developed economies and 2020 for developing economies.

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