Incoterms & VAT: Why Ex Works Gives Tax Advisors the Shivers

Ex Works in international trade? Gorka Echevarría calls it „the Incoterm that gives us the shivers.” And he’s right – if your buyer is outside the EU, they legally cannot act as exporter of record. Your contract says one thing. Customs law says another.

In this episode, Gorka Echevarría (VAT Expert Group at European Commission, Tax Executives Institute) walks us through the VAT and customs consequences of Incoterms – from Ex Works problems to DDP traps.

We also tackle chain transactions: why transport organization matters more than risk allocation, how Article 36a works (and when it doesn’t), and what happens when Incoterms in a chain don’t align.
The bottom line: Incoterms aren’t just logistics terms. They determine your exporter status, VAT recovery rights, and zero-rating eligibility. Choose them thoughtfully – or pay the price at the audit.

This article summarizes a discussion with VAT and international trade expert Gorka Echevarría and does not constitute a sourced academic paper. The analysis presented reflects the conversation’s key insights rather than comprehensive research.

Incoterms and VAT: Navigating Supply Chains, Chain Transactions, and Compliance Risks

Introduction

This article summarizes a podcast conversation between Paweł Mikuła, partner and founder of „Halcyon | Tax. Customs. Legal.”, and Gorka Echevarría, VAT Director at a multinational commercial organization, member of the VAT Expert Group working with the European Commission, and Vice President of the Tax Executives Institute. The discussion explores the critical interplay between Incoterms and VAT, examining how contractual trade terms affect customs compliance, zero-rating eligibility, and chain transaction treatment.

What Are Incoterms?

Incoterms are standardized acronyms established by the International Chamber of Commerce that define the responsibilities of buyers and sellers in international trade. They address three fundamental aspects: the transfer of risk, the allocation of costs, and the responsibility for customs clearance (determining who acts as importer and exporter).

The beauty of Incoterms lies in their simplification function. Instead of writing extensive contractual clauses about transport responsibilities, insurance obligations, and risk allocation, parties can reference a single acronym that both sides should understand.

However, Incoterms are often misunderstood, even by supply chain experts, because they tend to focus on logistics aspects while overlooking the tax and customs consequences.

Incorporating Incoterms into Contracts

There are two schools of thought regarding how parties should incorporate Incoterms into their contracts. The first approach involves expanding on what the chosen Incoterm means for the specific transaction, ensuring nothing is taken for granted. Adding explanatory language or even a link to Incoterm definitions can prevent misunderstandings.

The second approach treats Incoterms as self-explanatory, assuming both parties understand their implications. This may work with sophisticated trading partners but creates risks when dealing with final clients who may not pay close attention to trade terms.

Less mature businesses sometimes simply indicate „Ex Works” on an invoice without any contract reference or even without specifying the relevant place – a practice that creates ambiguity and compliance risks.

The Four Categories of Incoterms

Incoterms are divided into four categories, forming a continuum from buyer-heavy to seller-heavy responsibility.

E Terms (Ex Works) place almost all responsibility on the buyer. The seller merely makes goods available at their premises, and the buyer handles everything from that point forward – transport, customs clearance, risk, and costs.

F Terms (FCA, FAS, FOB) shift some responsibility to the seller. Under FCA (Free Carrier), for example, the seller delivers goods to a carrier or terminal and typically handles export formalities, but the buyer controls and pays for the main transport.

C Terms (CPT, CIP, CFR, CIF) are often misunderstood because they create a split between cost and risk. The seller pays for the main transport, making the arrangement feel more „delivered” commercially, but risk transfers to the buyer much earlier – typically when goods are handed to the first carrier. This disconnect makes C terms particularly tricky for VAT purposes.

D Terms (DAP, DPU, DDP) are the most seller-heavy. The seller arranges and pays for transport to a destination near or at the buyer’s location. Depending on the specific term, the seller may also handle import formalities.

The Relationship Between Incoterms, VAT, and Customs

The choice of Incoterm directly impacts who is responsible for export and import formalities, which in turn affects VAT treatment and customs compliance.

Certain Incoterms determine whether the seller or buyer acts as exporter of record – a critical factor for claiming zero rates on exports. Choosing the wrong Incoterm can cause a company to incorrectly assume tax liabilities or lose eligibility for VAT zero-rating. Customs authorities also rely on Incoterms to assess who should be held accountable for duties and taxes as importer of record.

The key message: aligning Incoterms with the actual flow of goods and contractual arrangements is essential to avoid mistakes, penalties, and audits.

The Problem with Ex Works

Ex Works is the Incoterm that „gives us the shivers.” It places responsibility for transport and export entirely on the buyer, creating several serious problems.

The Exporter of Record Issue

Under EU customs law, the exporter of record must be established in the European Union and have the right to dispose of the goods in a specific manner. If the buyer is a non-EU entity, they cannot legally act as exporter of record, even if Ex Works is contractually agreed. This creates a compliance gap where the seller must step in as exporter despite what the contract says.

Ex Works is fundamentally incompatible with international trade involving non-EU buyers. While it may work for domestic sales where the only question is who handles transport, it becomes a „no-go” for cross-border transactions.

The Documentary Evidence Problem

Beyond the exporter issue, Ex Works creates a significant VAT risk related to proof of export. When sellers use pick-up Incoterms, they rely on faith – faith that the customer will transport the goods and that documentation will be available years later during an audit.

Multiple scenarios may be identified where this faith proves misplaced: customers go bankrupt, companies merge, third-party logistics providers lose documents in fires, or electronic systems get hacked. The seller has no control over documentation that is essential to defend their zero-rating position.

His recommendation is pragmatic: if the business insists on pick-up transactions, add protective language to the contract requiring the customer to provide transport documentation within specified timeframes. Include provisions allowing the seller to recover any VAT assessments, penalties, and interest from the customer if documentation is not forthcoming. When such clauses are proposed, stakeholders often reconsider their enthusiasm for pick-up transactions.

Safer Alternatives

As alternatives to Ex Works, Gorka suggests FCA (Free Carrier) or CPT (Carriage Paid To). Under FCA, the seller delivers goods to a buyer-chosen carrier but remains responsible for export formalities – provided the seller is EU-established. Under CPT, the seller also covers transport costs to a specified destination while still managing export clearance.

These alternatives reduce compliance risk because acting as exporter of record provides a level of customs authority validation. While sellers still need to maintain transport documentation, having the export declaration in their name offers more comfort than pure pick-up transactions.

The Problem with DDP

At the opposite end of the spectrum, DDP (Delivered Duty Paid) presents its own set of challenges. Under DDP, the seller handles all costs including import duties and VAT in the destination country.

Registration and Establishment Risks

Companies sometimes agree to DDP without fully understanding the implications. Acting as importer of record may require VAT registration or even trigger permanent establishment concerns in the destination country. In some jurisdictions, customs authorities expect the seller to perform the import clearance when DDP is chosen, and customers may be unwilling to act as importer of record unless this was specifically negotiated.

Given current trade tensions and tariff uncertainties, there might be seen little commercial logic in sellers voluntarily assuming duty and import VAT obligations in foreign jurisdictions.

The VAT Deduction Question

A common practical scenario may be raised: DDP is agreed contractually, but the EU buyer still acts as importer of record and pays import VAT. But this creates misalignment between the Incoterms and VAT reality.

If DDP is genuinely followed, ownership and the right to dispose of goods remain with the non-EU seller at the moment of import, with ownership transferring only after customs clearance. Referencing the Weindel case from the European Court of Justice, it can be noted that import VAT is deductible only by the person who bears the cost of importation and uses the imported goods for their own taxable transactions. If the buyer merely advances import VAT while the seller remains economic owner at import, the buyer may lack the required „direct and immediate link” to taxable output transactions – potentially jeopardizing their right to deduct.

The Recommended Alternative

Instead of DDP with last-minute corrections, it may be recommended (Delivered At Place). Under DAP, the seller handles transport to the destination, but import responsibilities shift to the buyer, who becomes the unambiguous importer of record and can recover VAT without hesitation or complications.

Chain Transactions and Incoterms

Chain transactions add substantial complexity to the Incoterms-VAT relationship. When goods pass through multiple parties before reaching the final customer, only one supply in the chain can benefit from zero-rating for export or intra-Community supply purposes.

The Transport Attribution Question

The zero rate is typically attributed to the supply during which goods are actually dispatched or transported. This raises the fundamental question: what determines which supply the transport is attributed to?

It can be viewed that the organization and control of transport is the primary criterion. VAT legislation and case law seek to identify who instructs the carrier, determines the destination, and links the physical movement to each sale. However, Incoterms and risk allocation are not irrelevant – they serve as supporting evidence, particularly where transport facts are ambiguous.

In a hierarchy, transport organization comes first, but Incoterms and risk allocation should ideally be aligned. It may be agreed that the ideal situation is making Incoterms compatible with who factually arranges transport, though he acknowledges this is not always commercially feasible.

Who Bears the Cost Matters

On the question of whether bearing transport costs is relevant, it may be suggested it would be difficult to demonstrate that a party directs a forwarder without paying for those services. The safer position is that whoever has the contract with the logistics provider and pays for their services is the party arranging transport.

The EU Simplification: Article 36a

The VAT Directive’s Article 36a, introduced during the Quick Fixes reforms, provides welcome standardization for intra-Community chain transactions. Where the intermediary (B in an A-B-C chain) arranges transport, the default position is that the first supply qualifies for zero-rating as an intra-Community supply, while the second supply is taxable in the destination country.

The intermediary can opt out of this default by providing their VAT identification number to the supplier in the dispatch country, shifting the zero-rating to the second supply instead.

Limitations of the Simplification

Article 36a only applies when the intermediary arranges transport. When party A or party C organizes transport, the provision does not apply, and the older, more complex case law analysis returns.

Even when Article 36a should apply, practical challenges arise. In related-party situations where the first two entities are affiliated, the first party typically has the logistics contract by default. Making the intermediary the genuine transport arranger requires signing specific contracts or addenda with forwarders, setting up purchase orders, and ensuring the intermediary actually receives and pays for transport services.

Shortcuts are not recommended: having party A pay the forwarder and recharge costs to B via intercompany billing, or simply adding transport costs to sales invoices, does not satisfy Article 36a requirements.

A Complex Example

A a challenging scenario can be considered: a Polish company sells to a Dutch company on DDP Rotterdam terms, and the Dutch company resells to a Chinese company on Ex Works Rotterdam terms, with goods moving directly from Poland to China via the port of Rotterdam.

It may be said: The first supply appears to be an intra-Community supply (assuming Article 138 conditions are met – VAT ID collection, EC Sales List reporting, invoicing requirements). For the second supply, Ex Works creates the familiar problem: the Chinese company should be exporter of record but cannot be unless EU-established. The Dutch supplier must act as exporter, contradicting the agreed Incoterm.

The confusion of applying DDP followed by Ex Works in the same chain weakens contractual positions and forces parties to find solutions to „the conundrum.” It could even constitute a „broken chain” resulting in two zero-rated supplies – a complex question without clear answers.

Conclusions

Practical recommendations for both companies and advisors could be indicated:

For companies: Integrate Incoterms thoughtfully into contracts, ensuring terms reflect actual goods flows and responsibilities. Understand the consequences of each Incoterm choice. Avoid Ex Works and DDP in international trade scenarios – both primarily affect sellers and create unnecessary compliance risks. Regularly review supply chain arrangements and seek expert advisory support.

For tax advisors: Develop awareness of the interplay between customs, VAT, and Incoterms. The choice of Incoterm affects exporter status, VAT recovery rights, registration requirements, and the validity of zero rates. Advising clients to structure supply chains compliantly and efficiently requires understanding all these dimensions.

A cautionary observation from practice can be added: companies frequently operate for years using Ex Works in chain transactions, incorrectly applying zero rates, only to discover significant tax arrears when the arrangements are eventually examined. These problems are too important and too costly to leave unaddressed – thinking them through carefully and consulting experts is essential.

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