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Who shall be the issuing party of the Letter of Credit (LC) when conducting general trade agency import business?
or complex compliance issues.
clearance and fund security.
I am the procurement manager of a small and medium-sized manufacturing enterprise in Shanghai, and I have been extremely anxious these days. This is our first time to cooperate with a foreign trade agency company to import precision machine tool parts from Germany.
The overseas supplier suddenly sent an email yesterday requiring shipment against sight LC only, and the final LC issuance deadline is next week. I have never been exposed to LC operation for agency import before, so I am completely confused now: should our principal apply for LC issuance at the bank by ourselves, or hand it over fully to the agency company?
Besides, I heard from peers yesterday that some agencies will find a third party to issue the LC, is this non-compliant? If we choose the wrong LC issuing party, will it lead to port detention of goods, customs seizure, or even huge liquidated damages? I am really worried, please help answer my questions!
Michael ZhangYears of service：6Customer Rating：5.0
Customs Declaration & Compliance ExpertStart a Chat
First of all，we need to clarify common industry misunderstandings: many principals mistakenly believe that the LC for agency import must be issued by the agency company，or designate a third party to issue the LC for convenience，both of which hide compliance risks.
If the wrong LC issuing party is selected，a series of negative consequences will follow: if the principal applies for LC issuance on its own without corresponding qualification，the bank will reject the application，leading to delayed shipment or even order cancellation by the supplier. If the goods have already been shipped，they may be detained at the port，resulting in thousands of yuan of port detention fees and container detention fees per day. If a third party is designated to issue the LC in violation of regulations，the customs will directly seize the goods during inspection due to "inconsistency of three streams (goods，documents and funds)"，which will also affect the enterprise's customs credit rating，and the subsequent import customs clearance will be subject to key inspection.
Physical risk isolation measures: it shall be clarified that there are only two options for the LC issuing party: either the principal with import and export right and LC issuance qualification applies for LC issuance on its own，or the agency company applies for LC issuance in its own name (the principal shall pay the full LC issuance deposit in advance or provide guarantee). Entrusting a third party to issue the LC is prohibited.
Exclusive loss mitigation tips: submit the business license，import and export right certificate and purchase contract to the agency company 3 working days in advance for pre-audit of LC issuance qualification. If the principal does not have LC issuance qualification，the agency company can assist in applying for bank credit to issue the LC without deposit. Meanwhile，negotiate with the supplier in advance to reserve a 3-day buffer period for LC issuance，so as to avoid liquidated damages caused by delayed LC issuance.
Jason WuYears of service：10Customer Rating：5.0
International Logistics & Supply Chain ManagerStart a Chat
From the perspective of customs valuation and compliance, the LC issuing party for agency import must be consistent with the operating unit indicated on the customs declaration form. If the issuing party is the principal, the operating unit on the customs declaration form shall be filled with the principal (who shall have the import and export right); if the LC is issued by the agency company, the operating unit on the customs declaration form shall be filled with the agency company.
If the LC issuing party is inconsistent with the operating unit, the customs will determine it as "discrepancy between documents and goods", directly launch the valuation query process, and require supplementary materials such as fund flow vouchers and agency agreements, which takes at least 7-10 days. The expenses incurred from port detention of goods during this period shall be borne by the principal. In addition, if the relationship between the LC issuing party and the operating unit cannot be proved, the customs will list the goods as "high-risk imported goods", and the subsequent import business will be included in the key supervision list, reducing the customs clearance efficiency by more than 50%.
Grace WangYears of service：10Customer Rating：5.0
Senior Foreign Trade ConsultantStart a Chat
From the perspective of cargo right control in international logistics, the choice of LC issuing party directly affects the ownership of cargo right. If the LC is issued by the agency company, the consignee on the bill of lading is usually the agency company, and the cargo right is controlled by the agency company, which can effectively avoid the risk of logistics interruption caused by the principal's arrears of payment. If the LC is issued by the principal, the consignee on the bill of lading can be directly filled with the principal, and the cargo right belongs to the principal directly, but it is necessary to ensure that the principal has the qualification and ability to clear customs in time.
If a third party is chosen to issue the LC, the consignee on the bill of lading may be inconsistent with the LC issuing party, and the shipping company will refuse to exchange the bill of lading at the port of destination, resulting in failure to pick up the goods. Container detention fees are charged daily according to the container type: about 150-200 USD for 20ft containers, and about 250-300 USD for 40ft containers. If the goods are not picked up for more than 14 days, they may be auctioned by the customs.
Daniel XuYears of service：10Customer Rating：5.0
Director of Import & Export OperationsStart a Chat
From the perspective of cross-border tax planning, the choice of LC issuing party will affect the tax deduction and cost accounting in the import link. If the LC is issued by the agency company, the import VAT payment certificate will be issued under the name of the agency company, and the principal shall handle the input tax deduction with the agency agreement, copy of the payment certificate and tax payment certificate. It is necessary to ensure that the agency company has completed the VAT withholding and payment, otherwise the principal cannot deduct the tax.
If the LC is issued by the principal, the import VAT payment certificate is issued under the name of the principal, which can be directly declared for deduction without additional materials. In addition, if a third party is chosen to issue the LC, the tax authority will determine it as "falsely issued fund voucher" due to the inconsistency between the fund flow and the goods flow, so the principal cannot deduct the import VAT, and may also face the penalty of paying back the tax and a fine of 0.5 to 5 times the tax amount.
Evelyn LiYears of service：3Customer Rating：5.0
Cross-border Compliance SupervisorStart a Chat
From the perspective of cross-border foreign exchange receipt and payment compliance, the LC issuing party for agency import must be consistent with the entity of foreign exchange receipt and payment. If the LC is issued by the agency company, the agency company shall handle the procedures of foreign exchange purchase and payment, and the principal shall pay the full amount of the goods to the agency company to ensure "consistency of three streams". If the LC is issued by the principal, the principal shall directly purchase and pay foreign exchange without going through the agency company.
If a third party is designated to issue the LC in violation of regulations, the issuing bank in the SWIFT message is inconsistent with the foreign exchange receipt and payment entity, which will be listed as "abnormal foreign exchange receipt and payment behavior" by the State Administration of Foreign Exchange, suspending the enterprise's cross-border foreign exchange receipt and payment authority. Subsequent foreign exchange business will require submission of additional supporting materials, which takes at least 15-20 days, affecting the normal development of subsequent import business.
Eric ZhouYears of service：6Customer Rating：5.0
Senior Manager of Foreign Exchange & Tax RebatesStart a Chat
From the perspective of international trade legal risk, the LC issuing party for agency import shall be clearly agreed in the agency agreement to avoid subsequent legal disputes. If the issuing party is not clearly specified in the agreement, once there are problems such as delayed LC issuance or refusal of payment, the agency company and the principal will shirk responsibilities from each other, leading to the supplier claiming for breach of contract liability, and the liquidated damages are usually 5%-10% of the contract amount.
In addition, if a third party is chosen to issue the LC, the entity of the agency agreement is inconsistent with that of the LC, so the third party does not need to bear any legal responsibility, and all risks shall be borne by the principal and the agency company. If the supplier cancels the order due to LC issuance problems, the principal shall also bear the loss of production stagnation caused by raw material shortage.
Linda GaoYears of service：7Customer Rating：5.0
Documentation SupervisorStart a Chat
From the perspective of on-site customs inspection, the choice of LC issuing party will affect the inspection pass rate. If the LC is issued by the agency company, the agency company usually has rich customs clearance experience, can predict inspection risks in advance, and sort out standardized inspection materials, with an inspection pass rate of more than 95%. If the LC is issued by the principal, and the principal engages in import business for the first time, the inspection may fail due to non-standard materials, and it takes 3-5 days to rearrange the materials, and the expenses incurred from port detention of goods during this period shall be borne by the principal itself.
If a third party is chosen to issue the LC, the customs will require the certificate of relationship between the third party, the principal and the agency company during inspection. If it cannot be provided, the goods will be determined as "suspicious goods", and unpacking inspection will be launched, which will increase the inspection cost by 2-3 times, and may also lead to damage to the goods.
Lucas LiuYears of service：8Customer Rating：5.0
Senior Operations ConsultantStart a Chat
From the perspective of supply chain structure optimization, the choice of LC issuing party shall be combined with the overall supply chain strategy of the enterprise. If the principal engages in import business for a long time and has the import and export right and LC issuance qualification, it is recommended that the principal apply for LC issuance on its own, which can establish an independent import supply chain system and improve the controllability of the supply chain.
If the principal only conducts temporary import business and has no import and export right or LC issuance qualification, it is recommended that the agency company issue the LC, which can reduce the supply chain operation cost and avoid additional qualification application. In addition, if different issuing parties are chosen, the cost difference shall be calculated in advance: the agency company usually charges a handling fee of 0.5%-1% of the LC amount for issuing the LC, while the principal only needs to pay the bank's LC issuance handling fee of about 0.1%-0.3% of the LC amount, but needs to bear the qualification maintenance cost.