Methods of payment in foreign trade

The flow of money across national borders is complex and requires the use of special documents. Foreign trade usually is financed on credit. Exporters rarely get paid right away because of collection and foreign exchange problems.

The basic methods of payment for exports are:

• Cash in advance

• Letter of credit

• Documentary collection or draft

• Open account

• Other payment mechanisms, such as consignment sales or counter trade.

Payment is to be made by a documentary collection or draft, also known as a commercial bill of exchange; the drawer (exporter) instructs the drawee (importer) to transfer the face amount on the bill of exchange at a given time. The transfer is made to a designated payee, possible to the exporter's bank at which the drawer has an account, or directly to the exporter. If the exporter requests payment be made immediately, the exchange instrument is called a sight draft. If payment is to be made later, for example, 30, 60, or 90 days after delivery, the instrument is called a time draft. These drafts generally contain a significant amount of information about the shipment. With a bill of exchange it is always possible the importer will not be able to make payment to the exporter at the agreed upon time.

A letter of credit however, obligates the buyer's bank in the importing country to accept a draft (a bill of exchange) presented to it, provided the draft is accompanied by the prescribed documents. A documentary letter of credit stipulates that payment will be made by the bank on the basis of the documents, not on the terms of the sale. A letter of credit denominated in the exporter's currency means the exporter incurs no risk of loss as a result of possible exchange rate fluctuations.

A letter of credit can be revocable or irrevocable. A revocable letter of credit is one that can be changed by any of the parties involved. However, both exporter and importer may prefer an irrevocable letter of credit which is a letter that cannot be cancelled or changed in any way without the consent of all parties to the transaction. With this type of letter, the importer's bank is obligated to pay and is willing to accept any drafts (bills of exchange) at sight, meaning these drafts will be paid as soon as the correct documents are presented to the bank.

A letter of credit transaction may involve a confirming bank in addition to the parties mentioned above. With a confirmed letter ofcredit, the exporter has the guarantee of a bank in the exporting country as well as the guarantee of the importer's bank.

An exporter may sell on an open account. This means the necessary shipping documents are mailed to the importer before any payment from or definite obligation on the part of the buyer. Releasing goods in this manner is somewhat unusual because the exporter risks default by the buyer. An exporter ordinarily sells under such conditions only if it successfully conducted business with the importer for an extended time.

Vocabulary:

to require – вимагати, потребувати

cash in advance – передплата готівкою

letter of credit (LC, L/C, LOC) – акредитив

draft – тратта

consignment sale – комісійний продаж

counter trade – компенсаційна, зустрічна торгівля

sight draft – безстрокова тратта, тратта до запитання

time draft – строкова тратта (підлягає сплаті в обумовлений строк)

delivery – доставка

to stipulate – обумовлювати

to incur a risk – ризикувати

irrevocable letter of credit (ILC) – безвідкличний акредитив

Questions:

How is foreign trade usually financed?
What are the basic methods of payment for exports?
What are the peculiarities of a documentary collection or draft?
How does the letter of credit work?
What types of letter of credit do you know?
What does selling on an open account mean?

MANAGING TAXES

The term fiscal policy refers to government efforts to keep the economy stable by increasing or decreasing taxes and (or) government spending. For many years, governments of all countries have tended to raise taxes to fund more and more spending to balance the budget. But such attempts are usually unsuccessful. The result is an increasing state debt, which usually causes raising taxes.

Government at every level is financed through the collection of taxes. Under state and local laws organizations and individuals are required to compute their tax liability, complete the necessary forms, and pay the taxes due. Many features of taxation, both in the imposition and collection of taxes, are the same in many countries. We pay many kinds of taxes including state and city income taxes, social security and other payroll taxes, wage (salary) taxes, property (real estate) taxes, excise taxes, value-added, profit, and sales taxes. The speciality of tax management or tax accounting has, therefore, developed into one of the most important branches of finance and accounting throughout the world.

Income taxes are a major concern to businesses as well as individuals. Unfortunately, businessmen themselves often do not understand the tax laws, and they must therefore depend on the advice of tax managers, accountants and lawyers. The latter must have a thorough knowledge of the tax code of his/her country and of any divisions within it that have the power to levy, or impose, taxes.

Many businesses pay over 50 per cent of their net income to the state government in the form of income taxes, and the rest taxes cover the next 30-40 per cent. So, careful planning designed to decrease the tax liability to the lowest level is thus a major concern of business. This planning is made possible by various provisions in the tax laws that offer alternative methods for handling particular transactions or accounting procedures.

One alternative way thus has a significant tax advantage over another, resulting in a tax-saving. A business can pay substantially more taxes than necessary if the wrong financial decision is made. There are different accounting methods for the inventory, that is, the goods that a business has on hand. They are known by the names of FIFO and LIFO. FIFO stands for first-in, first-out and it means that the first goods acquired are the first goods sold. LIFO, on the other hand, stands for the last-in, first-out and it means that the costs of the most recently acquired goods are the same as the costs of the goods sold during the accounting period.

So the second method is better from a tax standpoint, because this method results in a lower tax liability in a period of rising prices. Under LIFO, the higher-priced goods are depreciated in the current accounting period.

A tax advantage also exists for businesses that sell merchandise for personal use on the installment basis, with payment spread over a period of months or years.

A well-known saying holds that nothing is certain but death and taxes. Unhappily, governments are often responsible for the former, but they are virtually always the source of the latter.

Vocabulary:

fiscal policy – фіскальна, фінансова, бюджетна політика

tax - податок