Glossary Terms

Transfer of Risk

Transfer of Risk refers to the moment when the risk of loss or damage to goods shifts from the seller to the buyer. This is defined by the terms of delivery in the contract.

Common terms include:

FOB (Free on Board): Risk transfers when goods are placed on board the shipping vessel. E.g., Overseas shipping.
CIF (Cost, Insurance, and Freight): Risk transfers when the goods pass the ship’s rail. E.g., International trade.

Understanding these terms ensures clarity in responsibilities during transactions.

Transfer Pricing

Transfer Pricing: The practice of setting prices for transactions within and between enterprises under common ownership or control.

Rules and Methods: Governing authorities establish protocols for calculating transfer prices to ensure fairness and compliance with tax regulations.

Transactions: These include sales of goods, provision of services, or transfer of intangible assets between related entities.

Enterprises: Parent companies, subsidiaries, and sister companies typically engage in these internal transactions.

Examples:

Sales of Goods: A parent company sells raw materials to its subsidiary.
Provision of Services: A subsidiary offers IT support to a related entity.
Transfer of Intangible Assets: A corporation licenses patents to a sister company.

Pricing Methods:

Comparable Uncontrolled Price (CUP): Uses prices of similar transactions between unrelated parties.
Resale Price Method: Based on the resale margin of the buyer in comparable transactions.
Cost Plus Method: Adds a standard mark-up to the cost incurred by the supplier.
Transactional Net Margin Method (TNMM): Applies net profit margins from comparable entities to the controlled transaction.
Profit Split Method: Divides profits based on the functions, assets, and risks of the related entities.

Key Information: Accurate transfer pricing ensures compliance, minimizes tax liability, and avoids double taxation.

Importance: Transfer pricing directly impacts fiscal policies and international trade dynamics.

Transfer Pricing Documentation

Transfer Pricing Documentation provides records that multinational enterprises must maintain to prove the compliance of their transactions with transfer pricing rules.

Enterprises must include details of all intercompany transactions, such as services provided, goods sold, loans granted, licenses issued, and asset transfers. Documentation should specify the methods used for pricing these transactions and the rationale for their selection.

The Master File and Local File formats should be used. The Master File includes global business details, financial information, and a company’s overall transfer pricing policy. The Local File focuses on specific transactions within individual countries, detailing comparability analyses and financial data.

Detailed reports must be maintained for advance pricing agreements (APAs) and any reliance on unilateral or bilateral agreements. The documentation should be updated annually and must be readily available for tax authorities’ inspections.

Comprehensive records should include contracts, invoices, transfer pricing studies, and relevant communications. Financial records must support the economic substance of transactions and the arm’s length principle.

Transferable Letter of Credit

A Transferable Lett Letter of Credit (L/C) permits the beneficiary to transfer part or all of the credit to another party. It is useful in supply chain transactions involving multiple parties.

Financial institutions such as banks issue Transferable Letters of Credit. These documents ensure payment to suppliers by transferring credit from the buyer to intermediaries like wholesalers, distributors, or secondary suppliers. For example, if a manufacturer needs to pay component suppliers, the supplier can receive funds through a Transferable L/C.

Conditions for transfer include conformity with original term agreements. Transfer percentages must match the initial credit value. Applicants remain liable if discrepancies arise during secondary transactions.

Common uses involve global trade, facilitating seamless transactions among exporters, importers, and third-party suppliers.

Examples of significant instances:

Exporters transferring credit to local suppliers.
Primary contractors allocating funds to subcontractors.
Wholesale distributors ensuring payment to retail suppliers.

All involved parties must understand the terms explicitly to avoid disputes.

Transshipment

Transshipment involves transferring goods from one vessel or mode of transport to another during their journey from origin to final destination. It consolidates shipments and complies with trade routes.

Examples include:

Offloading containers from a ship to a truck at a port.
Switching cargo from a train to a plane at a logistics hub.
Moving parcels from one delivery vehicle to another at a distribution center.

Transshipment is common in locations like Singapore, Dubai, and Rotterdam.

Transshipment Certificate

A Transshipment Certificate certifies the transfer of goods from one vessel to another. Customs authorities require it to verify the origin and handling of goods during transit.

Necessary details in the document include:

Names of the vessels
Dates of transfer
Description of goods

Examples of goods include electronics, clothing, and machinery.

Trust Receipt

A Trust Receipt is a document a bank issues to a borrower allowing possession of goods while the bank retains ownership until sale and loan repayment.

UCP 600

UCP 600, the Uniform Customs and Practice for Documentary Credits, 2007 Revision, ICC Publication No. 600, establishes guidelines for Letters of Credit in international trade. It defines procedures for document examination, the roles of banks, and the obligations of buyers and sellers. Its rules ensure documentary credit transactions’ consistency and security.

Transforms letters of credit into instruments of payment. Provides standards for issuance, amendment, presentation, and examination. Specifies timeframes, such as examinations within a maximum of five banking days following presentation.

Standardizing documents like invoices, transport documents, insurance certificates, etc. Details when discrepancies arise, banks must notify parties following protocols. Guarantees independence from underlying contracts and enforces compliance with stipulated terms.

Numerical details, document formats, and procedural steps guide involved entities. Mitigates risks associated with non-payment and non-delivery in cross-border commerce. Aligns practices across international banking and trading fields.

Unclean Bill of Lading

An Unclean Bill of Lading is a shipping document indicating that the goods are damaged or deficient. Examples of such clauses include "packaging torn" and "products inadequate."

Unconfirmed Letter of Credit

An Unconfirmed Lett Letter of Credit (L/C) is a financial document backed solely by the issuing bank. The seller bears more risk due to the lack of guarantees from any additional banks.

Issuing Bank: Provides the letter of credit, guaranteeing payment to the seller.

Beneficiary: The seller or exporter who receives the payment.

Applicant: The buyer or importer who requests the letter of credit.

Currency: The specified currency in which the payment will be made, such as USD, GBP, or EUR.

Expiration Date: The last date on which the letter of credit is valid.

Amount: The exact monetary value specified in the letter of credit.

Conditions: The specific terms and conditions that must be met for the issuing bank to release funds, such as shipping documents or proof of delivery.

Example: An American importer (Applicant) requests an L/C from a U.S. bank (Issuing Bank) for goods purchased from a Chinese exporter (Beneficiary). The L/C specifies a payment of $50,000 upon receipt of shipping documents proving the goods have been dispatched.

Uniform Customs and Practice for Documentary Credits (UCP)

Uniform Customs and Practice for Documentary Credits (UCP) comprise a set of internationally recognized rules established by the International Chamber of Commerce (ICC). These rules govern the issuance and usage of letters of credit. The latest version, UCP 600, was adopted in 2007. Companies, banks, and various traders employ UCP to streamline trade finance. Key articles cover definitions, obligations of banks, and document examination criteria. The UCP ensures uniformity in international trade transactions.

Entities affected by UCP include importers, exporters, and financial institutions. Letters of credit managed under UCP must comply with specific requirements such as presentation, compliance, and expiry terms. UCP 600 enhances reliability by providing clear and consistent guidelines. It reduces discrepancies by specifying conditions for acceptable documents like invoices, transport documents, and insurance certificates.

Uniform Rules for Collections (URC)

Uniform Rules for Collections (URC) are a set of regulations created by the International Chamber of Commerce (ICC) to systematize payment collection via documentary collections. They are codified under ICC Publication No. 522, addressing procedures like the presentation of documents, types of collections (sight collections, acceptance collections), and the roles of banks in collection processes. This standardization ensures uniformity across international transactions, reducing disputes and ambiguities. Organizations rely on URC to manage documentary collections for export and import trades.

Usance

Usance refers to the specified period, usually in days, allowed for payment of a bill of exchange or letter of credit following its presentation.

In international trade, usance periods differ. For example, 30, 60, or 90 days are common. European nations often follow a 30-day usance, while Asian counterparts may use up to 90 days.

Banks and financial institutions frequently set unique usance terms, impacting import and export transactions. Letter of credit terms, including usance days, significantly influence cash flow and trading efficiency.

Usance is critical for managing the timing of international payments. It ensures sellers receive payment over a fixed period, enhancing predictability in commerce.

Value-Added Tax (VAT)

Value-Added Tax (VAT): A consumption tax on the value added to goods and services at each production or distribution stage, ultimately borne by the end consumer.

VAT applies to various significant goods and services, including electronics, clothing, and food. Each transaction from raw material extraction to retail involves VAT charges.

In Europe, the average VAT rate is approximately 20%. In contrast, the United Kingdom maintains a standard VAT rate of 20% with reduced rates for specific items like children’s car seats and home energy.

Retailers must include VAT in the final price displayed to consumers. This ensures transparency and compliance with tax regulations.

VAT registration thresholds vary by country. In the European Union, businesses exceeding annual turnovers of €85,000 must register for VAT.

VAT exemptions exist for certain sectors, such as healthcare and education. These services typically do not incur VAT, reducing administrative burden and costs for essential services.

Several nations utilize VAT, including Germany, France, and Japan. Each country tailors VAT rates and exemptions to their economic policies and social needs.

Warehouse Receipt

A Warehouse Receipt is a document issued by a warehouse operator acknowledging the receipt of goods stored in the warehouse. It serves as proof of ownership and defines storage terms. Goods referenced include commodities like grain, machinery, clothing, perishable items, and electronic devices.

Warehouse-to-Warehouse Clause

A Warehouse-to-Warehouse Clause in an insurance policy covers goods from the point of origin to the final destination. This clause includes risks during loading, transit, interim storage, and unloading. It applies to multiple transport modes, including sea, air, and land.

Example goods include electronics, pharmaceuticals, textiles, and machinery. Coverage typically spans from the initial warehouse to the receiving warehouse.

Weight Certificate

A Weight Certificate certifies the weight of goods being shipped. It is required for customs clearance and calculating freight charges.

Customs authorities demand Weight Certificates to verify shipment details. Freight companies use the documents to determine charges. The certificates often list detailed weight measurements, including gross, net, and tare weights.

Instances include shipments of goods like machinery, bulk commodities, and packaged products. Standard weighing methods, approved by regulatory agencies, ensure accuracy.

Verifiable examples are certificates issued by licensed weighbridges, government-approved facilities, and certified logistics providers.

With Recourse

"With Recourse" indicates the seller or lender can demand repayment from the buyer or borrower if the primary obligor defaults. This term is common in factoring and financing agreements.

Without Recourse

Without Recourse: A term indicating that the seller or lender has no right to demand repayment from the buyer or borrower if the primary obligor defaults. The risk transfers entirely to the financier or purchaser.

Example entities: banks, financial institutions, and sellers.

Common instances: mortgage loans, trade receivables, and commercial loans.

World Trade Organization (WTO)

The World Trade Organization (WTO) regulates international trade between countries, ensuring that trade flows smoothly, predictably, and freely. It provides a framework for negotiating trade agreements and resolving disputes.

The WTO handles agreements covering goods, services, and intellectual property. It includes major agreements like the General Agreement on Tariffs and Trade (GATT), the General Agreement on Trade in Services (GATS), and the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).

The WTO operates through a structured process involving rounds of negotiations. It features notable rounds such as the Uruguay Round, which led to the creation of the WTO, and the Doha Development Round, which addresses issues important to developing countries.

The Dispute Settlement Body (DSB) of the WTO resolves disputes between member countries. Key cases have included disputes over subsidies in agriculture, intellectual property rights, and trade barriers.

Membership in the WTO includes 164 member countries. Key members include the United States, China, the European Union, Japan, and India.

The WTO’s decision-making processes are generally consensus-based. The Ministerial Conference is the highest decision-making body, meeting approximately every two years.